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Azov

Negotiating assignment fee on TOS

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Just wondering if anyone has ever had success negotiating with TOS to reduce/remove the $19.95 fee that TOS charges for assignment and exercise. If so, what kind of arguments worked best?

 

I agree with Kim that we shouldn’t have to negotiate to get the best rates. However, I greatly prefer TOS’s platform to anything else out there. I’ve been using tastyworks for a while now too, and their platform is only ok, but it’s still a work in progress, and they still charge $5 for assignment/exercise. 

 

The reason I’m asking - and not considering IB’s $0 assignments- is because I’m evaluating a couple of candidates for wheel trades (sell puts, get assigned, sell covered calls, get assigned, rinse/repeat). Since the cycle involves two assignments, the $40-ish total fees at TOS is cost prohibitive. And I refuse to use IB because of their auto-liquidation algorithm - I don’t want to have my account blown up if I get assigned on a couple of different positions one night and don’t have a chance to close things out within 10 minutes of the market opening. 

 

So if I could get TOS to come down or eliminate their assignment fee, that would be great. Otherwise I’m stuck with TW - I suppose I’ll get more used to their platform over time, but everything about their apps makes me feel like I’m playing an arcade game from the 80s. And not in a good way....

 

Any input is greatly appreciated!

 

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5 hours ago, Azov said:

 

Just wondering if anyone has ever had success negotiating with TOS to reduce/remove the $19.95 fee that TOS charges for assignment and exercise. If so, what kind of arguments worked best?

 

I agree with Kim that we shouldn’t have to negotiate to get the best rates. However, I greatly prefer TOS’s platform to anything else out there. I’ve been using tastyworks for a while now too, and their platform is only ok, but it’s still a work in progress, and they still charge $5 for assignment/exercise. 

 

The reason I’m asking - and not considering IB’s $0 assignments- is because I’m evaluating a couple of candidates for wheel trades (sell puts, get assigned, sell covered calls, get assigned, rinse/repeat). Since the cycle involves two assignments, the $40-ish total fees at TOS is cost prohibitive. And I refuse to use IB because of their auto-liquidation algorithm - I don’t want to have my account blown up if I get assigned on a couple of different positions one night and don’t have a chance to close things out within 10 minutes of the market opening. 

 

So if I could get TOS to come down or eliminate their assignment fee, that would be great. Otherwise I’m stuck with TW - I suppose I’ll get more used to their platform over time, but everything about their apps makes me feel like I’m playing an arcade game from the 80s. And not in a good way....

 

Any input is greatly appreciated!

 

Robinhood charges nothing for assignment.  I have never traded with them so I can’t speak to platform, etc.

https://support.robinhood.com/hc/en-us/articles/360001214663-Free-Options-Investing

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On 11/10/2018 at 8:05 AM, SBatch said:

Robinhood charges nothing for assignment.  I have never traded with them so I can’t speak to platform, etc.

https://support.robinhood.com/hc/en-us/articles/360001214663-Free-Options-Investing

I have heard (admittedly, secondhand) that Robinhood has a similar auto-liquidation algorithm to IB that has also blown up people’s accounts. It makes me very nervous to trade with a broker that will indiscriminately liquidate positions without regard to whether it solves the problem that created the margin call in the first place! If that’s not the case with RH, I would welcome a correction from anyone with firsthand experience. 

 

TOS may have overpriced commissions, but they have always been extremely easy to work with when I’ve been assigned on positions. It’s just that I can’t pay $40 round trip in assignment fees to do these wheel trades and still be profitable long-term. 

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I indirectly answered my own question. I called TD/TOS yesterday to request a lower commission rate on my options trading. They granted my request today (no ticket fee and $0.75 per contract), and they also (unasked) lowered my exercise/assignment fee from $19.95 to $8. I realize that $8 is still higher than the $0 I could get at IB, or even the $5 at TW, but this is probably JUST low enough to make it feasible to do wheel trades with TOS.

 

Edit: they also lowered my equities commission to $4.95 (also unasked).

Edited by Azov

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    • By cwelsh
      It is not. (Well, it is rarely a problem).  In fact, almost 99% of the time, early assignment is a better outcome.  Below will set forth two common assignment examples, work through the potential outcomes, and demonstrate why assignment is typically a better outcome than having just held the position.
       
      For Steady Option’s Anchor members, there is a persistent risk of being assigned a long stock position on the income producing portion of the strategy (the short SPY puts).  This only happens in sharp market declines or very close to rolling of the position, but it can happen.  Assignment risks increases the closer the position gets to a delta of 1.  Most recently, this happened the week of May 13, 2019.For purposes of this example, we’ll use the actual SPY positions and walk through what did occur and could have occurred in other possible market situation. 
       
      In early May, the strategy sold four contracts of the May 20, 293 put for $3.11.  The market started to drop. On May 19, 2019, the options were early exercised when SPY hit 285.  The value of the contract when assigned was $8.11.  All of a sudden, most accounts had 400 shares of SPY and were down $117,200 (4 contracts x 100 x $293).  Most accounts don’t have cash in them to cover the position and may have received a Reg-T notice (a Reg-T notice is a form of a margin call by your broker).   What is a trader to do?
       
