What to do When Assigned a Short Option

When doing PCCRC’s you will find that a big move in the stock may cause your options to be deep in the money. When options are deep in the money they may be assigned, particularly if you are close to expiration. Here is what you do:

1. Do NOT Panic, being exercised means that your counterpart in the trade (the option buyer) is giving up the time value of the shares, and you are the beneficiary.
2. Do NOT make the mistake your counterpart made and turn around and exercise your long term option, you will be giving up even more time value than your counterpart gave up.

What to do next depends on whether you are assigned a call or a put. Let’s take a look at a practical but fictitious example:

Let’s say that you entered a PCRCC on AAPL in July 2004, and then you rolled over the trade to September. Note that the September short calls are ITM. The stock price has reached >$36 with only 9 days to expiration.



Early that day, you check your account and find that you are short 100 shares of AAPL, and that the short calls are no longer there. Your trade now looks like this:

As you can see, your counterpart in the trade (the call buyer), gave up the remaining time value in the trade (between $0.05 to $0.10/share) in favor of the shares which you are now short.

Your risk graph looks quite acceptable, but you may not want the cash requirements for the short stock. Your job is simply to cover the short stock at the market price, which will have very little slippage and commission costs, and SELL an equivalent number of options to the next month (1 October 30 call in this case). Here is the result:

As you can see, there is no loss, rather, your cost has reduced somewhat while your profits had increased. This demonstration does not include commissions, so you need to figure that with your broker, but I recommend that you don’t reproduce this trade with such small number of contracts, this is for demonstration purposes only.


Next, let’s take a look at an example with EBAY for the PUT side:

The day after the January earnings report on EBAY, the stock drops 18 points leaving my 115 puts well within the money, with only one day to expiration. While the trade is profitable, and you may want to close it at that point, there is an alternative: to run the remaining PUT options as a Put Ratio Calendar.


To transform the PCRCC into a PRC, I would have simply closed all the call options, both long and short leaving only the PUT positions, here is the resulting trade:


The risk graph illustrates the bearish trade that results when the call portion is removed, and the increase in cost of the trade.


However, with only one day left to expiration, I also find that I have been assigned 500 shares of EBAY at 115, as a result of the short puts in my account. Here is the resulting trade with the assignment:


The risk graph shows that the trade may be too bearish, if there is a bounce after the big decline in the stock price. Further, I’d rather not see that large stock position in my account.


As for the AAPL example above, I remember to:

1. Sell the 500 shares of EBAY at the market price.
2. Short 5 put options of EBAY with the next month expiration. In this case, sell February options.
3. You may find that the 115 puts are no longer available for that month, since the stock has declined so much. If you insist in continuing this trade, you could sell Feb 100 puts (which are closer to the money) and compensate for the cost by selling more puts. Here is the resulting trade:


Do not feel that you have to continue the trade under these conditions. You can simply sell the assigned shares, and sell the April 115 puts at the market, and keep the profit. You must consider If this modification is better than any other alterative trade that you could place on EBAY or other underlying. This is for demonstration purposes only. Assignment is usually in your favor, but if you are too close to expiration, you don’t need to panic either.



This is the resulting PRC. Only days later, the trade would have given us additional profits: