If you are new to options trading, then you probably have a lot of questions. There are many different terms out there and many of them are difficult to understand. One of those terms is an assignment. If you have never heard of the term before and you want to trade options, it’s a good idea to learn what it means.
Today, we are going to learn what an assignment is and how it is used. So if you would like to learn more about an assignment, make sure to pay close attention to the information below.
What Is an Assignment?
The term assignment refers to when an option seller is designated to buy or sell the underlying asset which typically happens when an option expires in the money and the buyer of the option would like to exercise their right to buy or sell the underlying asset.
As a seller of options you have an obligation to sell or buy the underlying asset if assigned whereas a buyer has the right to buy or sell the underlying. The buyer can chose to not exercise their right if they want to. When you sell short an option contract, you can be assigned at anytime while you have that position open.
The good news is though, that most short options are not assigned unless they expire in the money. The reason for this is because it doesn’t make sense for a long call buyer to exercise their right to buy the underlying if the option is out of the money because they would be paying more than the market value.
Since you are 5 points out of the money you are much less likely to be assigned because the buyer of that that contract would have to sell SPY shares at the strike price of $200 while the SPY is trading at $205 and that wouldn’t make much sense.
However, if the price of the $SPY sells off and trades below $200 you’re short position is now in the money and has an increased chance of being assigned where you will have to buy shares at your strike price and the buyer of the put will get to sell the shares at the strike price.
It doesn’t mean that you will automatically be assigned when your short put goes in the money it just means you have a higher chance. Most options are neither exercised or assigned but rather closed out before expiration.
Now that you know more about the term assignment, you are better educated about the world of option trading. Remember, the more you can learn about option terminology, the easier it will be for you to navigate the often-confusing world of trading.
So the more you learn, the greater your chances of establishing an exciting and lucrative career as an option trader.