      Well first, the next trading day, simply close the position.  Sell the stock, and the margin call should be covered.  If it’s not, you can always sell other holdings to cover it.  The way the Anchor Strategy is structured, it is virtually impossible not to have available cash or stock to cover in this situation.  After closing the assigned position, is the trader worse or better off than if the position had been held?  In all market conditions (up, down, flat), the trader is either in the same position as not having been assigned or better off.
       
      Note: This assumption ignores transaction costs.  Some accounts have assignment fees, different commissions for buying and selling stocks and options and other various fees.  These fees could make a difference on the analysis, depending on a trader’s individual account.  Since such fees vary widely, the below discussion ignores all fees.
                     
      The Market stays flat, SPY stays right at 285
       
      In this case, the trader sells the assigned shares back at $285, facing a loss of $8.00/share.  ($293 - $285)[1].    In other words, the trader has lost $1,956 ($8 stock loss less $3.11 received for selling the original position). This seems like a poor outcome.
      [1] For purposes of this article, I am going to ignore the fact that the position was hedged and look at it just from the assignment point of view. 
       
      However, this is better than if the trader had just closed the short put at $8.11 at the market open.  In that case, the trader would have lost $2,000.  (($8.11 - $3.11) x 4 x 100).  By being early assigned, the trader saved $0.11/share.  This is what actually happened in actual trading the week of May 13.
       
      The Market moves up the next morning

      What would have happened though if the market had gone up?  Let’s say to SPY $288.  In this case, instead of selling the stock back at $285, you would sell it back at $288.  That is a loss of $5 per share ($293 - $288) for a total loss of $756 on the trade ($5 - $3.11).
       
      Once again, the trader is better off.  Delta of the short put is not one, rather it had a dynamic average of .95.  This means the value of the put would have declined not to $5.11 (the previous price of $8.11 - $5.11), but, by $2.85 to $5.26.  Closing that option position would result in a loss of $860 on the trade ($5.26-$3.11).
       
      The Market goes down

      The scariest situation for a trader is waking up the next morning and the market has declined.  Instead of SPY $285, the market might have continued to go down to SPY $282 (or worse).  In this case, the trader sells the stock for $282, resulting in a loss of $11 per share for a total loss on the trade of $3,156 ($11-$3.11).
       
      Yet again, the trader is better off.  With the market going down from $285 to $282, the dynamic delta average is .98 and time value has dropped a bit, and the short put is now worth $11.03.  Closing this put for a loss of $11.03 results in a total loss on the trade of $3,168.  Even if the market had plunged down to SPY 100, the two positions would have been equivalent – meaning that the loss by being assigned equals the loss of having been in the short put.
       
      In other words, in every market situation, the trader is either better off or exactly the same when assigned the position rather than having simply held the short put.  The closer delta is to 1, the more likely you are to be assigned, but even in that situation, you would be no worse off between assignment and holding.
       
      But if that’s true for puts, is it also true for calls?

      Let’s take a common example.  You sell 5 contracts of the $100 call on Stock ABC that is currently trading at $99 for $2.00.  You are now short the $100 call.  You receive $1,000.  It expires in 3 weeks.  Two weeks from now the stock is trading at $99.80 with earnings coming up tomorrow, and the option is trading at $1.00.You have $1,000 in cash and -$500 in call value.  Someone exercises the option.  The next morning your account looks like:
      Short 500 shares ABC at a value of $49,900 Long $51,000 cash ($50,000 for sale of stock at $100/share plus $1,000 from the sale)                
      Are you in trouble?  Did you lose money?  Once again no, you’re not. Let’s look at what happens in each situation at market open:
       
      The Market stays flat at $99.80

      In this situation, you buy back the 500 shares of Stock ABC for $49,900.  You keep the $51,000 and did not have to buy back the call.  So you’re up $1,1000.
       
      If you had not closed the position out, not been assigned, and the market stayed flat, the price of the option may have declined to around $0.50. 

      Clearly, you are better off because of the assignment – by over $800.
       
      The Market goes down (any amount)

      Earnings come out and the price drops to $90 (or any value below $100).  In this situation, you buy back the 500 shares for $45,000.  You keep the $51,000 and did not have to buy back the call.  So you’re up $6,000.
       
      If you had not closed the position out, not been assigned, and the market went down, the price of the option may have declined to $0.01.
       
      Again, you are better off because of the assignment – by almost $6,000.

      The Market goes up by less than $2 (to under $102)

      Earnings come out, and the price increases to $102 (or anything between the last close and $102).  You buy back the shares for $51,000.  This nets out the cash you already had and did not have to buy back the calls.  In this situation you break even.

      If you had not closed the position out, not been assigned, and the market went up, the price of the option contract would have increased to at least $2.00. 

      In this case, you are in the same boat because of the assignment.  Closing the short contract at $2.00 would cost you $1,000, which nets to $0.00 with the $1,000 you received from the sale.
       
      The Market goes up by more than $2 (e.g. $110)

      Earnings come out, and the price increases to $110.  In this situation you must buy the shares back for $55,000.  Offsetting with the cash already received, you have lost $4,000.

      If you had not closed the position out, not been assigned, and the market went up a significant amount, the option price would have increased to at least $10.  Closing this short contract out will cost $5,000. You are again better off because of the assignment.

