Cash secured puts assignment happens when you sell a put option and the buyer decides to exercise it. This means you must buy the stock at the strike price you agreed to when you sold the put.
When assignment occurs, you keep the premium you collected from selling the put, but you must purchase 100 shares of the underlying stock at the strike price. Many traders worry about assignment, but it can actually work in your favor if you understand the process.
Assignment is not something that happens by surprise. You have control over when it might occur based on the strike prices you choose and the market conditions. Learning how to manage this process helps you make better decisions with your cash secured put strategy.
Understanding Cash Secured Puts Assignment
Cash secured puts involve selling put options while holding enough cash to buy the underlying stock. Assignment happens when the option holder exercises their right to sell shares to you at the strike price.
What is a Cash Secured Put?
A cash secured put is an options strategy where you sell a put option while keeping enough cash in your account to buy 100 shares of the underlying stock. Each options contract represents 100 shares.
When you sell the put option, you collect a premium from the buyer. This premium is yours to keep regardless of what happens to the stock price.
The cash in your account acts as security. It shows you can fulfill your obligation if the option gets assigned. Your broker will typically set aside this cash amount.
You profit when the stock price stays above the strike price at expiration. The option expires worthless and you keep the premium you collected.
How Assignment Works in Cash Secured Puts
Assignment occurs when the option holder decides to exercise their put option. This forces you to buy their shares at the strike price.
Assignment can happen any time before expiration if the option is in-the-money (ITM). ITM means the stock price is below the strike price.
When assigned, you must buy 100 shares per contract at the strike price. The cash you set aside gets used for this purchase automatically.
Assignment is more likely as expiration approaches if the option remains ITM. Many option holders wait until expiration day to exercise.
You have no control over when assignment happens. The option holder makes this decision based on their own trading goals.
Key Terms: Strike Price, Option Assignment, and Expiration
The strike price is the price at which you agree to buy the stock if assigned. You choose this price when selling the put option.
Option assignment is the process where you’re required to fulfill your obligation as the option seller. You must buy the shares at the agreed strike price.
Expiration is the last day the option contract is valid. Options that are ITM at expiration typically get exercised automatically.
The premium is the money you receive for selling the put option. This income helps offset any potential losses if you get assigned above current market prices.
Your obligation as the put seller lasts until the option expires or gets assigned. You cannot exit this obligation without buying back the option contract.
Managing the Cash Secured Puts Assignment Process
Assignment happens when the put buyer exercises their option and you must buy the shares at the strike price. Your responsibility as the option seller includes having enough funds ready and understanding the delivery process.
Risks and Responsibilities for Investors
When you sell cash secured puts, you take on specific responsibilities. You must keep enough cash in your account to buy 100 shares per contract at the strike price.
Assignment can happen any time before expiration. You have no control over when the put buyer decides to exercise. The option buyer makes this choice based on their own goals and market conditions.
Key responsibilities include:
- Maintaining required funds until expiration or assignment
- Accepting delivery of shares at the strike price
- Understanding you cannot avoid assignment once it occurs
Your main risk is owning shares below current market value. If the stock price drops significantly below the strike price, you face immediate loss on paper. The shares you receive might be worth less than what you paid.
You also miss out on other investment opportunities while your funds sit as collateral. This opportunity cost affects your overall return potential.
Strategies Before and After Assignment
Before assignment, monitor your options position daily. Track the stock price relative to your strike price. Consider closing the position early if you want to avoid owning the shares.
Pre-assignment strategies:
- Buy back the put option to close the position
- Roll the option to a later expiration date
- Let assignment happen if you want the shares
After assignment, you own 100 shares per contract. Your cost basis equals the strike price minus the premium you collected. You can hold the shares for potential recovery or sell them immediately.
Post-assignment options:
- Hold shares and collect any dividends
- Sell shares at market price
- Write covered calls on your new shares
- Set a target price for future sale
Planning your post-assignment strategy before selling puts helps you respond quickly. This preparation reduces emotional decision-making when assignment occurs.
Examples of Assignment Scenarios
Scenario 1: You sell a $50 put on XYZ stock for $2 premium. The stock drops to $45. Assignment occurs and you buy 100 shares at $50 each. Your actual cost basis becomes $48 per share ($50 strike minus $2 premium).
Scenario 2: You sell a $40 put on ABC stock for $1.50 premium. The stock stays above $40 until expiration. No assignment happens and you keep the $150 premium as profit.
Scenario 3: You sell a $60 put on DEF stock for $3 premium. Early assignment occurs when the stock hits $55. You must purchase 100 shares at $60 despite the lower market price.
Each scenario shows different outcomes based on stock price movement. The premium you collect provides some protection against loss but does not eliminate risk entirely.
Assignment timing varies based on factors like dividends and time until expiration. Puts are more likely to be exercised early when dividends approach or when deep in-the-money.
