The Logistics of Being Assigned a Put Option
Published July 05, 2012
Question posted on the Trader Network:
I've just started using TK and am not familiar with the UI and forums. Today I had a put option contract that I wrote expire ITM. I would assume that means an automatic assignment.
1. When and how will I know if I've in fact been assigned the option?
2. Since I wrote the put, are the stocks I have to buy purchased automatically or is this an action that must be done manually?
3. Where does the premium come into play? I don't see any credit to my cash or margin that reflects the premiums I was expecting from writing the puts. How are they recorded and where do I see that displayed in the UI?
Thanks for the help!Mark’s Response:
Your questions have been answered, but this response is an attempt to clarify the information with extra detail.
1) You will be notified before the market opens for treading on Monday, following expiration.
If you login to your account Sunday (or Monday morning), you will be notified at that time. All you have to do is look at your positions. You will see that the put is missing and that you own 100 shares per put option. If you check your cash balance, you will also see that the cash to buy the stock (plus an assignment fee) has been removed from your account.
Also check your trade confirmations. An exercise or assignment is considered to be a transaction.
The bottom line result is the same (the commission/fee is different) as if you bought the shares overnight, when the markets were closed. You own the shares and the cash to pay for them has been removed from your account. It was all done automatically.
2) As far as record-keeping is concerned, you bought the shares at the strike price, minus the premium received when you sold the put option. Thus, if you sell a put struck at 20 and collect $0.85 as the premium, your cost basis (if assigned an exercise notice) is $19.15 (plus commissions/fees) per share. That is the price to be used when you sell the stock and report your eventual capital gain (or loss).
3) The entire process is automatic. If you are assigned an exercise notice, you will find the shares in your account, per above. Every once in a blue moon, if the option is ITM by only a penny or two, there is a VERY SMALL chance that you will not be assigned and that the option has expired worthless. That is the reason why it is mandatory that you check your TK positions and must not assume you have been assigned.
Not being assigned is unlikely, but a retail customer may own one or two options that are ITM by a penny and (correctly in my opinion) decide (after being unable to sell the options because there was no bid) that it is not worth the cost of paying the exercise fee to own the shares. That trader could instruct his broker DO NOT EXERCISE. When that happens, some randomly chosen person who was short that option will not be assigned. Again, do not expect to see this happen. Just be aware of the possibility.
Then there is this possibility: After the market closes on Friday and the settlement price for the underlying stock has been determined, news is issued that is expected to greatly affect the stock price. If that announcement is sufficiently bullish, some ITM put owners may elect not to exercise (but they must hurry. The time available to make this decision is quite short). If the news is bearish, some ITM call owners may choose not to exercise. Again, this is not a common situation.
4) You already collected the premium. Your cash balance increased the day after the trade. You do not receive any additional cash when the option expires. Do not confuse your cash balance with your net liquidating balance. The former represents the cash in your account and the latter represents the value of your account (before trading expenses) if you converted everything (sold all your longs and bought all your shorts) to cash at the current ‘mark’ (price listed for each item).
I trust that eliminates all confusion. I wish you good trading.
Mark D WolfingerOptions for Rookies
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