Stocks & Commodities V. 23:11 (86): Explore Your Options by Tom Gentile

Stocks & Commodities V. 23:11 (86): Explore Your Options by Tom Gentile
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Stocks & Commodities V. 23:11 (86): Explore Your Options by Tom Gentile


Suppose I use a spread by selling a 50 call and buying a 55 call. If the stock starts approaching 50, at what price should I buy back the 50 call to avoid assignment? How else can I hedge this situation for limited losses?

Assignment happens when you have very little or no time value remaining in the options contract. Time value will drop toward zero when an option is inthe- money and running out of time. Very deep in-the-money options also have very little time value.

In rare instances, an out-of-themoney option will get assigned, but it doesn’t happen often. Assignment might occur, for example, if weekend news is expected to affect the stock to the downside after expiration day. However, you are at risk of assignment if the option is in-the-money at or near expiration, with little or no time value. If you want to avoid it, close out the position. On the other hand, if there is time value remaining, the option will probably not be assigned. A good rule of thumb is if the time value drops to 1/4 points or more, assignment is unlikely.

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