13 Avoiding Early Exercise of Short Options
A general rule of thumb for anyone opening short positions regards the possibility of exercise: You should be willing to accept exercise as one of several possible outcomes.
This does not mean that exercise is the best outcome, but it is a possibility. When using options to hedge equity positions, exercise is not desirable. It contradicts the basic reason for the hedge, which is to minimize or eliminate equity market risk. For example, if a covered call leads to having shares called away, it disrupts the portfolio and presents a problem: Do you get back into the stock position or find a suitable replacement? It would be more in line with the hedging goal to avoid exercise as long as that does not mean ...
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