      In other words, in every situation you are in an equal or better situation because of an assignment.  This is because options have time value – which an early assignment forfeits to the option contract holder.  Even if the option contract had no time value left in it, the worst situation is still break even.

      The only real risk to assignment is failing to quickly move and adjust the position (eliminate the over sized short position), your account goes into a Reg-T call, and your broker starts closing positions in a non-efficient manner.There are brokers who also require margin calls to be covered by cash deposits, instead of adjusting positions.  (Very few).  If that’s the case, you may get a demand for cash (and switch brokers). 
       
      As long as you stay on top of your positions and address any assignments, there is no reason to fear early assignment since in all situations you will be either equal or better off on early assignments.  This is why I am almost always surprised by early assignments.  The only time early assignment really ever makes sense is on surprise dividend announcements that weren’t originally calculated into the option prices – and even then, as the price of the option likely moved before the assignment occurred, there may be no impact.
       
      What any option investor should always keep in mind is what to do if they get assigned early, what that will look like, and what trades will need to be entered the next business day.  Being prepared prevents fear and mistakes – particularly when there is no need for that fear in the first place.
                     
      Christopher Welsh is a licensed investment advisor and president of LorintineCapital, LP. He provides investment advice to clients all over the United States and around the world. Christopher has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. Christopher has a J.D. from the SMU Dedman School of Law, a Bachelor of Science in Computer Science, and a Bachelor of Science in Economics. Christopher is a regular contributor to the Steady Options Anchor Strategy and and Lorintine CapitalBlog.
       
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    • By cwelsh
      If you don't you can find your entire account blown out over a weekend.
       
      Assignments occur in two basic varieties. First, on expiration Friday (or Thursday or Wednesday depending on the instrument your trading, but most commonly on Friday). If you have a position that is .01 in the money, or more, you WILL be assigned. For instance, if you have a 100 Call on stock XYZ that expires today, and XYZ closes (AFTER HOURS) at 100.01, you will find that you own, sometime Saturday, 100 shares of XYZ that you paid $100/share for.
       
      Now this option might have only cost you $100 or so. But all of a sudden, due to the inherent multiplier in options, you are now out of pocket $10,000.00. What if you're account only had $5,000.00 in it? Well, you are going to get both a Regulation T Notice and margin call from your broker. First thing Monday morning, your broker will automatically liquidate the position. What if there is adverse news over the weekend and the opening price is only $80? Well you just lost $2,000.0 -- in a $5,000.00 account. In other words, that $100 option just cost you 40% of your entire account. This happens.

      What if you had "hedged" the position though, and had a vertical call spread? For instance, you might have bought the $100/$105 spread on XYZ. Well if XYZ closes anywhere above $105 you are ok because BOTH positions will be auto-exercised. This SOMETIMES results in a margin call as well -- but don't worry. Option clear throughout the day on Saturday and your account will frequently show one position and the other not exercised yet. By Sunday morning it will be fixed. By way of example, I had a very large position (for me) (20 contracts) in the LNKD 92.5/95 vertical call before earnings. Well earnings did what they were supposed to and LNKD jumped to 104. Well Saturday morning, all of a sudden, I was SHORT 2000 shares of LNKD and had received roughly $190K in cash into my account. This sends off all kinds of margin alerts. I got an email, a call, and another call. Ignore them. The 92.5 side simply hadn't cleared yet. Three hours later the other option cleared, buying the shorts back at 92.5. Then Sunday morning, your account statement will reflect that all trades happened at the same time.

      HOWEVER, what if, on that 100/105 spread, XYZ closes at 103 on Friday? Well, guess what, you'll be assigned on the 100 position, the 105 will expire worthless, and now your back in margin call.

      MORAL OF THE STORY:
      DON'T EVER LET YOURSELF BE ASSIGNED ON A SPREAD THATS NOT FAR IN THE MONEY ON BOTH LEGS.


      Image courtesy of https://www.projectoption.com. 

      What if, on Friday, the price of XYZ was at $106 at close? You better have closed the spread, because of after hours trading. The price of XYZ can move after hours -- but you can't get out of the options. So if the market closes at 106, and you say good, both legs will clear and I won't pay commissions (or pay less commissions) and get a huge tax break, you could be wrong, as in after hours the market might go back to $104.98. Then you're screwed, only the 100 option gets exercised and you go into margin call. I'm convinced when your near a strike the market makers manipulate the after hours markets to have this happen.

      Of course if you have enough cash in your account, you won't get margin called -- you're risk profile will just be largely out of whack.

      And this isn't to say you can't have a big benefit from this. My single most profitable trade EVER occurred on a spread that was $.50 above the line, I didn't close it, and then in after hours the price dropped. So I got assigned long on the lower strike. Well, that weekend there was big news involving the company and the price jumped 15% the next morning. In that case, here's what happens -- I own the 100 (long) /105 (short) vertical. After hours, the price is $104.92. Well that spread was worth $4.85 at close on 20 contracts, or $9,700. Well, Saturday I'm now the proud owner of 2,000 shares bought at $100.00 each, for a net cost of $200,000 -- oops. Margin call, broker call, broker email, etc. Well they inform me the trade will immediately close at open on Monday. Well the price jumped, and the position was closed, at $240,000.00. My original investment of $8,500.00, that I didn't want to close at $9,700.00, netted me $40,000.00, or roughly a 470% return. BUT, what if the price had gone down 20%? Well I would be owing my broker money and have completely blown out my account.

