Credit Spreads, getting assigned too "early"?

Discussion in 'Options' started by Rocko1, May 5, 2007.

  1. Rocko1


    Sorry for the newbie question. Does anyone know of a way to manage unexpected assignments before the spread reaches either end of the targets?

    The guy at Optionetics insists that as long as you exit before the last 30 days, there's no real reason for anyone to exercise the written call/put. Does that have any merit?

  2. 1) Always know how much time value is left on the option. If it's close to $0, the odds of you being assigned are very high.

    2) Always know if a dividend or other corporate action is about to occur. Make sure your option is worth substantial time value + dividend.

    3) Beware of OEX, which has unusual exercise rules which make it highly likely for you to get assigned early.

    Time remaining is not the important factor--these other issues are.
  3. Rocko1


    thank you very much, that was way more informative than the freaking Optionetics CD's.
  4. The last 30 days has the greatest amount of time decay, which is what you want for a credit spread. Makes no sense to exit until expiration.
  5. Hold on a second. You are a newbie but you are talking about selling credit spreads and letting them go in the money? I have posted before on when, specifically, you are likely to be assigned but I think it more important to caution you not to trade options yet because it does not sound like you know what you are doing. The more specifics you give in your posts the more help you are likely to get.
  6. Rocko1


    Can I have the link to your post regarding assignment risk?

    OK I've been trading currencies for 2 years and had been doing OK, and was recommended to look into options via friends.

    The specific strategy that caught my attention from the Optionetics people is the ratio backspread, and the calculations for it from "Mathematics of Options Trading" looked good.

    However both the CD's and the book had completely failed to mention the risk of getting assigned early. Hence my question here.
  7. Read through this thread:

    Trading an underlying instrument, stocks, futures, etc. is very different than trading options. There is a reason most retail option traders lose money in the long run. If you haven't read and understood Natenberg's book "Option volatility and pricing" then don't trade options. It takes about 2 years of serious study, work, and experience to start to know what you are doing in options.
  8. Rocko1


    noted with much thanks.
  9. nikko309


    Fully Articulate replied with the pertinent criteria for early exercise. Barring a pending dividend or a corporate action, the most likely reason is that the short option is in the money and its time premium (TP) is approaching zero. By that time, more often than not, you're approaching if not already in deep doo. Know your break even points and have a plan as to what you can do to adjust if you decide not to close.

    You can have early exercise despite some TP remaining but it's rare. That's a good thing because you can usually close the underlying and sell the option again, pocketing the remaining TP from the exercised option. As I said, it's rare but it's nothing to fear.