Why the early assignment of a DIA call against me?

Despite my vigilance against early call assignments (see my previous post), I received one on 7/19/18, the day before option expiration Friday.  On 7/2/18, I had sold the DIA July $245 call against my DIA shares, when DIA traded for $241.03.  (DIA is the ETF that holds the 30 stocks of the Dow Jones Industrial Average.)  On 7/19/18, DIA closed at $250.79, over $5 in the money.  I had planned to visit the position on 7/20/18, option expiration Friday, to consider a one month repair (roll out) to an August call, to avoid the July assignment (e.g., buying back the July $245 call & selling the August $253 call).  When I visited the position on July 20, I was surprised to find that my DIA call had been pre-maturely assigned the night before, forcing me to sell my DIA.  I had presumed that DIA's ex-dividend date on its 32 cent monthly div was August 1.  However, DIA goes ex-div on the 3rd Friday of the month (July 20), & I was assigned the day before, ensuring that the buyer receives the div along with the cheap ETF.           

Mea culpa, mea culpa, mea maxima culpa.

Pardon the appearance of my website.  Normally I wouldn't send out a first post while the blog is under construction, but I'm such an IT Luddite that waiting to post until the site appearance is respectable might take forever & I'd never get to satisfy my objective of helping you with option selling.  Plus, since I do have a pretty good sense for conveying the nuances of this arcane strategy, I hope you find it's worth getting going now rather than waiting until my site is pretty.

And - please pardon me again, because this sounds quite self-serving - I do want to promote my 144 page, recently published primer Selling Options...Simply Called and Simply Put.  However, I don't even know how to link the "Buy Now" button.  I am confident though, that even if you have zero understanding of option trading, as long as you have a keen desire to learn the strategy, my crystal clear book will be most helpful.

In a future post, I'll tell you a bit about myself, including my experience with options.  But I'd like, with this post, to share with you a trade I recently made that very succinctly answers a question I'd received while in the investment business.  Clients asked, "When I sell covered calls, how frequently may I experience early assignments?"

I use monthly options which always expire at the close of business on the month's 3rd Friday.  But a pre-mature (as I like to describe them) assignment of a call can occur anytime prior to option expiration Friday.  Quite frankly, they usually do not occur pre-maturely.  But when they do, I find, it's generally when the underlying equity (stock) is a dividend paying equity, & the call option is in the money (the equity's market price is higher than the option's strike price).  And when that's the case, the pre-mature assignment of a call generally happens on the business day before the ex-dividend date.

So, my trade:  To start with, on May 21, 2018, I sold a covered call against TLT, the ticker symbol for the US Treasury ETF.  TLT was trading around $117.  I sold the June 15, 2018 call, with a $118.50 strike price, & received a $0.55 premium.  But on May 31, TLT traded at $121.  And I knew that on on June 1, TLT would go ex-dividend on its $0.28 monthly dividend.  I suspected that the owner of the TLT June $118.50 call (the owner would have bought the call some time earlier from a seller like me) might want to exercise that call to become the buyer of TLT at $118.50 & importantly, to be eligible to receive that $0.28 dividend.  But by exercising on June 1, he'd be a TLT buyer on the ex-div date, the "without" dividend date, & he'd not be eligible for the 28 cent div.  However, by exercising on May 31, he'd be buying TLT "with" dividend, & be eligible for the 28 cents.  To capture the dividend, I knew that he might be motivated to exercise his in the money call on May 31.

I did not like the prospect of being assigned to sell my TLT pre-maturely on May 31, at only $118.50 (my strike price), when TLT was trading in the market for $121.  So I used what I call a repair strategy (most option traders call it a roll out).  In step #1, I bought back the TLT June $118.50 call, which I had sold on May 21, but I had to pay a rich $2.89 premium on May 31.  This closed out (terminated) my June $118.50 call.  In step #2, I immediately sold a TLT July 20, 2018 call, with a $119 strike price, for a richer premium of $3.04.  I pocketed the 15 cents in premium difference, & now have the potential for another half dollar in strike price.  For extending my strategy one month, I accepted the potential for another $0.65, which annualizes to a 6.5% return versus the original $118.50 strike price.  Not too bad a repair of an unwanted obligation.

Keep in mind, with TLT at $121 on May 31, the day of my repair, the new $119 call is still in the money & I could certainly be assigned pre-maturely.  But if I was forced to sell my TLT quickly at $119, well in advance of July 20, my annualized return would then be enhanced above the 6.5% return.  And to be honest with you, the market is very smart, & it probably would not allow me to get such an enhanced return so easily.

I hope this kind of blog is helpful.  Let me know.  Ask me questions.

Dave Skonieczki