lystn

Hey everyone, Kirk here again and welcome back to the daily call. On today’s call, we’re going to talk about what to do when your short leg of a put spread is assigned. First of all, I think a lot of people actually just first freak out. Maybe that might be the first thing that most people do, is they just freak out which is not what you should do. You should not freak out obviously. It's totally manageable. You can work through it. There’s nothing to freak out about. Maybe the first step is – Don’t freak out, take a deep breath, calm down, maybe walk away from the computer or email for a minute and then come back. The reality though is (and we’ve said this before, but it's worth saying again) most of our positions that we trade, the vast majority do not go through assignment on our short strikes. When we go back and track it, it's like 1% or less over time that we actually get assigned and most of that assignment happens closer to expiration. It's totally something that's not likely to happen, although I will say it will happen eventually as you keep trading more. As you trade more and you start to get further and further into this options trading business, it eventually is going to happen. It’s just part of the process. If you are trading a short put spread where you’re selling a put and then buying a put even lower, eventually, maybe one of your short put legs gets assigned. Whether you’re just letting the position go deep into the money, it’s getting closer to expiration, whatever the case is, one of those put legs might get assigned. At this point now, you basically get put stock at whatever price your short strike is. If you sold the 100 puts and bought the 95 puts, you might get put stock at 100 and the stock is trading at say 97 which is in between. At this point, you’re long shares at 100. The first thing I would tell people to do is to first assess whether you have the capacity to hold the shares in your account. If you have an account size large enough that holding those 100 shares or however many shares you were assigned is not going to break the bank, is not a significant portion of your account, then at least you can continue forward at this point and decide whether or not you want to hold shares or not. If you don't have an account size that’s large enough to hold those shares, then all you have to do is immediately sell the shares back in the open market. You can sell the shares back even if it cost money. You’re in a margin ish call situation. The brokers understand and realize that you are going to be liquidating the position. They will either help you do it or walk you through it or allow your account to do it. Don’t worry about that. They know that you have to reverse the trade. I would just say just go into the open market that day. Don't rush to do it. You don’t need to do a market order to do it. You usually have basically that day about 24 hours to actually reverse the position if you can’t hold the position in your account. Just reverse the stock and sell the stock back in the market and then close out of your long put option that you had. Now, at this point, if the stock has made a quick move lower, maybe that long put option still has some money left in it, so you want to liquidate that and get whatever you can out of it. That would be the best avenue to go in my opinion. It’s the cheapest commission avenue to go, is to reverse the stock and then single-handedly close out of that long put option say at the 95 strike. If you wanted to… Since you do have that long put option and you are the option buyer in that case, you do have the choice to exercise your put option and basically get assigned short stock which would cancel out the long stock that you’re long. If you wanted to, you can use your put option for what it was meant to be which is protection against the short strike. But in that case, your broker might actually charge you a pretty high commission to go through that process. You’d pay a commission to exercise, sometimes $15, $20, $30 in some cases per contract, then delivery of the stock, then commissions to get out of it. I mean, you can see that it's not an easy process to do, but it’s definitely something you can do and it’s still there to protect you. Even though you get assigned, it's totally a manageable process. Now, if you get assigned and you have the ability to hold the long stock, then understand that your long put option at 95 still acts as protection like it would've been before. Ultimately, your position generally looks about the same. You’re still long a put option at 95. Now, you’re long stock, so you still have some protection. It's now more acting like a call option, like a directional call option than anything else. But you’re still protected of the downside in case the stock falls. My question would be… I always ask people this, is – Do you have the ability to hold it and do you think that the stock might be making a move higher in the future as to the point at which you could actually hold that position maybe a couple of days and try to reverse it? I always look at the technicals to see if the stock is moving. If the stock is moving higher or starting to bottom out and potentially moving higher, I might be more inclined to hold that position and maintain the position moving forward. That’s the way that we look at it. Hopefully this helps out today. As always, if you guys have any comments or questions, just let me know. Until next time, happy trading!