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One of the most common shocks for beginners is being unexpectedly assigned on a short option position.
What is Assignment?
When you sell an option, you take on an obligation. For a call you sell, that means you must deliver the shares if the buyer exercises the option. For a put you sell, you must buy the shares. Most people think assignment only happens at expiration. But assignment can occur any time the option is in the money.
Why It Happens
For American-style options (which includes most US equities), the buyer can exercise early. This might happen if, for example, a stock goes ex-dividend. A call buyer might want to exercise to capture a dividend that they wouldn’t get just by holding the call. Or if there’s a big move in the underlying, an option holder may lock in gains early.
Example
Suppose you sell a covered call on XYZ stock at a $50 strike. The stock jumps to $55 a few days before the ex-dividend date. The call buyer may exercise early to receive the dividend. You could wake up to find your shares have been called away, which could mess up your tax planning or broader strategy.
How to Manage It
Be aware of ex-dividend dates if you’re short calls.
Use covered calls only when you’re prepared to let go of the shares.
Monitor in-the-money short options near expiration.
Early Exercise Risks
Many traders overlook how early exercise affects their position, especially with American options.
What is Early Exercise?
While assignment refers to you being on the hook for an option you sold, early exercise means you might choose to act on an option you own before expiration. But many traders forget that for long options, early exercise often isn’t ideal.
Why It Happens
In most cases, it’s better to sell an in-the-money option than exercise it early. That’s because an option often still has time value left. Exercising early means giving up that value for no extra gain.
Example
Imagine you hold a long call option on XYZ stock with a strike of $40. The stock is trading at $45 with two weeks to go. You might think you should exercise and buy the shares now. But by selling the call, you’ll likely capture the intrinsic value plus any remaining time value. If you exercise early, you forfeit that premium.
When It Makes Sense
The rare times when early exercise makes sense include:
For calls: to capture a dividend.
For puts: to lock in the sale of shares when deep in the money, especially near expiration.
How to Manage It
Know when your option is worth more sold than exercised.
Use option pricing calculators to see the time value left.
Don’t rush to exercise unless you have a clear benefit.
Liquidity Traps
Another hidden risk is trading illiquid options. Wide bid/ask spreads and low open interest can erode your profits or trap you in a bad position.
What Is a Liquidity Trap?
A liquidity trap happens when you enter a trade easily but can’t get out at a fair price, or you get terrible execution on entry because the market is thin.
Why It Happens
Options on some stocks or ETFs may look attractive, but if the open interest is low or the bid/ask spread is wide, the real cost of trading is higher than it appears. You might pay more getting in and lose more getting out.
Example
You see an option with a bid of $1.00 and an ask of $1.50. That’s a 50% spread! If you buy at $1.50 and later sell at $1.00, you automatically lose 50 cents just from the spread — not including commissions or price moves.
How to Manage It
Stick to options with tight bid/ask spreads.
Look for high open interest and decent daily volume.
Use limit orders, not market orders, so you don’t get filled at a terrible price.
Conclusion
Options are powerful tools, but they come with hidden risks that many traders overlook. Being assigned early can disrupt your strategy if you’re not ready. Exercising early can cost you extra premium you could have kept. And trading illiquid options can eat into your profits through wide spreads and bad fills.
Here are three rules to keep in mind:
Monitor your positions, especially around dividends and expiration.
Know the time value of your options to avoid giving up money.
Double-check liquidity before placing a trade — always use limit orders when spreads are wide.
By understanding these real-world pitfalls, you’ll be in a much better position to use options wisely, protect your capital, and avoid nasty surprises. Options trading doesn’t have to be intimidating, as long as you respect the risks that don’t always show up in a textbook payoff diagram.
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