Early Assignment on a Credit Spread

[@larrymccormick1352]

Would the contingent trigger to buy to close work over the weekend?

[@PowerOptions]

Hello Larry, Stop Orders or other Contingent Orders to Buy or Close are only applied during trading hours. This is the risk of using Contingent or Stop Orders on volatile positions or around earnings: The gaps in the pre or post trading hours can result in you getting filled at a much larger loss than your initial stop order. For credit spreads (Bull Puts) I like to close the positions if I hit a -40 to -50% loss of the max. expected loss. If I am close to that line at the close, and the stock gaps down the next morning, a contingent to close the spread will be triggered but I might get filled at a higher loss, whatever the market is offering at 9:31 AM now that my 'order' of -40% has been triggered.

[@jzk2020]

HOWEVER.... if you BUY a call debit spread (instead of selling one) then the max you're risking is the premium you paid, right? Or would you still be on the hook for 1 part of the leg.

[@PowerOptions]

Hello C., That is correct. If both options remain ITM in a debit spread the long (bought) will cover the obligation of the short (sold option). If both options are OTM at expiration and now adjustments were made, both options would expire and you would lose only the net debit. If the stock is between the strikes the long option will still have some value, and the short will expire. If you do not close the position prior to expiration in this case your broker will assume you wanted to exercise the long option - meaning for a Bull Call Debit you would buy shares of stock at the bought Call strike price; for a Bear Put Debit you would be short shares of stock at the bought Put strike price. Here is another video that you might find useful: Outcomes of Credit and Debit Spreads On or At Expiration: kzbin.info/www/bejne/nZfHqX6DjLKLhK8

[@reeshavacharya]

I have a question. In a put credit spread ($444 strike sold and $442 strike bought) if the market price is above both the strikes (450) before expiration, what is the likelihood i get assigned? And if the current market price is above both the strike prices, am i in the money or out of the money?

[@PowerOptions]

Hey Paperfly, If the stock is above your put strike price(s) they are considered Out of the Money and will expire worthless. It is the opposite of a call option. If the stock is at $450 and you are in a 444/442 put credit spread there is no chance of assignment. You would only risk assignment on the sold put (444) if the stock is trading below that price, making the put In the Money.

[@reeshavacharya]

@@PowerOptions got it. Thank you.

[@natewhite9731]

So i do call credit spreads on robinhood but dont have the capital if i were to get assigned, what would i do? What would happen?

[@PowerOptions]

Hello Nate, If you are assigned early on a Bear Call Credit spread you would end up shorting shares of stock. The sold call obligates you to deliver shares of stock - if you do not own them or have a call at a lower strike price (Bull Call Debit or ITM Diagonal Call Spread) you deliver stock you do not own, thus being short shares of stock. It is possible RobinHood would simply close the position for you, and you may incur fees or penalties. Your best bet is to contact them to see how they would handle the situation with your account approval.

[@synnic6051]

Are call debit spreads safer on early assignments?

[@PowerOptions]

Hello Synnic, In a sense, yes, but safer meaning you are protected and have achieved the maximum profit. It also depends on the structure of the Call Debit Spread... For the Bull Put, we would have started the positions OTM. A concern of early assignment occurs if the stock falls below the sold put strike price prior to expiration. If I used the same structure on a Call Debit spread, where both calls were ITM - if I am assigned early as the stock is above both call strike prices I make the maximum profit. My broker would exercise the long call to buy shares of stock to cover the obligation of the short call. This is a benefit as I am out of the trade early with the max. profit. Many investors will use an At or OTM Debit spread: Stock at $54 Buy a 50 call and sell a 55. If the stock is below $55 there is no risk of early assignment as the sold call is still OTM. If the stock moves up above $55 and the Debit Spread is assigned early, you are at maximum profit prior to expiration. Early assignment does not happen that often, but the obligation of the short call or put in a credit or debit spread must be considered, as there is the chance of being long or short shares of stock due to the obligations. The first 24 minutes of this video might answer your questions: Exercise and Assignment of Debit Spreads kzbin.info/www/bejne/bIvHoYysibSYlck

[@zayntran691]

I’m a beginner and I’m in a SHOP bull put credit spreads position strike price $1265 exp 25/06. So basically i’m ITM rn and I can’t get out of my position due to the low volume and open interest. What’d you suggest me to do now as if i get assigned I won’t have the fund to pay, i’d need $130k to buy the shares.. please help

[@PowerOptions]

