Covered Calls and Cash Secured Puts (Part 18)

I left off discussion with what might be assigned sooner: CCs or CSPs? Today I want to give two further considerations.

A short put is likely to be exercised sooner than a short call in order to maximize collection of interest payments.

However, neither short puts nor short calls are likely to be assigned when they have time value remaining.  Option premium is composed of intrinsic value [how far in-the-money (ITM)] and extrinsic (time) value.  Option exercise involves surrender of all remaining time value.

Consider call (put) owners who want to buy (sell) the stock.  If the option still has time value then the fiscally responsible choice would be to sell the call (put) thereby recovering the time value and then to buy (sell) stock on the open market as a separate trade. This costs two commissions but at many brokerages, the charge for exercise/assignment is comparable to that of the stock and option trade combined.

Options are more at risk of being assigned as expiration approaches or as they go deep ITM because these are the cases when time value dwindles.

One potential exception that applies to calls only is when a stock goes ex-dividend.  On this date, owners of the stock are entitled to a dividend payment, which generally occurs soon after.  Even though I generally prefer to delay payments, as a call owner who wants the stock I might be willing to buy [stock] sooner if it means collection of the dividend.

More specifically, a short call is at risk of early assignment typically the day before the ex-dividend date when the dividend payout exceeds the time value remaining in the option.

One piece of good news for a CC trader upon assignment is the flip side of what I said above about option exercise:  instant gain of all remaining time value without having to wait until expiration.

In my next post I will resume discussion of CC/CSP trade management.