Covered Calls and Cash Secured Puts (Part 17)

In my last post, I talked about ways to manage CC/CSP winners when the market moves up. Today I want to discuss some details about exercise and assignment, which may occur if the stock moves down.

I should never place a CSP trade if I do not feel okay about owning the stock. In selling a put, after all, I am legally accepting the obligation to buy stock at the strike price anytime before option expiration.

Q: who would I be purchasing the stock from?

A: put owners, who have purchased the right to sell stock at the strike price on or before option expiration.

Put owners may exercise their right to sell stock while put sellers have an obligation to buy stock if assigned. When a put owner exercises, the put seller gets assigned. This is the lingo.

Q: why might assignment of a short [cash-secured] put be more likely to occur before assignment of a short [covered] call?

A: this is a loaded question.

If the stock moves lower then short [cash-secured] put assignment will likely occur whereas the [covered] short call will likely expire worthless. If the stock moves higher then the [cash-secured] short put will likely expire worthless whereas [covered] short call assignment will likely occur.

This detail aside, short puts are likely to be assigned sooner than short calls in stocks that pay no dividend. The higher the interest rate, the truer this becomes. When put owners exercise their right to sell stock, they will be raising cash. When call owners exercise their right to buy stock, they will be losing cash. People like to maximize the collection of interest, which means raising cash sooner and losing cash later.

Stocks that pay dividends are a separate case that I will discuss in my next post.