      If you have ANY questions on this, please let me know.

      Now SITUATION TWO -- and you will, sooner or later, encounter this. Let's say we have a 100(long)/105 (short) put spread on XYZ. Only we own the September spread and today (Friday) XYZ closes at 103. No big deal - UNLESS someone exercises their 105 option. American style options can be exercised at anytime. Why would this happen with time value? Who knows, most likely someone needed to unwind a position, hedge something, take profits, or any number of things.
       
      Well if you had a 10 contract position, on Saturday your account is down $105,000.00 in cash and you are long 1,000 shares of XYZ. You will again likely go into margin call, unless you had over $105,000 in cash in your account. However, while this is a headache and you will have to deal with your broker, you don't need to panic because the position is still hedged.
       
      So what happens here?  Well when Monday rolls around ideally the price of XYZ has gone up.  If it has, you sell the shares and keep the money.  If the price has gone DOWN though, you stand to lose up to $5,000.00.  You can't lose more than that because you still own the 100 puts.  Depending on what occurs here, your broker might just auto-close the whole position, may allow you to exercise the 100 puts and have that resolve the situation, or may let you just sell off enough to get out of margin call.  Different brokers handle margin violations differently.  The good news is though your losses are capped.

      When this happens, take your lumps and move on. I have this happen about once a quarter and my worse loss was 4%. There's nothing you can do to protect against this. You are hedged, and you won't blow your account out, but it does suck - particularly if the price moves down quite a bit at the open.

      I hope that clears some things. If not, please let us know.

      Christopher Welsh is a licensed investment advisor in the State of Texas and is the president of an investment firm, Lorintine Capital, LP which is a general partner of three separate private funds. He is also an attorney practicing in Dallas, Texas. Chris has been practicing since 2006 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. He offers investment advice to his clients, both in the law practice and outside of it. Chris has a Bachelor of Science in Economics, a Bachelor of Science in Computer Science from Texas A&M University, and a law degree from Southern Methodist University. Chris manages the Anchor Trades portfolio, the Steady Options Fund, and oversees Lorintine Capital's distressed real estate debt fund.
       
       
    • By CXMelga
      Can someone kindly clarify the following couple of questions for me please, thank you
      Looking at America style options first
      I understand they can be exercised at any time. 
      So if sell a call option (write) for a strike price of $55 when the stock (spot) price is $45 with an expiry of 30 days (just to give some numbers) 
      Question 1: 
      If the stock never reaches its strike price during this 30 days the holder of the option (buyer) 'can not' exercise this option (as the contract terms have not been met). Therefore the contract cannot be assigned, is this correct ?
      Even thought the option holder (buyer) cannot exercise (until strike price is reached) they could sell their option contract (with less days left on it), at what ever market premium they can get for the option at that time. (which is not the same as an option being exercises/assigned) ?
      Question 2: 
      When it comes to European style options which can only be exercised at at expiration (small time window) again using the numbers above (but on an Index) 
      If the index goes goes well above is strike price 15 days from expatriation, but then goes back down below the strike price at expiration, I assume the option expires worthless. As the buyer of the option was 'unable to exercise it when it went past the strike price' is the above also correct ? 
      However as above even though the holder of the option could be exercise this European style option exactly when they wanted, they could sell the option on (with the remaining time until expiry and same strike price), is that also correct ?
      Thanks very much in advance
       
    • By Mark Wolfinger
      Jeff,

      I am here to help you understand how options work, but am at a loss as to where to begin. I’ll explain in the simplest possible language. I am not talking down to you. I am trying to get you to move past a mental block.

      Facts
      Any time that an option is in the money (ITM) at expiration, expect that its owner will exercise. Even when it’s ITM by one penny. The option owner must fill out and submit a DO NOT EXERCISE form to prevent the Options Clearing Corporation from exercising ITM options Many beginners do not know they have the choice to not exercise

      Many beginners forget they own the options or forget that expiration has arrived. As a result, they become owners of stock that they do not want, and cannot afford to purchase

      Many beginners make mistakes. Let’s minimize yours.
       
      Call strike price + premium paid = break-even

      I’ve placed your equation in bold. It is of vital importance that you understand one thing about that equation:

      This equation, all by itself, is the cause of your problem.

      Forget it. It has no relevance on whether anyone exercises an option. Your formula is fine for keeping records, after the trade is closed. It is unimportant now. More than that. It is currently causing confusion and limits your ability to recognize the truth.
       
      Q: Using such a formula, does it follow that when the stock price is less than the break-even, then the call would not be exercised? For example, if at expiration the stock was $15.05 and one had purchased the $15 strike for a $0.10 premium, it seems one would not exercise the option.

      No, it does not follow. If you ignored your break-even equation, you would never ask this question. You believe the owner of your call option would throw away $5, just because it represents a loss! Look at it from the perspective of someone who owns 100 calls. They are worth $500 to the trader.

      You are saying that it ‘seems right’ for trader would throw away $500 because he paid $1,000 for that investment. No one in his right mind would do that.

