I want to discuss something somewhat basic that seems to hound me constantly: Retail traders asking me if I am worried about being assigned on a short put position. The very neophyte traders will sometimes go so far as to ask if I am worried about call assignment. I am going to give the short answer on assignment, and then I am going to prove it. Then I will discuss when it is okay to consider assignment. Very quickly, as traders being assigned should be on one of the last things we worry about. The reason being, it isn’t something that happens very often. The circumstances when a trader will be assigned are actually somewhat rare. This is especially true now with interest rates so low. Here is why:
I am going to start with this statement, and it was one of the first things I learned as a trader. A put is a call and a call is a put. Almost every trade pro traders make is converting calls to puts and vice versa. For instance, the protective put: If one charts the graph of a protective put (long put + long stock) what does the trader notice? It looks exactly like a call. The position has a limited loss, and unlimited upside.

Another common trade, the covered call (long stock + short call) looks exactly like a short put. The position has a limited upside and an unlimited downside.

If all combinations of stocks and options can be converted into other positions then there must be some sort of force holding these combinations together. Similar to E=MC2 the option world has a formula that holds it together called put-call parity. Put- call parity is the formula that ensures that traders cannot make more money buying calls than they can buying puts and stock. When options are out of parity, arbitrage begins; this quickly brings options back to parity. This Formula is:
Call-Put=Stock Price-Strike Price+(Interest-Dividends).
The short equation is C-P=S-X+(I-D), the I-D is often replaced with a K for cost of carry.
Using this formula if a customer wants to sell the February 50 call at 9 dollars, with the stock trading 55.00 and a cost of carry of 0.20, what would the put be trading? 9-P=55-50+.20. The put should be trading around 3.80. If the put had a bid of 4.00, the market makers would buy as many calls as they could for 9 dollars, sell the stock against the calls (converting them into puts), then sell the puts. This would allow them to synthetically buy the put and then sell the actual put.
Let’s think about put-call parity and assignment. If I am long a put, and long the underlying against that put, what position do I really have? I am long a call. If I really have on a call then the only way I would exercise my put was if the value of the call was less than the value of the put, stock and cost of carry combination or C
If I had bought an ATM butterfly in OEX on January 19th I may have entered into the OEX 500/530/560 put fly. On February 5th the OEX is 40 points lower trading at 491.35, the 530 puts are trading 41.50. With a market maker interest rate of .25 and a cash accrued dividend of about $2.95 our cost of carry ends up being about -2.90. The calls are trading .15 cents. Would I exercise the puts? Is .15<491.35-530+(-2.90)+41.5?
491.35+530=(-2.90)+41.5=.05. The answer is NO, thus despite a MAJOR down swing it is not in my counterparties best interest to exercise the put. With interest rates this low assignments are few and far between. The Market Maker rate will have to increase by at least 1% before this position becomes a somewhat attractive exercise candidate, even with an 8% down move.
Hopefully by now one can see there are few scenarios where the put should get assigned to seller. Calls are a slightly different story, non dividend paying calls should NEVER be early exercised. However, traders are at risk of assignment if the underlying pays a dividend. Take EXC for instance, on February 11th EXC goes ex-dividend paying 52.5 cents per share. If I am short the 40 calls should I worry about getting assigned? I can figure it out by plugging the numbers into put call parity. The call is trading around 4.25, the put around .05. The stock is trading 44.25 and the cost of carry ends up being (.01-.525).
Plugging these numbers 4.25-.05=44.25-40+(.01+.525) the 40 calls have a problem, the C-P does not equal the S-X+(K). Those calls will likely get assigned to me.
Now that we have run through the math traders should certainly be clear about how to tell if they will be assigned, using slow long hand. I will give you what I am calling the ‘Traders Short Hand’ to figure out assignment:
- If the (i-d) is greater than the value of the call opposite the traders short put, the trader may get assigned on the position. Generally, I do not pay attention to this until the call is worth less than .25 or so. With rates as low as they are it is closer to .05.
- If the dividend is great than the value of the put opposite the traders short call position, the trader is likely to get assigned on his or her short call position. If the call does not have a dividend traders should never be assigned on the short position.
Traders have many risks associated with a position. It is important to concentrate on the most important risks, while ignoring the insignificant risks. In almost every case, save dividends, assignment risk is at or near the bottom of trader’s risks.
Sign up for email updates, please support our sponsers, sign up for the forums, check us out at Seeking Alpha, and follow us on twitter-ID @option911!
DONT FORGET TO CHECK OUT EXPIRING MONTHLY and follow the E magazine on twitter @expiringmonthly

I am sure you guys are hopelessly lost without a post from me. Fear not I will post a nice piece tommorrow!
Mailbag/article coming tommorrow. Briefly, the SPX straddle lost, the OEX condor made money. Net it was a small loser.
Sign up for email updates, please support our sponsers, sign up for the forums, check us out at Seeking Alpha, and follow us on twitter-ID @option911!
DONT FORGET TO CHECK OUT EXPIRING MONTHLY and follow the E magazine on twitter @expiringmonthly

