option expiration Will You Be Assigned At Option Expiration?

"My stock closed at the strike price on expiration Friday. Will I be assigned?"

This is a common question posed by covered call writers. The answer: It depends.

First, what does "closed at the strike price" mean? Stocks don't have just one price. They often have 3: the bid, the ask, and the last trade (which is often between the bid and ask). Which one should you use to know if your covered call is "in the money" or not?

For example, consider AMZN on Apr 15th (option expiration day). Imagine you had shorted the Apr 180 calls and had these closing prices:

AMZN closing prices Apr 15, 2011
Stock Bid 179.95
Stock Ask 180.10
Last Trade 180.00

Will your 180s be assigned to you or not?

Well, it's not so much the price you want to use as it is the price that the option buyer decides to use. It is the option buyer's decision on whether or not to exercise his option. The fundamental question he is asking himself is "Should I buy the stock today (expiration Friday) and pay the strike price per share, or do I think can buy it for less when the market opens on Monday where I will pay the asking price at that time?" What will the weekend bring? AMZN could gap up on Monday, or gap down, or could open right near the closing price on Friday.

Once the option holders have made up their minds, they send their decisions to their brokers, who in turn tell the OCC (Options Clearing Corp) that they have clients who are exercising their options.

The OCC will then randomly assign exercise notices among all the people who are short the option being exercised.

When a stock closes within pennies of a strike price on option expiration day some percent of the outstanding options will be exercised and some will not. Some option holders will decide to wait until Monday to buy the stock in the open market, while others will want to own it over the weekend. Because the assignment by the OCC is random, if you have multiple contracts you've shorted (which close at the money) you may be assigned on some but not on others. If you shorted 10 contracts you might be assigned on 0, 3, 6, or all 10 (or any other number; it's random).

Note: We've been talking about at-the-money options on option expiration day. If you have options that are definately in-the-money (more than a few pennies) on expiration day then they will all be assigned due to automatic exercise of in-the-money options by brokers.

If you really do NOT want them to be assigned (for tax reasons or whatever) then your best choice as the option seller is to buy back the options near the close on expiration Friday. By closing them out you don't have to worry about random assignment or any after-hours price action in the underlying stock that may occur.

And in case you are wondering about what happened in the AMZN example: Monday after expiration the stock opened down about 2 points. The option holders who exercised on Friday were wishing they hadn't, and the option sellers who were assigned are glad they were assigned (if they still liked the stock they could take the money they received from assignment and buy more shares for less).

Mike Scanlin is the founder of Born To Sell and has been writing covered calls for a long time.

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