      To clarify: Have you ever sold stock at a loss? Did you consider telling your broker to take the shares out of your account and to give them to some randomly chosen person? Instead of taking current value for your stock, you could have chosen to make them worthless to yourself. Surely you know not to do that. When taking a loss, you recover some money. Your money. This situation is no different.

      You must not toss cash in the trash just because the trade is at less than break-even.

      If you lost a $10 bill and the next day found a $5 bill, would you refuse to pick it up because your loss was a larger sum? This is exactly the same. You must understand this principle. I don’t know how to make it more clear. Those options are worth $5 apiece and only an idiot would elect not to collect cash for them. [Exercise is a different decision and trust me when I tell you that selling is better for you.] Whoever ends up holding those options will exercise at expiration.

      There is a tiny [my guess is less than one chance in 10 million] that an option ITM by five cents would not be exercised by its owner. But, it remains a possibility. People do make mistakes.

      Q: Yet I have read that options will be exercised if the stock price exceeds the strike price at expiration [MDW: this is only true for calls; for puts the stock must be below the strike], which it does in my example. It makes me wonder if there are other factors being considered by the call buyer. One rule, which I assume is adopted by the industry, is that all options in the money at expiration by $0.05 or more are automatically exercised, unless otherwise directed. What other factors could cause calls to be exercised below the break-even detailed above?

      Yes, automatically exercised. The OCC does not care about break-even. Nor should you. Today the number is ITM by $0.01, not $0.05.

      You want to know what other factors would make someone exercise when that exercise (or sale) results in a loss. Here’s the answer: MONEY.

      When you invest or trade, it is inevitable that you will have losses. When you have a loss, you do not have to lose every penny. The trader is allowed to sell (or exercise) to recover some money. You probably understand that process. However, when expiration comes into the picture, you ignore what you know because you think about that break-even nonsense. When you fail to exercise (or sell), you allow the option to expire WORTHLESS. Why would you take zero for an option that you can sell for $0.05? Answer that one question (correctly) and you will understand.

      How can the original cost matter? That’s your hang-up. That break-even is bothering you. Today, right now, you have a choice. Take $5 or take zero. It’s as simple as that.
       


      Q: Perhaps my question was misunderstood. I discussed selling the call rather than at what stock price a call owner will exercise. I understand and agree with you that it is better to sell your call for any amount rather than let it expire. I also understand what you mean by saying the premium paid is meaningless. Yes, if your plan was to sell the call and not exercise it then the premium paid is meaningless in terms of deciding whether you are going to sell the call or let it expire.[MDW: If you understand that, then why are you asking?]
      (However, the premium is not meaningless if you want to determine if your trading strategy is successful as it represents part of your investment.)

      I did not misunderstand. The premium is meaningless, as you admit.

      You continue to look at useless items. You think record keeping and evaluating your strategy play a role in this discussion. They play no role when it’s time to make a trade decision. They are used after the fact to see how well you did. [If you disagree, and I have no doubt that you do, that discussion is for another time]

      Q: Also, I think you misunderstood my example when I said the stock price was $15.05 and I had a call with a $15 strike for which I paid $0.10. This was interpreted as the stock was trading at $15.10. Perhaps the price relationships I used in my example would not exist in the market. I apologize if I improperly set my example.

      When you buy the call at ten cents, and eventually exercise, then you buy the stock at the strike price ($15) per share, but your cost basis is $15.10. You did not improperly set your example. Nor did I misunderstand.

      Q: Even so, I am encouraged by how you ended your response: “In this scenario you should almost never want to exercise”. This indicates to me that the risk of owning the stock, plus the additional investment required, must produce a greater return than displayed in the example before exercising the call becomes likely (at least for you).

      No, not for me. For everyone. You made an investment. You sought a certain return. You did not earn that return. so what? Today is decision time: You take your $5 or you don’t. ‘Return’ no longer applies.

      You are confused because you are looking at too many variables

      You are concerned with break-even. You are worried about whether your strategy is working. You think about producing ‘a greater return.’ NONE of that matters at the time when the call owner decides what to do with the options: sell, exercise, discard. You either take the $5 or you don’t. It’s that simple. There is nothing else to consider. The fact that you have irrelevant items on your mind is the reason this is a problem.

      Q: I’m still left not knowing at what stock price / strike price combination calls are usually exercised. [MDW: Of course you know. When the stock is at least one penny in the money options are exercised.] I suppose as a buyer it would be when the stock price is greater than the strike price plus the premium. [MDW: NO]As a covered call seller it probably would be best to assume it would be when the stock price exceeds the strike price.[MDW: YES] Although this is not technically correct since a call’s price must be greater than zero to be sold, it’s probably good enough.

      Calls are always exercised when they are in the money at expiration. Period.

      There may be the occasional individual investor who correctly (for his/her situation) decides that exercising is too expensive because of commissions (and there were no bids when he/she tried to sell the call), but in general, all ITM options are exercised. That is all you or anyone needs to know.

      Over the years, if (and only if) you can overcome your mental block, you may not be assigned a couple of times when the option is ITM by a penny or two. Just don’t expect it to happen.
      Q: I appreciate your efforts to help me with my question. I’m sure when my covered calls expire next week I will have an even better understanding that can only come from experience. Thanks again.

