I have started writing covered puts and calls recently. Everything I read talks about the risk of early assignment of your position, but I don't really understand how often this happens. It seems that you should only exercise an option when the extrinsic value is lower than the brokerage fees for buying/selling the stock (say about $0.10). Otherwise you could always make more money by selling the option than exercising (assuming there are no dividend payouts on the underlying stock). It seems only an irrational investor would exercise an option with time value left on it, and I assume that is exceedingly rare.
I've read that early assignment of a put is more likely than a call as the money is flowing to the exerciser rather than from, which is more likely to happen early (money in as early as possible vs money out as late as possible). But it seems to me that the contract holder would still get more money if they just sold the contract (and their stock if they're holding it). Am I doing that math right?
I am trading ETFs and will start with ETNs soon. So the detailed questions are:
- At what level of extrinsic value does the possibility of assignment become likely?
- Is there really a risk of early assignment if there's time value left? Or is this just some CYA verbage that everyone includes because it is technically possible?
- Does that risk change when you are looking at ETN vs ETF vs Company Stock? How?
- Does the risk change between a put and a call?