Short Calls get assigned mostly for two reasons
So why do short calls get assigned? The more I pop into large group chat discussion the more I see this come up. There are several group discussions on FB and StockTwits about options but I largely hang back from them. I figure if you want to know what I have to say you will check out the Option Pit blog or grab one of the free YouTube videos on the Option Pit channel or join Option Pit. I do find the questions interesting because there is an enormous amount of misinformation about options floating around. I will do my best to dispel some of those myths on the 2 big reasons for assignment.
The first reason for assignment is a dividend
The first reason short calls get assigned is for a dividend. Short calls get assigned on the day prior to the ex-div date. A reason why someone would wait until the day before is that every exercise by the holder of the call creates a short synthetic put. No one would want to sell a put earlier than they had too since that would make no sense. The magic formula if a call option would be assigned is if the put value on the same strike is less than the expected dividend. If that happens, it is a 99.9% chance of assignment. If not assigned then it is a mistake by the liquidity provider and some poor clerk gets fired.
ITM calls get assigned in a hard to borrow stock all the time
The second most common form of assignment is in a hard to borrow stock. Since the ability to short the stock is reduced, selling an ITM call option is the next best thing. A liquidity provider might have to pay a negative cost of carry just to hold a short stock position. Since the market on balance wants to short the stock, the value of the ITM call gets reduced relative to the underlying stock price. Moreover, a liquidity provider might have to exercise all their long calls to come into compliance with REG SHO. That means the short call seller gets assigned. The math here is similar to the dividend above but in this case the negative cost of carry greater than the put value will generate a potential assignment. This is harder to figure out since the negative cost of carry can vary from house to house. Most retail customers get in trouble here when the OTM call they sell becomes ITM and then gets assigned. Good morning margin call!
A word about TSLA
TSLA has been in and out of negative cost of carry over the years. Right now the stock is making some new recent lows as the shorts pile in. Be careful of selling ITM calls in TSLA calls because as the borrow rate increases, these could be exercise candidates. Very wide, long put butterflies seem to work decently for a short and has near 0 assignment risk.
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