Assignment in a Vertical Spread

Discussion in 'Options' started by Spaghetti Code, Dec 20, 2020.

  1. If I have a long, ITM, call vertical spread, there is a risk the short leg could be assigned. This seems unlikely if the leg is deeply ITM, but suppose that it was close to ATM. In my case, the options have 14 DTE, and I am approaching the ex-div date. If the short leg gets assigned, the broker would have to cash out my other assets to cover it.

    My question is how do I know the broker will try to cash out the long leg first, before selling the other securities I have? Do brokers have a published preference for which get sold first? I would prefer to keep the position open, but limit the risk to just the long leg.
     
  2. newwurldmn

    newwurldmn

    call your broker and ask them.
     
  3. BKR88

    BKR88

    Your risk doesn't change if short position is assigned so your short call should be replaced with a short stock position. No need to liquidate any other positions.
    ***Margin requirement could change slightly but risk doesn't.
    ***Short stock position exposes you to the dividend payment.
    ***BTW, a deep ITM position is more likely to get assigned (if you're short) than an ATM position. Options are very unlikely to get assigned unless there's almost no premium. Deeper ITM will have less premium than ATM options so more likely to get assigned.

    ***If you're long an ITM call spread, you're trying to collect the premium in the short call so will have premium or you'd have no reason to hold the spread. Therefore shouldn't be assigned.
     
    Last edited: Dec 20, 2020
    Spaghetti Code likes this.
  4. taowave

    taowave

    If you think the short side could get assigned to capture the dividend,you should exercise your long call..Look at the corresponding puts


     
  5. In my case I had 5 QQQ spreads at 10 point spreads. Executing the long calls would have a drastic effect on my buying power, since I would need around $135K to follow through.

    This is pretty counter intuitive, but makes sense. I guess it means if the time-premium is ever lower than the expected dividend, It will be assigned. Thanks for the insight!
     
  6. zdreg

    zdreg

    nonsense as to margin requirement. If your short call is exercised you are short now and must meet short sale margin requirements as if you have no long calls. Long calls do not offset a short position in an "ordinary" margin account for margin purposes.
     
    Last edited: Dec 20, 2020
  7. caroy

    caroy

    https://tastyworks.freshdesk.com/su...read-help-how-to-set-up-a-covered-stock-order video from tastyworks on how to exit to avoid margin issues.