Hot Tip: Options Spreads: Forget worrying about Early Assignment!...

E

earth_imperator

With Options Spreads simply forget worrying about any possible Early Assignment, as the End Result will be the same! :)

Imagine you have a Put Spread position consisting of 2 legs: a ShortPut and a LongPut position, both expiring in say 16 days.
But unfortunately the other side makes an "early exercise" (ie. causing you to become "early assigned"), that means the ShortPut position gets closed early by delivering the underlying stock (in this case you will get the stock instead, usually you will be in negative zone when this happens).

BUT: in the end it does not matter, because the end result at expiration date will be the same
whether an early assignment did occur or not! :)

So, don't worry be happy, and keep the stock at least until the expiration date to have the same initial win/loss guarantee.
Of course you can "early close the stock" when the position (LongPut plus now the LongStock) rebounces from the loss zone to the profit zone.
But of course the initial guarantee of the spread continues working only up to the expiration date of the LongPut leg, since after it the Protective Put functionality will have expired.

So, with Options Spreads an early assignment is a neutral thing, not to worry about it at all!
But don't forget: the above said good news works only with Options Spreads! But not when you have just a ShortPut (or just a ShortCall) alone.

Numbers of a recent real trade (it's a deepITM ShortPut + a nearATM LongPut):
Spot=1.13, DTE=16
ShortPut: Strike=35, Premium=33.80
LongPut: Strike=1, Premium=0.06
On the 2nd day (DTE=15) the spot fell to around 1.00 and the counterparty exercised, causing me to take the underlying stock at the strike price of $35, worth now only $1.
At that point my unrealized loss was 35 - 33.80 - 1 = 0.20.
But this is just unrealized yet. Since I continue keeping the other leg (LongPut of the initial spread) plus now the LongStock, effectively nothing much changed as I will continue having the same guarantee the initial spread had offered, as long as I keep the LongPut and the LongStock till expiration of the LongPut.
Lesson learned: forget about any Early Assignment with Option Spreads.

BTW, the ticker was/is VERU, ExpDate 2023-04-21, so it's still active :)
It's this trade together with its PnL diagram: https://optioncreator.com/stp8pn8
The possible MaxLoss is capped at $0.26 (see left side of the chart towards the 0 point).
You can reduce the right side of the axis by setting it to 2 or so to get a bigger view.

See also:
https://en.wikipedia.org/wiki/Exercise_(options)#Assignment_and_clearing
https://www.thebluecollarinvestor.com/early-exercise-and-assignment-of-options/
https://www.investopedia.com/terms/e/earlyexercise.asp

Dr. Strangelove or: How I Learned to Stop Worrying and Love the Bomb :)
 
Last edited:
What you say simply isn't true.

Here are the risks of early assignment in option spreads,

First, margin issues. An option spread will use much less margin vs if you are assigned on your short leg as you will then have a stock position. Depending on your capital, you will then have a margin call. You can meet this call by liquidating your position, but its going to depend on the broker. For example, IB may auto liquidate other positions as well to meet the call. There are reports that Robinhood simply exercises your long leg (destroying any time premium left). You also have potential margin interest to pay until you liquidate.

In calls you have the potential to pay a dividend if you are assigned just before an ex dividend date. If the stock is hard to borrow and you are assigned early, you have the potential to pay some high hard to borrow interest.

In puts you will have stock carry fees if you are assigned early. In a put spread, when you are assigned early, you have long stock vs your long put. Carrying that long stock to expiration costs money (or keeps you from receiving interest if you have a credit balance already). In fact, this is why puts are exercised early, the higher interest rates go the more likely this is to happen for deeper in the money puts.

From a purely risk perspective you are right. Your long option protects you form a large move and the new position can actually provide an opportunity in an extreme move, but as mentioned there are these other risks.
 