Coming out of today, I do not want to make any prognostications. However, there are a couple of strange things that I can’t help but point out. I will actually probably end up making a guess at a few thing, anyway.
The VIX popped about 20% today to over 26%. The SPX is now off over 7% from the top. Bill Luby over at VIXandMore may be getting the 10% IV move on this particular move. However, I do not think that will be the case. I am thinking we are going to be flattish to somewhat up tomorrow morning. The main reason, the VIX did not pop over the high from January 22nd, and the IV of the VIX options is incredibly high. This is making me think we could run right back down to 21 in the VIX in no time (or the market may tank). Traders, I will say one thing. I may be willing to sell vega, but I certainly wouldn’t do it in the VIX.
The index volatilities are way out of whack right now.
When I was on the floor there were lots of trading firms that liked to trade the indexes volatilities off the indexes off of each other. They must be having a field day today. If I was running a market making firm I would be selling volatility in the OEX and the SPX and buying it in the NDX and the RUT. The most out of whack index of them all is the OEX. For the first time in recent memory VXO actually popped OVER the VIX. At the same time the VIX/VXO are over the VXN. The Russell has actually been moving the least over the last few weeks. Thus its IV is, relative to the other indexes, low.
How am I approaching this market as a retail trader?
If I am looking to sell condors I want to do so in the OEX or the SPX. The calendar spreads have also lined where the front month is well over the back month. I am looking to trade the calendar. Just to disclose I bought a several SPX calendars today. In the Option911 account, I bought 5 SPX FEB1060/1070 strangles, because I want the gamma, and then I sold 30 OEX March 465/490/495/520 split strike butterflies against them because I want to sell the vega. I would have sold straddles, but they paper account wouldn’t let me. I really wanted to get these trades on thus, because trade monster is so hard to get a paper fill on the trades are losing a little over 3k combined. That said, if IV’s come in tomorrow these trades will win big. I also attempted to buy the SPX 1065 calendar, although I did not have any luck. If I am playing the calendar game, price is VERY important. One note, if you do not understand 100% what I am talking about here, please do not come close to trying to trade one of these spreads.
Here is the trades from today-Don't try this at home!


Underlying Data
| Symbol |
Close |
Change |
| VIX |
26.08 |
+4.48 |
| BTU |
41.10 |
-2.97 |
| IBM |
123.00 |
-2.66 |
| OEX |
490.07 |
-15.12 |
| SPX |
1063.11 |
-34.17 |
| WLP |
62.83 |
-1.24 |
SPX Price Chart for Feb 4, 2010

BTU Summary
| -20 |
BTU |
JUN10 |
55 Call |
@ |
2.25 |
Currently |
0.86 |
= |
-20 |
* 100 * |
1.39
|
=
|
+$2780 |
| 12 |
BTU |
MAR10 |
48 Call |
@ |
3.30 |
Currently |
0.61 |
= |
12 |
* 100 * |
-2.70 |
=
|
-$3234 |
TOTAL UNREALIZED LOSS IS
(excluding commissions) |
-$454 |
IBM Summary
| 12 |
IBM |
FEB10 |
125 Put |
@ |
0.94 |
Currently |
3.68 |
= |
12 |
* 100 * |
2.74
|
=
|
+$3283 |
| 12 |
IBM |
FEB10 |
140 Call |
@ |
0.74 |
Currently |
0.03 |
= |
12 |
* 100 * |
-0.71 |
=
|
-$853 |
| -10 |
IBM |
FEB10 |
130 Put |
@ |
2.28 |
Currently |
7.78 |
= |
-10 |
* 100 * |
-5.50
|
=
|
-$5495 |
| -10 |
IBM |
FEB10 |
135 Call |
@ |
2.03 |
Currently |
0.07 |
= |
-10 |
* 100 * |
1.96 |
=
|
$1960 |
TOTAL UNREALIZED LOSS IS
(excluding commissions) |
-$1105 |
OEX Summary
| 30 |
OEX |
MAR10 |
465 Put |
@ |
7.50 |
Currently |
7.50 |
= |
30 |
* 100 * |
0.00
|
=
|
+$0 |
| -30 |
OEX |
MAR10 |
490 Put |
@ |
14.90 |
Currently |
15.55 |
= |
-30 |
* 100 * |
-0.65 |
=
|
-$1950 |
| -30 |
OEX |
MAR10 |
495 Call |
@ |
12.20 |
Currently |
12.15 |
= |
-30 |
* 100 * |
0.05
|
=
|
+$150 |
| 30 |
OEX |
MAR10 |
520 Call |
@ |
3.30 |
Currently |
3.00 |
= |
30 |
* 100 * |
-0.30 |
=
|
-$900 |
TOTAL UNREALIZED LOSS IS
(excluding commissions) |
-$2700 |
SPX Summary
| 5 |
SPX |
FEB10 |
1060 Put |
@ |
19.20 |
Currently |
19.30 |
= |
5 |
* 100 * |
0.10
|
=
|
+$50 |
| 5 |
SPX |
FEB10 |
1070 Call |
@ |
18.10 |
Currently |
16.45 |
= |
-5 |
* 100 * |
-1.65 |
=
|
-$825 |
TOTAL UNREALIZED LOSS IS
(excluding commissions) |
-$775 |
WLP Summary
| 20 |
WLP |
FEB10 |
65.0 Put |
@ |
1.60 |
Currently |
2.97 |
= |
20 |
* 100 * |
1.37
|
=
|
+$2740 |
| -20 |
WLP |
FEB10 |
67.5 Put |
@ |
2.40 |
Currently |
4.95 |
= |
-20 |
* 100 * |
-2.55 |
=
|
-$5100 |
| 2 |
WLP |
MAR10 |
75 Call |
@ |
1.30 |
Currently |
0.21 |
= |
2 |
* 100 * |
-1.09
|
=
|
-$218 |
TOTAL UNREALIZED LOSS IS
(excluding commissions) |
-$2578 |
Sign up for email updates, please support our sponsers, sign up for the forums, check us out at Seeking Alpha, and follow us on twitter-ID @option911!
DONT FORGET TO CHECK OUT EXPIRING MONTHLY and follow the E magazine on twitter @expiringmonthly