      You are welcome. However, your entire conversation was from the point of view of the call owner. As the call seller you will learn zero about the mindset of the call owner. ZERO.

      You must open your mind, throw out your misconceptions, and the truth will be right there in front of you. This is not difficult. This is the easy part. If you cannot understand this, there is no chance you can ever learn to use options effectively.

      Mark Wolfinger has been in the options business since 1977, when he began his career as a floor trader at the Chicago Board Options Exchange (CBOE). Since leaving the Exchange, Mark has been giving trading seminars as well as providing individual mentoring via telephone, email and his premium Options For Rookies blog. Mark has published four books about options. His Options For Rookies book is a classic primer and a must read for every options trader. Mark holds a BS from Brooklyn College and a PhD in chemistry from Northwestern University.

      If you liked this article, visit our Options Trading Blog for more educational articles about options trading. 

      Related articles:
      Can Options Assignment Cause Margin Call? The Right To Exercise An Option? Options Expiration: 6 Things To Know Early Exercise: Call Options Expiration Surprises To Avoid
       
    • By cwelsh
      Option assignments occur in two basic varieties. First, on expiration Friday (or Thursday or Wednsday depending on the instrument your trading, but most commonly on Friday). If you have a position that is .01 in the money, or more, you WILL be assigned. For instance, if you have a 100 Call on stock XYZ that expires today, and XYZ closes (AFTER HOURS) at 100.01, you will find that you own, sometime Saturday, 100 shares of XYZ that you paid $100/share for.
       
      Now this option might have only cost you $100 or so. But all of a sudden, due to the inherent multiplier in options, you are now out of pocket $10,000.00. What if you're account only had $5,000.00 in it? Well, you are going to get both (a) a Regulation T Notice and (b) margin call from your broker. First thing Monday morning, your broker will automatically liquidate the position. What if there is adverse news over the weekend and the opening price is only $80? Well you just lost $2,000.0 -- in a $5,000.00 account. In other words, that $100 option just cost you 40% of your entire account. This happens.
       
      What if you had "hedged" the position though, and had a vertical call spread? For instance, you might have bought the $100/$105 spread on XYZ. Well if XYZ closes anywhere above $105 you are ok because BOTH positions will be auto-exercised. This SOMETIMES results in a margin call as well -- but don't worry. Option clear throughout the day on Saturday and your account will frequently show one position and the other not exercised yet. By Sunday morning it will be fixed. By way of example, I had a very large position (for me) (20 contracts) in the LNKD 92.5/95 vertical call before earnings. Well earnings did what they were supposed to and LNKD jumped to 104. Well Saturday morning, all of a sudden, I was SHORT 2000 shares of LNKD and had received roughly $190K in cash into my account. This sends off all kinds of margin alerts. I got an email, a call, and another call. Ignore them, they're idiots. The 92.5 side simply hadn't cleared yet. Three hours later the other option cleared, buying the shorts back at 92.5. Then Sunday morning, your account statement will reflect that all trades happened at the same time.
       
      HOWEVER, what if, on that 100/105 spread, XYZ closes at 103 on Friday? Well, guess what, you'll be assigned on the 100 position, the 105 will expire worthless, and now your back in margin call.
       
      MORAL OF THE STORY:
       
      DON'T EVER LET YOURSELF BE ASSIGNED ON A SPREAD THAT'S NOT FAR IN THE MONEY ON BOTH LEGS.
       

       
      What if, on Friday, the price of XYZ was at $106 at close? You better have closed the spread, because of after hours trading. The price of XYZ can move after hours -- but you can't get out of the options. So if the market closes at 106, and you say good, both legs will clear and I won't pay commissions (or pay less commissions) and get a huge tax break, you could be wrong, as in after hours the market might go back to $104.98. Then you're screwed, only the 100 option gets exercised and you go into margin call. I'm convinced when your near a strike the market makers manipulate the after hours markets to have this happen.
       
      Of course if you have enough cash in your account, you won't get margin called -- you're risk profile will just be largely out of whack.
       
      And this isn't to say you can't have a big benefit from this. My single most profitable trade EVER occurred on a spread that was $.50 above the line, I didn't close it, and then in after hours the price dropped. So I got assigned long on the lower strike. Well, that weekend there was big news involving the company and the price jumped 15% the next morning. In that case, here's what happens -- I own the 100 (long) /105 (short) vertical. After hours, the price is $104.92. Well that spread was worth $4.85 at close on 20 contracts, or $9,700. Well, Saturday I'm now the proud owner of 2,000 shares bought at $100.00 each, for a net cost of $200,000 -- oops. Margin call, broker call, broker email, ect. Well they inform me the trade will immediately close at open on Monday. Well the price jumped, and the position was closed, at $240,000.00. My original investment of $8,500.00, that I didn't want to close at $9,700.00, netted me $40,000.00, or roughly a 470% return. BUT, what if the price had gone down 20%? Well I would be owing my broker money and have completely blown out my account.
       
      If you have ANY questions on this, please let me know.
       
      Now SITUATION TWO -- and you will, sooner or later, encounter this. Let's say we have that same 100(long)/105 (short) spread on XYZ. Only we own the September spread and today (Friday) XYZ closes at 103. No bigger. UNLESS someone exercises their 100 spread. American style options can be exercised at anytime. Why would this happen with time value? Who knows, most likely someone needed to unwind a position, hedge something, take profits, any number of things realy.
       
