My last post in this series on covered call writing dealt with volatility, and we kicked off the series with a definition of covered calls, including what it means to "write" them. Today's tip deals with assignment. Often surprising to new options investors, it can feel like you've been singled out to deal with an unexpected problem. Who likes that? However, if you know a bit about what assignment entails and what your choices are if it comes up, you'll feel better and more informed if and when it happens to you.
Tip 2: Don't panic if you're assigned.
If you're called up to deliver stock -- "assigned" -- it can be a surprise. Some covered call writers worry about losing a long-held stock position this way. But you have more choices in this situation than you may realize.
You can deliver the stock from your existing position, and you can choose which cost-basis you'd like to let go. In other words, there's no need to trigger a big tax bill on capital gains.
If you'd rather not let go of any of the stock you're holding, that's also okay. It's possible to buy the stock in the open market on margin and deliver that stock instead, which helps investors control their tax consequences and their long-term positions.
(Keep in mind that buying stock on margin has its own risks. Margin is essentially a line of credit for purchasing stock, for which you make a minimum down-payment required by NASD regulation and pay your broker an interest rate. If the market moves against you suddenly, you may be required to add to this down-payment in short order in what's termed a 'œmargin call'. Read up on the risks of margin to use this tool wisely.)
Next stop, tip 3: planning your moves in advance if your stock goes down.
Regards,
Brian (OG)
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.
