Podcast – Episode 138 – Can A Credit Spread Get Assigned

Podcast Transcript

So a common question that we get is, when you sell a credit spread, can you get assigned? And so the idea is that, you know, if I’m in the middle of a trade, what happens? Or at the end of the trade? What happens? So there are different connotations here. So the answer really is yes and no, because in trading, nothing is black and white, right? Nothing is just on the line. So let’s go through this a little bit longer. So you would think it’s a very easy answer, but it’s going to take a little bit of explanation. So number one, there are two types of options, right? There’s the European style option. And then there’s the American style option, the European style option cannot be assigned early. So you stay in a trade, nothing happens. And then at the end of the trade, you’ll see what happens, right? So early assignment does not happen. These are index options, SPX rut and a lot of futures options.

So you’ll have to check which future option you’re trading to find out if it’s early assigned, or European, or American style, American style options can get assigned early. So there’s a risk of that happening whenever you’re trading an American style option, which are options on most stocks, just about every stock, and just about every ETF. So again, first thing you know of, is there going to be early assignment. And that is going to be determined on if it’s American style or European style. Secondly, what causes early assignment? Well, if you’re in the money, there’s a good chance of getting assigned. And if there is very little time left. So if there’s only a few days left in the trade, or until expiration, there’s a good chance that you can get assigned, of course, it’s not guaranteed. But if there’s a lot of time, chances are very little that you will get assigned. And if you’re out of the money, most likely you will never get assigned. But again, there’s no guarantees. Okay? Now, a lot of people wonder is like, Okay, if I let my option, my credit spread, go into expiration, and the short strike is in the money, but the long strike is not what happens, then?

Well, again, we’ll say that it’s a American style option. Let’s say you did it on a stock or an ETF, right? So can you get assigned? And the answer is yes. If it’s in the money, you will probably get assigned. Okay, now, that’s not a big a fear, or a big thing happening, as you might be afraid it is. A lot of newbie traders are totally scared about assignment. And they’re like, oh, no, I don’t want to get that high. Sorry, I don’t know what’s gonna happen to my account, I might not have enough money, blah, blah, blah, yeah, don’t worry about it, it’s not a big deal. Even if you don’t have enough money, there’ll be a negative sign in your account, you’ll get a margin call. And all you have to do is just get out of that stock position. So if you’re assigned stock, you just sell it there. If you’re short stock, then you just buy it back, and you do an exit order. And it’s all taken care of the day after. So usually, if it’s assigned on a Friday, let’s say expiration is on a Friday, then on Monday, when the market opens up again, all you got to do is just exit. If you don’t exit it, your broker will do it for you. So yeah, I mean, it won’t be as good a price and you don’t want that. But if that happens, then the broker will will get you out. So it’s not as big a deal as people think it out to be. So again, can you get assigned with a credit spread?

If it’s American style, you can get assigned early, before expiration, if you go into expiration, and your short strike is in the money, most likely, you will be assigned almost all the time. Doesn’t happen every single time. But usually, if it’s in the money, there’s a trigger at your broker, and it’s it’s gonna go into assignment. Now, how does that work on the money center? You know, the money side of it? Well, it depends on how much it’s in the money. So let’s say you sell a $5, wide spread, okay, you sell the 100. And you sell the 105. Okay, let’s say it’s a call spread. So you sell the 100, you buy the 105, the stock ends at 101. So it’s $1 in the money. So that is how much you would lose, you would lose that $1 In the money. But you got a credit. Let’s say you got a let’s say you got $1 credit. So now you’re still at breakeven, but you get assigned the stock. Right now you sold a call. So you have to give up the stock. Right? You have to get rid of you have to sell the stock because you sold a call and your call got assigned. You don’t have the stock because it was a spread. So now you would be short 100 shares for every contract. Okay? So when the market opens, it’ll show that you are short 100 shares and then you just have to buy that stock back and you’ll be out. Really, you need to find out what the PNL is after you get out of that stock position. Now, sometimes what people do is they say, Hey, you know what, I don’t mind buying the stock, I’ll sell a put spread. And if it goes in the money, I’ll buy the stock. You can do that. A lot of times you can, you can do that. And that will be fine. So depending on what you want to do, depending on how your process is, but yes, you can get assigned early in a spread. Again, if it’s in the money, and there’s very little time left expiration. So those are the two things to look for. Or at expiration. If it goes into the money, can you get assigned? Yes. All right. So again, it’s not a big deal. It’s not the craziest thing in the world, it happens sometimes, if you don’t want it to happen, all you got to do is exit the trade early. And that’s it, that’s probably the best way to do it. You don’t want.. if you’re if your short strike is going to be in the money on a call, unless you want to be assigned. Just don’t do it just get out early, and you’ll be fine. So again, you know, I always say that, whatever you’re afraid of sometimes you got to experience it once, right? So if this is something that is really causing you a hang up really doing like really scared, well, then I would say you probably do like a one point widespread. If you could find something that’s a one point widespread or something, do a really small trade or short, like not very expensive stock or something and let it get assigned. Just do it. Just let it let the fear out. Let it happen, whatever you’re afraid of let that happen. And you’ll see what happens.

You see Oh, wow. Okay, no big deal. Click, click, click out, done. You know, yes, you might lose a little bit money because you let it go too far and you’re on the wrong side of the trade. But the world didn’t end your style, your account didn’t blow up, you know, the brokers not sending the police to knock your door down and take your house or anything like that. So no big deal. Just let the worst thing happen sometimes and you know, in a small way, not in a big way and small way. Try it out and see what happens and you’ll learn something again. Thanks for Thanks for visiting and showing and watching. (He) didn’t show me anything but yeah, thanks for visiting. I’ll see you again in the next episode.

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