McDonald's Corp (NYSE:MCD) is gearing up for its second-quarter earnings report, due out before the open on Wednesday, July 28. Shares of MCD are pulling back ahead of the event, off 3.4% at $226.73 at last check, as the broader market takes a dive. McDonald's stock is coming off a July 14 record high of $239.05, too, though there's reason to believe this recent pullback could be short lived. 

McDonald's stock just pulled back to its 80-day moving average after months above the trendline. According to data from Schaeffer's Senior Quantitative Analyst Rocky White, similar moves have occurred four other times over the past three years, and enjoyed positive one-month returns 67% of the time, averaging a 0.2% pop. Slightly below this trendline is the 120-day moving average, which kept a lid on shares until MCD broke higher in mid-March. 

Puts are popular with McDonald's stock today, with 16,000 across the tape so far -- triple the intraday average amount -- compared to 13,000 calls. The most popular is the 7/23 225-strike put, followed by the 227.50-strike put in the same weekly series, with positions being opened at both. 

Drilling down to MCD's post-earnings moves over the past two years, results have been a mixed bag, with the equity dropping lower after five of these eight reports, though several of these next-day drops have been muted. Regardless of direction, McDonald's stock has averaged a 1.6% move the day after earnings, which is smaller than the 3.8% swing the options pits are pricing in this time around. 

There is a lot of technical jargon that is specific to the options market. For a beginner who is aiming to learn how to trade options, understanding these technical terms is crucial to optimizing trading results. One phrase that is a critical part of this options trading language is “assignment.” Simply defined, the assignment of an option refers to the fulfillment of the options contract by the seller. An option holder has the right to buy or sell the underlying equity at the given strike price. Once the holder decides to exercise the option, the option is said to be “assigned.” If a trader sells options, he must be aware of the assignment process and the risks it entails. We recommend subscribing to one of Schaeffer's options trading newsletters to gain the ultimate insights into the language of the options market while making money, too.

What Does it Mean to Write an Option?

When an options seller writes an options contract, this is known as a “sell to open” trade, as he is essentially opening a new position. As the trader is selling the option to open this position, he is technically said to be “short” that underlying stock. The seller accepts a responsibility to sell or buy the underlying security in lieu of a premium received from the buyer. As a general rule, an option holder can exercise his rights any time before the contract expires. In order to learn to trade options, it is necessary to grasp this structure of corresponding rights and duties. It's important to also note that most options are exercised when they are nearing expiry because, after that, the options contract is worthless.

How Does the Option Assignment Process Work?

The assignment process is done at random by the Options Clearing Corporation (OCC). A trader will become more acquainted with the operations of the OCC as he or she learns to trade options. When a buyer exercises his option, the OCC will randomly connect them with a brokerage that is short on options of that equity. Due to the lottery-like nature of the process, it is almost impossible to predict when an investor’s option may be assigned.

2 Categories of Options to Understand

As a brief summary, let’s go over the two basic categories of options. These categories and their respective merits become apparent as one learns to trade options. In a call option, the option holder possesses the right to buy the security before the contract expires. In this scenario, the seller’s obligation is to sell the option upon assignment.

The inverse of this is the put option. In this category, the holder has the right to sell to the security at the contract price. The consequence of this is that upon assignment, the seller must purchase the security at the strike price. If an investor does not own the stock, he must first buy it. After this, he must deliver it to the holder.

Initially, a seller has an edge in the options trading process. He starts with a net benefit as a premium is paid to him by the buyer without him giving any monetary return immediately. If an option is never exercised, the seller actually retains the premium if the contract expires.

However, the issues arise as the contract nears its expiry, as the chances of assignment increase exponentially. The problem for investors when called to assign are three-fold: 1) they have no control over when the option is exercised, 2) they must fulfill their end of the bargain irrespective of whether this could lead to a loss or a low gain, and 3) even if the underlying stock is not trading, in a call option the deliver the stock to the buyer.

Can an Options Seller Predict When an Option Will Be Exercised?

It would be misleading if we were say there is some magic formula that we could use to predict when an option will be exercised. Traders will understand how frequent assignment occurs once they more completely learn to trade options. However, a general statistic is that approximately 7% of options are actually ever exercised. Even though, technically, an option can be assigned any time while the contract remains open, option holders usually exercise their option near its expiration date. This is because traders usually wait to find the ideal time and observe trading prices. As you learn to trade options, you will realize that very few buyers ever exercise options ahead of expiration.

When is Options Assignment Less Likely?

