From Our September 2015 E-mail Archives: Today, our Head of Trader Development, Joe, answers a question from one of Maverick's traders about what to do when getting assigned in a vertical spread.*
-----Original Message-----
From: James L.
Subject: Assignment
Hey Joe,
I was wondering if you could help me understand what I would do in a situation where I get assigned. I've been demo and live trading for a while, but haven't been assigned yet. I want to be prepared and not go into "panic mode" when it does eventually happen.
I'm guessing the action would depend on what kind of position I would be in. For starters, let's say that I'm in a vertical that's well beyond max gain in the week of expiration and I get assigned stock.
Would you hold the position for max gain through the expiration or close out the stock followed by the long leg?
Thanks!
James
-----Reply Message-----
Hey James,
In the scenario that you described, an In-the-Money (ITM) vertical spread, you would simply allow the whole thing to "same day substitute." At expiration, both options would be worth money and both options will be replaced with stock.
Since you are long one side of the vertical spread and short the other, shares will be assigned long and short. Following the guidelines of a vertical spread, you should have had the same amount of contracts long and short. So, upon assignment, your newly acquired long and short shares will cancel each other out, leaving you the difference +/- your original credit or debit.
The idea is not to panic, which will certainly take some getting used to.
If you would like some examples of similar situations, I run an options expiration class each month on the third Thursday (two days before the monthly expiration cycle ends). We cover Maverick's positions, along with any trader positions they would like discussed via the questions box.
EDITOR’S NOTE: Remember, when you are long the original vertical spread (i.e., a debit spread), then you want the spread to go to full value (as above). If, instead, you are originally short the vertical spread (i.e., a credit spread), then you actually want the spread to expire worthless.
I hope this helps,
Joe
* NOTE: Some original wording has been modified for legibility.