@FSU, my analysis is for CashAcct only. Sorry I forgot to mention this important fact.
In a CashAcct a ShortPut means actually CashSecuredPut: it requires cash amounting Strike minus Premium to be reserved in advance, ie. that cash is locked for the whole duration of the ShortPut. This is handled automatically by the brokerage system. If there is not enough cash avail then the system of course does not allow to open the position.
In the above example only $1.20 x 100, ie. $120 CashRequirement per contract was necessary, ie. 35 - 33.80 = 1.20

But the advantage of CashAcct is: one will never ever get any kind of any call (like margin call with MarginAcct) . Another advantage is: the PDT rule does not apply to CashAccts, meaning one can do many trades, incl. daytrades (but one can spend (trade) the money only once each day). Of course unlike with MarginAcct, the disadvantage of CashAcct is that one cannot use any money of the brokerage firm (ie. "margin" :)).
 
Last edited:
earth_imperator said:
@FSU, my analysis is for CashAcct only. Sorry I forgot to mention this important fact.
In a CashAcct a ShortPut requires cash amounting Strike-Premium to be reserved in advance, ie. that cash is locked for the whole duration of the ShortPut. This is handled automatically by the brokerage system.
If there is not enough cash avail then the system of course does not allow to open the position.
More...
Shouldn't matter for a cash account. You should still be earning interest on the cash required to secure a put. When it is assigned, you now have an asset where you will be paying (or not receiving interest)

You also were talking about spreads (which generally require a margin account) When you put a spread on only the debit of the spread is required (until you are assigned). If the spread is in a cash account, each option may be looked at separately, so go by my first statement.
 
FSU said:
Shouldn't matter for a cash account. You should still be earning interest on the cash required to secure a put. When it is assigned, you now have an asset where you will be paying (or not receiving interest)
More...
I never considered any interest to earn or to pay as it's a CashAcct, meaning the money has already to be in the CashAcct, ie. trading with own money only.

You also were talking about spreads (which generally require a margin account) When you put a spread on only the debit of the spread is required (until you are assigned). If the spread is in a cash account, each option may be looked at separately, so go by my first statement.
More...
Yes, in my CashAcct each position is treated for itself, ie. it's not real spread trading, but just a simulated one.
Still, it works for me.
FYI: the brokerage firm TradeStation allows SpreadTrading also with CashAccts. Proof: see the last column in their table:
https://www.tradestation.com/pricing/options-margin-requirements/

Can you also analyse the strategy when used with CashAcct, like in my case? Thx.
 
Last edited:
Update with even more good news:
An Early Assignment gives even a better end result than the original spread! :)
Proof: since at Early Assignment one gets a LongStock, then the original profit capping at strike 35 gets now eliminated, causing a straight PnL line through and beyond the 35 spot towards the North-East, as is usual with LongStock.
Of course the LongPut at the left side (strike 1) continues capping any losses at -0.26, which of course is a good thing (#1).

Ie. an Early Assignment has the positive effect of eliminating the profit capping at the right side (at original strike at right), which of course is a good thing (#2).

Here's the picture after the Early Assignment: https://optioncreator.com/st1am3c
Note that the stock price has been set to 1.00 plus the unrealized loss of 0.20 at assignment, giving a total of 1.20.
Compare this new PnL diagram to the PnL diagram of the original spread: https://optioncreator.com/stp8pn8
They are the same for spot 0 to 35, but beyond that the PnL diagram after the Early Assignment is better (no profit capping at spot >= 35 anymore).
Cf. also the data in the original posting above.
Q.E.D.

After_EarlyAssignment.png
 
Last edited:
One consequence from these new findings above for me will be to replace the ShortPut leg by LongStock right from the start on...
The net cost seems even to be slightly cheaper, and other advantage is that LongStock usually is easier to trade than its option (since options usually have a wide B/A spread, less volume etc)... And: also saving on commission, as commission for stock is usually zero nowadays... :)

So, in future I'll replace "ShortPut + LongPut" (ie. PutSpread) by "LongStock + LongPut" right from the start.

Hmm maybe I shouldn't do this, b/c options have other advantages like "leverage" when there is still plenty time till expiration. Ie. the end results can be the same, but options can have better results for the time before the expiration... Need to do some more research & simulations on this...
 
Last edited:
You must log in or register to reply here.
Back
Top