Sunday, 16 May 2021

Options Assignment or Exercise Shouldn't Matter (Other than commissions) - Cash Secured Puts / Covered Calls

Previous post about "The Wheel" here.

When writing Cash Secured Puts (CSP) or Covered Calls (CP), most think assignment is getting the stock at a discount. While true, it doesn't really matter since you can always close your options and buy back or sell the stocks.

Since I'm too poor to pay for historical options data, too dumb & lazy to calculate the price based on Black Scholes model, I just plug it into a calculator and use screenshots instead.  AAPL was at $127.10 when I took this screenshot.

Apple options pricing. Source: tastyworks, Friday 14 May 2021.

Plugging the figures into a calculator, we get a $0.90 or $90 premium which is close enough.
Source: GoodCalculator

Maybe the interest rate is too high but it doesn't affect the 0 DTE option price.

The 14 May 2021, $128 put was last done at $0.58/$58.

Source: Optionistics

AAPL Closing Price: $127.45
$128 Put Premium: $0.58
Strike - Premium:  $127.42  ($128 - $0.58)

Barring afterhours movement, the strike minus premium of expiring options are more or less the same as the closing price.


If you wrote the same 14 May 2021, $128 put a month ago when AAPL was $132.03, you would have received a ~$2.74 / $274 premium.

Source: Google, Optionistics, GoodCalculator.

On expiry, you would get assigned or choose can close your option for $0.58 / $58.

Scenario 1 - Take assignment.

If you take assignment, you would have an unrealized loss of $0.55 / $58 ($128 - $0.58) and a realized profit of $2.74 / $274 (Premium received)
Total gain = $2.16 / $216 ($2.74 - $0.58 / $274 - $58)

Scenario 2 - Close the position, buy shares.

If you bought back the option for $0.58, and bought 100 shares of AAPL, you would have a realized gain of $2.16 / $216 ($2.74 - $0.58 / $274 - $58). This is exactly the same as getting assigned.


With the opton premium, your 'margin of safety' would be $125.26 ($128-$2.64). If AAPL had fallen to $125, your option would be worth closer to $300. Taking the $128 assignment would result in an unrealized loss of $300 ($12,500 - $12,800) and a realized gain of $274 (premium received).
Total loss:
$26.

If you bought back the option for $300 and bought 100 shares of AAPL, you would have the same $26 loss. ($274 - $300, premium received - cost to buy back, 0 loss on shares).

The same applies to covered calls, you can simply close your call options and sell the stock for the same difference, the only thing that you pay is the commission (and tax implications but it doesn't affect me).

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