Hello Zayn, At a basic glance I do not think the loss on this position is too bad...yes, it is near full loss and I do not know the specifics, but using the PowerOptions tools I see: 1. The 25-JUNE series was not released on the market until around May 20th, according to historical data. 2. The trade was likely entered on May 20th or May 24th, when SHOP was bouncing around $1,260 to $1,280. 3. At mid-point (knowing these might not be your strikes) a $1,265 / $1,260 Bull Put spread might have gotten a credit of $2.85 on May 20th and a credit of near $2.25 on May 24th. 4. Right now (June 2rd, 12:16 PM Eastern US) the liquidation value at mid-point would be: Buy to Close 25-JUNE 1,265 put at $82.50 Sell to Close 25-June 1,260 put at -$79.20 Debit to Close = $3.30. With the initial credit of $2.85 or $2.25, this might be a loss of only $0.45 or $1.05, respectively. 5. At Natural Prices (buy to close on the ask and sell to close on the bid), the Debit would be $7.90, more than the 5 point strike difference, so it is likely you can get a better price. 6. Although you mentioned low volume and Open Interest, the 1,265 strike had 7 contracts yesterday and 1 contract traded today (Last trade at 9:43 this morning at a price of $83.00 - a little higher than mid-point but $1.30 below the ask price). 7. If you get assigned early, your broker would likely Exercise the Long put (in my example $1,260) to counter the short obligation at $1,265. This would be the full loss on the trade, but the initial credit would offset the loss. Check with your broker to make sure this is how they would handle the early assignment if the funds are not available to cover the full short put obligation. 8. Are there management techniques for this position? Not directly as the position is near full loss. However, we will look into ideas if we get more time today. For now, it may be best to try to liquidate the position at a debit cost near the mid-point. If that is not filled right away, you can move the limit order to try to get a better fill price. Just do not go to close the spread at Market price as that value is higher than the difference in the strike prices.

[@zayntran691]

@@PowerOptions First of all thank you so much for your detailed comment! It really makes sense! I just contacted the broker i’m using which is Tda and got my questions answered regarding the position. So this’s what I got from them, if SHOP stays below 1262.5, both legs of my spread will be ITM and exercised. I would buy 600 shares at 1265 and sell 600 shares at 1262.5. It would be a net loss of -$750 on the trade. -$1,500 for the exercise, +$750 from the initial credit. So basically a $750 loss in total but I won’t have to hold any shares at all because i am covered by the spread (which is a great thing). That’s the worst case scenario when I’d have to hold the position through expiration date. But yes, i’m just hoping that there would be an increase in volume of SHOP from now till the exp and i’d be able to cut loss/close the position. I really learned this the hard way I didn’t pay attention to the volume, open interest the spreads width. Thanks again for your support, I just subscribed to your channel. Keep up the great content please!

[@PowerOptions]

Zayn, Excellent (not about the losing trade, but about not having to worry about the early assignment on 600 shares)! Hopefully you will get a chance to liquidate / close this position prior to expiration at a better price. I still see a mid-point debit to close your spread than the max. loss, so hopefully you can get a decent fill price that is lower than the max. loss. Good Luck, and you might want to Search our channel for content on Bull Put Credit Spreads (Bull Put Criteria, 8 Ways to Manage a Bull Put, etc) for further education. And...we will have a video for you soon as well.

[@zayntran691]

@@PowerOptions I’ll keep that in mind and do those research for sure! Thanks once again and yes I’m looking forward to seeing your upcoming video!

[@PowerOptions]

Hello Zayn: Here is our recent discussion on the position and Bull Put Credit Spreads: kzbin.info/www/bejne/baHPq5SYZ9erpac

[@bbasian]

Hi, I have a question with regard to risk of early assignment: My question is, how much extrinsic value is considered as high enough for low risk of early assignment? I have a ITM short put position of SPY, that really needs your opinion on: 358 Days to expiration on 2021-06-18 Exercise Price: $385 Current stock price: $307.35 Bid / Ask: $81.57 / $85.38 SO the intrinsic value is 385 - 307.35 = $77.65 Then the extrinsic value is 81.57 - 77.65 = $3.92 One of the arguments I've heard most is if a short put position is 1) deep ITM , OR, 2) close to Expiration , it would have a great risk of early assignment. However, the example above is : Deep in ITM, BUT, far away from expiration. So how should we look at this scenario? $3.92 extrinsic value out of the option price of $81.57, is this high enough? Thanks in advance for your insight.

[@PowerOptions]

Hello, It is very difficult to say. In general you would not expect to see early assignment with an option this far out in time - but it is important to remember that you can be assigned at ANY time if your sold option is in the money. Also, it is hard to say if the Extrinsic value comes into play as a standard to say: 'If my extrinsic is above X no one would assign it early...' You are not really linked 1:1 with 'Joe the Option Buyer'. When you sold this put the open contracts were put into a pool with all the other buys and sells at the 385 strike. The rule is supposed to be first in-first out: Meaning if any option buyer exercises their puts (or sells to close them and the market maker has to balance out the sold puts and bought puts through exercise), the investors that first sold the puts should be the ones exercised. This means that the option buyer that is exercising or closing their longs: 1)Could have bought them around the same time you sold them, and is taking profits. 2)Could have bought the puts several months before you sold them at a completely different price 3)Just bought the puts a week ago and either hit profit targets or is rolling the puts to a new strike. In either case, the investor on the long side may have a completely different cost basis on their put then the premium you received, and is only looking at their target profits - not the fact that their is low extrinsic. It is also important to note that most investors who purchased long puts on SPY are not likely looking to actually exercise the puts - unless it is in the case of a Married Put position. They are just going to sell to close their puts when they hit their profit targets, or adjusting those puts that might be a market hedge. The Assignment will likely occur from the market maker when the put buyers start selling to close the positions to keep the balance of long puts and short puts at that strike equal.

[@camilaestelamariacamackfar3830]

the sound is not good I am quite disappointed

[@PowerOptions]

Hello Camila, Thank you for the feed-back. I admit the vocals are a bit 'tinny' compared to recent presentations, and that this could be a distraction for the presentation. Give us a day or two to get a more updated presentation together on the topic. Was there another component of the content you felt disappointed with?