Stocks & Commodities V. 23:5 (47): Explore Your Options by Tom Gentile
Got a question about options? Tom Gentile is the chief options strategist at Optionetics (www.optionetics.com), an education and publishing firm dedicated to teaching investors how to minimize their risk while maximizing profits using options. To submit a question, post it to our website at http://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C.
WHAT TO DO WHEN ASSIGNED
Q: If I hold a stock in my portfolio and I sell calls on the stock, what do I do if faced with assignment? That is, if the call owner wants to exercise the call option, how will I know and how can I deliver the stock?
A: If you own the stock and sell the call on that stock, you will set up a trade known as a covered call or a buy-write. It is a popular strategy that can be used to generate income in a portfolio and also lower the cost of owning the stock. However, as you note, the gains from the strategy are limited because, if the stock moves higher, the call will be exercised by the owner and assigned to you, the option seller. At that point, the
call seller must deliver the shares to the call owner.