What To Do When Short Leg of Put Spread is Assigned? [Episode 69]

[Music] so the big question is this how do investors like us who trade options and manage our own money generate income regardless of where the stock market goes and do it all in a way that lets us make time for the people and things we love and yet still build well and remain profitable that's the question and this podcast will give you the answer I'm your host Kirk G+ and you're listening to the daily call from optional everyone Kirky organum welcome back to the daily call on today's call we're gonna talk about what to do when your short leg of a PUD spread is assigned so first of all I think a lot of people actually just first freaked out so 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 so 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 right so it's totally something that's not likely to happen although I will say it will happen eventually as you keep training more so as you trade more and you start to get further and further into this options trading business it eventually is gonna happen right it's just you know part of the process so 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 likes gets the sign 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 like Smike in a sign so at this point now you basically get put stock at whatever price your short strike is so if you sold the 100 puts and bought the 95 puts you might get put stock at a hundred and the stock is trading at say ninety seven which is in between so at this point your 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 contracts in your to hold the shares in your account so if you have an account size large enough that holding those hundred shares or how many shares you are signed is not gonna break the bank it's 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 costs like it cost money you're in a more call situation the brokers understand and realize that you are gonna be liquidating the position they will either help you do it or walk you through it or allow your account to do it so don't worry about that they know that you have to reverse the trade and so I would just say just you know go into open market that day I 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 so 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 stocks 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 you know 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 ninety five the ninety five strike if you wanted to since you do have that long put option and your the option buyer in that case you do have the choice to exercise your put option and basically gets assigned short stock which would cancel out the long stock that you're long so if you wanted to you can use your put option for what it was meant to be which is protection against you know this short strike but in that case your broker might actually charge you a pretty high Commission to go through that process so you'd pay Commission to exercise sometimes fifteen twenty thirty dollars in some cases per contract then delivery the stock then Commission's to get out of it I mean so 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 okay so even though you get assigned it's totally manageable process now if you get assigned and you have the ability to hold the long stock then understand that you're long put option at ninety five still acts as protection like it would have been before so ultimately your position generally looks about the same right you're still long a put option ninety five now your 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 the downside in case the stock falls so my question would be and I always ask people this 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 you know hold that position maybe a couple days and try to reverse it so I always look at the technicals to see if the stock is moving and 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 so that's the way that we look at it so hopefully this helps out today as always if you guys have any comments or questions just let me know and until next time happy trading thanks for joining us on the daily call be sure to subscribe right now for more daily options trading ideas strategies and tactics to help you learn how to play smarter more profitable trades and if you like what we're doing don't forget to give us a rating and a review so we can continue to bring you the best daily content possible we'll see you again tomorrow right here on the daily call from optional Binaca [Music]

Channel: Option Alpha

Views: 24,758

Rating: 4.8891091 out of 5

Keywords: options trading, options, how to trade options, investing, trading, stock market, stock trading, trader, financial education

Id: Dt0o-aKnf-Q

Length: 6min 4sec (364 seconds)

Published: Sun Mar 25 2018