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Understanding assignments
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Understanding assignments

  #1 (permalink)
Trading Apprentice
Chicago, IL USA
 
Futures Experience: Intermediate
Platform: The freebie interactivebrokers platform
Favorite Futures: Treasury Futures
 
Posts: 10 since Apr 2015
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Understanding assignments

It's always been my understanding that buying (stock) options contracts to open is a risk-free proposition outside the (substiantial) risk of losing the cost of the contract itself. However, recently someone on this board mentioned in another post that there is a risk of assignment. I also noticed when filling out a new options agreement that there's mention that they "allocate assignments randomly."

From what I'm reading, assignment appears to be synonymous with exercising. And from my understanding, the only person who can be forced to exercise is the seller of the contract. I also assume you wouldn't actually need the funds in your account to make the purchase and sale if a contract expires in the money--that you would just receive the net proceeds of the profitable exercise.

Is there something I'm missing or misunderstanding?

Info on futures options would be useful as well. I wonder if brokerage firms will let you force an immediate sale of the option before expiration or alternately an immediate buy/sell of the underlying future in order to avoid the requirement of holding a performance bond.


Last edited by randomengineer; April 10th, 2015 at 10:59 AM.
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  #3 (permalink)
Market Wizard
Linz Austria
 
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randomengineer View Post
It's always been my understanding that buying options contracts to open is a risk-free proposition outside the (substiantial) risk of losing the cost of the contract itself. However, recently someone on this board mentioned in another post that there is a risk of assignment. I also noticed when filling out a new options agreement that there's mention that they "allocate assignments randomly."

From what I'm reading, assignment appears to be synonymous with exercising. And from my understanding, the only person who can be forced to exercise is the seller of the contract. I also assume you wouldn't actually need the funds in your account to make the purchase and sale if a contract expires in the money--that you would just receive the net proceeds of the profitable exercise.

Is there something I'm missing or misunderstanding?

I am not sure if you are talking about options on stocks or options on futures. I can only comment on options on futures.

After expiry, the monetary value of an option is zero. Thus, to take profit on an option, that you had bought, you have either to sell the option before expiry. Or - in your own interest - the correcponding future will be placed in your account. It definitely will be profitable at that time, but this can change quickly. You can liquidate the future immediately, or you can ask your broker to do so.

Best regards, Myrrdin

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