      Well if you had a 10 contract position, on Saturday your account is now down $100,000.00 in cash and you won 1,000 shares of XYZ. You will again go into margin call. However, while this is a headache and you will have to deal with your broker, you don't need to panic because the position is still hedged. You can certainly still lose money -- but only up to the 105 line.
       
      What happens? Well your broker will force you to exit the position Monday morning at the open. If you BEG and wheedle, the broker might let you close the position yourself, so you can close at the mid point instead of just a market order. They should let you do this because the position is still hedged, but you are technically in a Reg T violation, so they won't let you hold it for long. Monday you'll have to sell your shares and buy back the short calls. This should be, at worst, a break even situation because of the time value left in the short calls. However, markets fluctuate and you might have to sell your stock at something like 104 and by the time you exit the short calls its up to 105 (or you get a bad fill price) so you give back some.
       
      When this happens, take your lumps and move on. I have this happen about once a quarter and my worse loss was 4%. There's nothing you can do to protect against this. You are hedged, and you won't blow your account out, but it does suck.
       
      I hope that clears some things. If not, please let us know.
       
      By Christopher B. Welsh
       
      Christopher B. Welsh is a SteadyOptions contributor. He is a licensed investment advisor in the State of Texas and is the president of a small investment firm, Lorintine Capital, LP which is a general partner of two separate private funds. He offers investment advice to his clients, both in the law practice and outside of it. Chris is an active litigator and assists his clients with all aspects of their business, from start-up through closing.
       
      Chris is managing the Anchor Trades portfolio.
    • By Kim
      The impact of commissions on your results can be astonishing.
       
      This excellent article by Business Insider is asking the right questions (and also answering some of them):
       
      When you pay commission fees for online stock trades, where does that money go? Do you get better execution by paying $9.99 to TD Ameritrade than by paying $1 to Interactive Brokers? How much better? Enough to justify the difference in price?
       
      Their conclusions:
      At least 17 million investors overpaying for online brokerage Only 12% of commission fee is used for trade execution at top brokerages Over $1.8 billion per year wasted on unused premium services Lets analyze one specific month, January 2015, and see how different commissions structure can impact the returns of our SteadyOptions model portfolio.
       
      SteadyOptions $10k model portfolio traded 228 contracts in January. If you paid $0.75/contract with no ticket fee, you spent $171 on commissions, which is 1.7% of your portfolio value. While not cheap, but considering the fact that we produced 20.7% ROI in January (12.4% return on the whole account assuming 10% allocation), it is completely reasonable.
       
      However, if you had a ticket fee of $8, in addition to $0.75/contract, you would pay $427 in commissions, more than double. In this case, your returns will be reduced by 4.3%.
       
      This will make HUGE difference in the long term. To see how huge, I went to pro-trading-profits.com, a third party website that tracks performance of 400+ newsletters. I clicked on SteadyOptions performance report and played with different parameters. Using the $0.75/contract with no ticket fee, a $10,000 portfolio would produce $35,693 gains since inception. Adding $8 ticket fee to each trade would reduce the gains to $23,869.
       
      The impact of the ticket fee is especially significant if you have relatively small account.
       
      Of course commissions is only part of the whole package. Other factors include tools, platform, customer service etc. Barron's publishes a comprehensive brokers review every year. Here is the last one. Interactive Brokers (IB) was ranked #1 by Barron's third year in a row. This is the broker I personally have been using for the last 7 years and I'm very happy.
       
      Barron's mention that "IB offers a lot more support to new clients, including individuals, especially those with larger accounts. Yes, using the word "support" in the same sentence as Interactive Brokers (without the modifier "dismal") is a change for us, but the firm has clearly made this a point of focus."
       
      Their conclusion:
       
      "Interactive Brokers continues to have extremely competitive pricing, and the lowest margin fees of any broker in our survey. You may incur some data fees, but the firm takes care of any options-exercise costs, which can generate unexpected fees at many other brokers."
       
      On the open section of our forum, we have couple very useful discussions about brokers:
       
      Brokers and commissions
      Interactive Brokers tips, tricks, webtrader etc.
       
      There is a consensus among our members that IB and TOS by TD Ameritrade offer the best combination of commissions, platform, and execution. If you decide to go with TOS, I highly recommend that you negotiate a commissions structure that does not include a ticket fee.
       
      Here are couple more good articles worth reading:
       
      The Truth Behind Broker Commissions - Learning Markets
      Comparison of online brokerages in the United States
      Relative Importance Of Options Brokerage Fees
       
      For Canadian traders, here is an excellent study on the commissions schemas offered by Canadian discount Brokers.
    • By Mark Wolfinger
      What would make you wait for early exercise till Wednesday morning, Thursday morning, Friday morning of expiry week as a trader? Assume you have cash to buy all contracts. The time value is negligible, and theta is eroding it fast.
       
      Would you change your mind if the risk-free interest rate was say 8% and not 0-1% as currently?  Is that rate a huge factor for 2-4 days anyway?
       
      I read some books where a bunch of math experts say that except for a dividend-paying underlying, early exercise is impossible.
       
