I received the following email from TD Ameritrade this morning regarding an option assignment from my naked puts on Boeing Co (BA):
Date: 11-14-2007
Dear Valued Client,
RE: For account ending in ****
You have recently been assigned the following option position:
1 BAWT.
If you don’t have sufficient cash or positions to cover this assignment, please wire the necessary funds or make the necessary trades to close your position.
If you want to trade the position created by this assignment but it hasn’t posted to your account yet, you can place your trade by calling a broker. Please let the broker know the reason the order can’t be completed online in order to receive the Internet commission rate.
If you have questions, please call Client Services. Please enter your account number or UserID when you call to receive the best possible service.
Sincerely,
Bryce Engel
Chief Brokerage Operations Officer
TD AMERITRADE, Inc.
Nothing special is inside this email, but I thought some might be interested in seeing what happens when an option is assigned early. I get a few of these per year. The assignment means that Ameritrade is “assigning” the shares to me that I had the short option on. In English – On October 10th, I sold someone the right to sell 100 BA shares to me at 100 and I received $339.25 after commissions and now they are taking me up on the contract. They sold their 100 shares to me at 100 although BA closed at 93.70 yesterday.
What kills me about this position is that as I said in my post when I entered the trade I knew I made a mistake. Apparently I talked myself into believing the mistake would heal quickly and I held instead of taking a loss that day. Now I’m sitting on a $300 paper loss. All hope is not lost though. The January calls on BA are worth selling to bring me back to a profit on the position.
I have to follow my decision tree when an option is assigned. Should I take the loss on BA and find a better opportunity or should I cover the stock with a covered call to bring me back to a profit. If I’m moving on, I figure out my price to sell, enter my order and move on. If I’m going to hold the newly assigned stock I have to figure out at what strike I should sell my new covered calls. That decision depends on where I think the stock is going. I try not to over analyze it and only think of this as a new trade. Eliminating the emotional side of my ego wanting to work it back to a profit is important. Most important is planning from where I am now, not where I started or where I wish I was. In that context I tend to sell the new covered calls close to the money. With BA trading just under 95, January 95 will most likely be the strike I sell at, but I’ll wait until market open to double check myself.
I’m sure some people will wonder why the option was assigned early. While interesting to ponder, it just doesn’t matter. What matters is that I own it now. If it hadn’t been assigned early it would have been assigned in three days from now when the option expired. But to amuse the curious, an option can be assigned early for a number of reasons. These are a couple of possibilities:
- The option seller bought the put as insurance for shares she owned and now took advantage of the drop to take a profit or limited loss by selling to me at a higher price.
- The option seller saw that BA was heading south and bought a put without being long the stock. Now he can sell the shares to me at 100 and stay short the stock or sell the shares at the current price to have sold high and then bought low. This isn’t as likely the case as he would likely have just sold the put at the higher price and taken the profit that way.