When trading a single leg option (eg: sell put, buy put, sell call, buy call), there are 2 things that will happen at option expiration: either the option expires worthless (out of the money), or the option gets exercised/assigned (in the money).
If the option expires worthless, no transaction will happen. The option will simply disappear from your portfolio.
If the option expires in the money, it will get exercised. The brokerage (in this case, Moomoo) will execute the transaction automatically.
What is in the money (ITM)?
For put option, in the money means the stock price is less than the option strike price, hence it makes more sense for put buyer to exercise the option and sell their stock to the put seller rather than sell to market.
Meanwhile, for call option, in the money means the stock price is higher than the option strike price, hence it makes more sense for the call buyer to exercise the option and buy the stock from call seller rather than from the market.
What is out of the money (OTM)?
For put option, out the money means the stock price is higher than the option strike price, hence it makes more sense for put buyer to sell directly to the market rather than sell at lower price to the put seller.
Meanwhile, for call option, out of the money means the stock price is lower than the option strike price, hence it makes more sense for call buyer to buy directly from the market rather than buy at higher price from call seller.
My experience getting assigned stocks at expiration
Recently, the put option that I sold expired in the money, hence I got assigned the corresponding stocks.
The put option that I sold was JD210820P65000. Here’s what it means:
- Stock ticker: JD
- Expiry date: 20 August 2021
- Option type: Put
- Strike price: $65
On 20 Aug 2021 (Friday), during the beginning of trading hours, JD was hovering between $63 to $65.2. There is a high chance that my put expires in the money (ITM). So, before I went to sleep, I made sure I had US$6,500 cash ready in my Moomoo account in case Moomoo needed to deduct my cash when stock market is closed (which is about 4am in Singapore).
I woke up on 21 Aug 2021 (Saturday) morning and checked my account. JD closed at $63.62. It is lower than my strike price, hence my option was ITM. But, Moomoo had not deducted $6,500 from my account yet. The put option closed at $1.53 but it did not matter anymore because it had expired.
Below is how my portfolio looks like on 21 Aug, after expiration but before assignment takes place. The put option is still there. FYI, I already own 100 JD shares which I bought in June 2021 for $71.7 per share.
On 23 Aug 2021 (Monday), I received an email as well as a notification in Moomoo app telling me that my option has undergone assignment.
I then checked my Fund detail (Go to Trade – Brokerage Account – US – Fund Details) and saw that Moomoo had deducted $6,500 from my US wallet. No other fees was charged.
In the daily transaction report, it’s also shown clearly that the option assignment didn’t incur any fee at all.
Below is how my portfolio looks like after trading hours of 23 Aug 2021. My put option has been converted into 100 share of JD. I mentioned earlier that I already own 100 shares of JD (which I bought at $71.7) before this option assignment. So, after the assignment, I now own 200 shares of JD. Without accounting for fee or option premium, and just based on the stock price when bought, my current average price is (71.7 + 65)/2 = $68.35 as shown below.
When I sold this put option, I received $75 premium (which translates to $0.75 per share). During option assignment, I paid $6,500 (which translates to $65 per share). Hence, the net price I paid for these new 100 shares is $65-$0.75 = $64.25 per share. I think it’s a fair price.
Moving forward from here, I have 2 choices: I can wait patiently for the price to recover then sell them to take profit, or I can sell covered calls to earn premium. Covered call means I am selling the right to buy my stock at certain strike price. If I proceed to sell covered call, and then my option gets exercised, I have completed the “Wheel” strategy.
Wheel is one of the many option strategies that deserve a full article on its own. I’ll not go into the details of Wheel. When I complete a Wheel strategy, I’ll definitely write about it on this blog, so if you’re keen, you can subscribe to my email so that you’ll get to know when I have new post.
PS: My favorite platform to trade option is Moomoo. If you don’t have a Moomoo account yet, here are the welcome bonus for new users. If you want to start trading option using Moomoo, I have a step by step guide to trade option using Moomoo’s both desktop and mobile platform.
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