Even though we cannot accurately predict when an option will be exercised, there are certain indicators traders can use. These indicators are easier to see when you learn to trade options and observe market trends.

An assignment is less probable when an option is out-of-the-money. An option is out-of-the-money when the security is trading at a higher value in the market as compared to the strike price. It is rarely recommended to sell an option that is out-of-the-money. This is because if the strike price is lower than the market value, the option holder will make a loss on the contract. If the strike price is $30, and the market value is $20 and the holder exercises the call option, they will end up taking a loss since they are buying it at a higher price. As investors learn to trade options, they can better predict the time of assignment with greater accuracy.

The shares of footwear brand Skechers USA Inc (NYSE:SKX) are climbing higher this morning, last seen up 5.3% at $53.91 after its second-quarter earnings and revenue set a new record and topped analysts' estimates. Skechers' gross margin also hit a record high, despite issues with shipment delays and other pandemic-related headwinds. On top of this, the firm lifted its 2021 forecast 

No less than eight analysts lifted their  price targets, including UBS, which lifted its price target to $70 from $61. The 12-month consensus price target now stands at $63.16 -- an 18% premium to current levels. Analysts were optimistic on SKX coming into today. Of the eight in coverage, six called it a "buy" or better. 

Today's pop has SKX gapping to a fresh five-year high of $55.87 and toppling pressure at the $52 level. The equity enjoyed a major bull gap during its last earnings report in April, too, and has since found its footing at the $45 level, which previously acted as a ceiling on the charts. 

Options traders are coming out in droves, with 8,815 calls and 2,395 across the tape so far today -- 18 times the intraday average. The most popular by far is the weekly 7/23 55-strike call, followed distantly by the 51.50-strike put in the same monthly series, with positions being opened at the former. 

The shares of Crocs, Inc. (NASDAQ:CROX) are surging this morning, up 8.4% to trade at $131.92 at last check, after the shoe company adjusted second-quarter earnings of $2.23 per share, blowing past the $1.60 estimates. Revenue also exceeded expectations, and CROX lifted its full-year guidance amid strengthening global demand. Out of the gate, the stock raced to a record high of $136.50. 

Crocs stock is now up over 109% year-to-date. Crocs stock's ascending 50-day moving average has guided CROX higher, capturing several pullbacks during the last couple months. Putting the retail stock's rapid rise in perspective -- last year the shares were trading around $35.

There haven't been any upgrades and/or price-target hikes issued this morning on CROX, but that's likely because sentiment surrounding Crocs stock was mostly bullish coming into today. Of the eight analysts in coverage, five called the stock a "strong buy," with zero "sells" on the books. Meanwhile, short sellers have been hitting the exits in droves when it comes to Crocs stock. Short interest fell 33.6% in the last two reporting periods, though it still makes up a solid 5% of CROX's available float. 

CROX's typically quiet options pits are exploding with activity already today. So far, 15,000 calls and 1,813 puts have crossed the tape, a whopping 37 times the intraday average. The August 130 call is the most popular, followed by the 120 call in the same series. New positions are being opened at both, which may suggests buyers of the latter are expecting Crocs stock to maintain today's post-earnings pop. 

Chipotle Mexican Grill, Inc. (NYSE:CMG) is in rally mode this morning, up 5.2% at $1,658, following the firm's second-quarter earnings report. Chipotle's profits of $7.46 per share on $1.89 billion in revenue handily topped expectations. CMG also lifted its comparable sales growth forecast, which also topped estimates, as customers begin to return to restaurants.

Analysts are paying attention to CMG's blowout earnings report. Already, 14 members of the brokerage bunch have lifted their price targets on Chipotle stock, including RBC Capital Markets. The analyst lifted its price estimate to $1,825 from $1,800, adding that it sees margin expansion for Chipotle via possible price increases, seeing as few balked at the restaurants recent raise in menu prices. 

Chipotle stock jumped to a fresh record high right out of the gate, toppling the $1,622 level, which sits near CMG's recent record highs, hit earlier in the month. Though the shares suffered a sharp pullback from the area, Chipotle's stock dip was mostly contained by the 20-day moving average. 

Considering CMG's impressive price action, more analyst upgrades could be on the horizon. Of the 23 covering the security, six still say "hold." Plus, The 12-month consensus price target of $1,849.68 is a slim 8.4% premium to current levels. 

Options traders are also swarming the stock. So far, 17,000 calls and 7,988 puts have crossed the tape -- 10 times the intraday average. The most popular is the 7/23 1,750-strike call, followed by the 1,800-strike call in the same series, with positions being opened at both.