      Personally, if I were the call buyer and I had bazillion money, I would not sell the calls as the bid/ask spread widens and the market makers play games. I would choose early exercise sometime on late Wednesday or anytime Thursday to remove option spread slippage, so I buy underlying at the strike price and immediately sell it to lock in profit, because underlying spread is narrower than the option spread.
       
      Answer:
       
      This is a very easy question.
       
      1) I WOULD NEVER, exercise a call option prior to expiration – UNLESS it is to capture a dividend.
       
      Before I go further, there are three valid reasons why someone may want to exercise a call option early.  My guess is that >99% of all option traders will never encounter these situations. 
       
      These situations exist, and I mention them for the purist.  However, my contention remains that if you are a retail investor, you can easily go your entire lifetime and never exercise a call option – or have any reason to do so.
       
      A smart retail trader NEVER exercises a call option.  What can be gained?  Think about it.  Why would anyone prefer to own stock and suddenly have downside risk.
       
      If you are assigned an exercise notice on a call option prior to expiration, consider it to be a gift (unless you cannot meet the margin call).
       
      2) If I no longer want to own the option, I sell it.  You seem to arbitrarily hold options until Wed/Thur of expiration week.  That is terribly foolish.  The ideal time to sell an option is when YOU no longer want to own it – not on an arbitrary calendar date.
       
      3) The price paid for the option is 100% irrelevant.  I don't know why so many people get hung up on this.  Assume you own a call option and the price is $6.  Assume you no longer believe the stock is moving higher.  Does the price paid for that option change the decision to sell?  Would you sell if the cost were $2 but hold if you paid $7?  If 'yes,' then you don't understand trading. 
       
      When you no longer want to own a position then don't own it.  Do not hold just because it would result in a loss if you were to sell.  You already lost the money, and holding invites a larger loss.
       
      Bottom line: You either want to exercise your option, or you don't.  You either want to sell your option, or you don't.  The price you paid is ancient history and 100% immaterial.
       
      4) If the time value is negligible, then there is no theta to be 'eroding fast.'  Theta is the erosion of time value.
       
      5) I would never change my mind.  Period.  Exercising a call option is stupid (exceptions noted above).  Just take that as gospel.  It is stupid.  Just sell it when you don't want to own it.  Interest rates do not matter over a two-day period.  But why own stock for two days?  Don't exercise.
       
      6) If the option bid is less than parity (i.e. if you cannot get at least a fair price for the option), then it is possible to exercise and IMMEDIATELY sell stock.  But this involves extra commissions and is probably still a bad idea.
       
      It is NOT the bid/ask spread that matters.  If the stock is 60 bid, you can sell stock at 60.  If you own the 50-call and the market is 10 bid 14 asked, what difference does that make to you if the market is wide.  If you can sell at 10, that is easier and less expensive than selling stock.
       
      If however, the market is 9.90 to 10.10, that's a nice tight market, but does you no good.  You want to sell the call at $10.  So yes, in this example, you may exercise and immediately sell stock.
       
      Exercising calls to own the shares is a trade made by someone who should not be trading options.  One more point – if you were to make the mistake of exercising early, why would you do it in the morning?  Wait until the close of trading.  It is possible that the stock will decline 20 points that day and you would be left holding the bag.  Exercise instructions are irrevocable.
       
      Related articles:
      How Index Options Settlement Works Can Options Assignment Cause Margin Call? Options Expiration: Six Things To Know The Right To Exercise An Option? Want to learn more?
       
      Start Your Free Trial
       
    • By Dave W
      @Yowster or others,
      I'm hoping to get some advice. I occasionally trade unofficial hold through earnings (HTE) calendars and have run into a recurring issue. After earnings, sometimes the price jump in the stock results in my calendar becoming deep in the money. When I try to close out the deep ITM calendar, the market makes it very difficult or impossible for me to close out at a reasonable price.
       
      For example, this recently happened to me on RHT. I had an 82C calendar spread March 31 short / April 7 long and at the close before earnings on March 27 the stock price was $82.32. About an hour after the open on March 28, RHT stock was at $86.93. So my 82C were $4.93 ITM. But the mid-price to close out the spread was in a kind-of 'backwardation' (yes, I know that isn't the exact right term, but the situation seems similar). The mid for the short leg was $5.00 and the mid for the long leg was $4.90, so a debit of $0.10 to close the spread. Paying a $0.10 debit to close the spread (or even closing at $0.00) seemed unreasonable given that if I held the short leg through expiration, any premium to close the short options would be gone and hopefully the long option would recover some premium ($0.10 to $0.15 based on my review of other RHT options in different time periods).  So I held the spread through expiration and got assigned. I closed out the position the following day using a combo stock / option order on TOS.
       
      I'd like someone who has done a number of these HTE trades to help me understand:
       
      1. Has this ever happened to you? How would you recommend closing the trade when the price to close out the calendar spread is "way off" from what seems reasonable (e.g., having to pay a debit to close)?
       
      2. If I do hold through expiration and get assigned, am I still 100% covered by the long option? In other words, will the changes in the long option prices offset changes in the short stock position exactly? I'm guessing the answer is no, but I haven't really looked at this yet and am not sure the best way to model it.
       
      I appreciate the advice. Thank you!
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