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DaveLandry
06-13-2014,
Noob here. I'm well aware of the simplest option purchases such as long calls and puts. However, as I look beyond that into strategies like Spreads, Butterflies, Condors,, etc, etc I see that it requires SELLING (shorting) puts and calls in combination with buying them. . (Straddles and Strangles seem to be the only other strategies that involve only buying/long put and call combos)

If I sign up with a ThinkorSwim account and eventually do some of these strategies which involve selling/shorting, what risks am I realistically facing regarding getting assigned the call/put if the other side chooses to exercise early?

SwingKong01
06-13-2014,
The odds are slim that it will happen but occasionally it does...however assignment does not change your risk....it only changes your buying power.

Example....if you are short a 10$ call and long the 11$ call (vertical credit spread) and you get assigned on the 10$ you are then short that stock at 10$ but are long with the 11$ calls....your directional risk has not changed. If it doesn't throw your buying power out of whack you can chose to keep it that way or simply put an exercise order on your long 11$ strike and that will put it all flat....and wherever you were with profit and loss will not have changed.

If it does throw your buying power below your available funds then you don't have a choice...just exercise the 11$ call and all will snap back into place. You will be flat on the position and your P/L will not have changed.

Strangles are only different in that to flatten the position you buy back or sell the shares you are assigned....doing so leaves you short on the other side so you would have to buy those back also to be completely flat.
But I would learn verticals and their variations (iron condors, butterflys etc.) before I jumped into strangles....as they have undefined risk which you will want to know how to manage when something moves against you.

DO NOT sell calls (in spreads or otherwise) on anything with earnings that occur before expiration of those calls....at least until you understand why and how to work it out. That is the one that could nail you if you aren't paying attention.

If you are using TDA/TOS or want to...... sign up through Dough.com and you can have your fees reduced to 7.95 per stock trade and a flat 1.50 per lot on options.

AbnormalReturns
06-13-2014,
Alfred, when you buy a call option from me, you have the right to buy the underlying stock from me at a certain price before expiration. Since I sold you that option, I have the obligation to sell you the same stock.

So if you sell an option, you have an obligation that is in force until the option expires, or you buy back the option. Since you have an obligation, you have to understand how you are going to cover that obligation. For example if you simply sell a June 650 Call on AAPL, you have the obligation to sell someone 100 shares of AAPL for $650/share. If AAPL spurts to 750, you have the obligation to sell at 650, so if you don't already own the stock, you have to buy it at 750 in order to sell it at 650. The moral of the story: whenever you sell an option, you have to have a plan to cover the risk.

You can cover the risk of that June 650 short call by a) owning the stock already, b) buying a June 660 call so your max risk is $10 per share, c) buying a July 650 call, etc. There are many strategies to cover the risk of selling a call... and selling a put.

My favorite strategy is the vertical spread where you always buy an option in the same month a striker or two away to help you cover the risk of the short option. It's a flexible strategy with many permutations. My new book, mentioned below discusses a longer term vertical bull put spread. You might enjoy it.

I'll agree with AC above not to sell options until you understand how and why they work. But I don't worry so much about options that expire after earnings. I don't mind you opening those trades. Just be sure to close them a week ahead of earnings... until you know exactly what you're doing.