Hi, I am just learning about options and option spreads. I am worried though that an option in part of a spread I buy will be exercised early if it is in the money. Then I would be stuck in an undesirable position and possibly lose more money than expected. How can you avoid being assigned on an early exercise? Does this happen very often? Thank you
Once a leg reaches ITM you should close the entire spread and take the loss. The whole idea of spreads is you want them to expire OTM. -------------
This is wrong unless you assume it has to be a short spread. because if you are long a spread you dont want it to expire OTM. Also the OP should know that an option you BUY cannot be exercised against you early since you hold the rights to that option, I think you meant the short side of the spread. If you are long a vertical such as a bull call spread or a bear put spread, getting assigned early on the short leg means instead maximum profit on the spread by simply exercising the long leg to achieve the max profit.
Hey Robert, I've been trading options for several years(5) and never been assigned. This does not mean you will never get assigned but it does not happen that often in my experience. When doing a debit spread (call or put spread), this should not be an issues because you are selling a further out of the money option. So if you are assigned on your short option your long option position will be worth more or offset the amount. There are many great sites you can learn more about option trading. One of my favorites and they talk about strategies daily is OptionMonster.com. I really like their daily Volatility Sonar report (it is a FREE daily webcast). If you want a good book, Options PlayBook, by Brian Overby and Tradeking. Short book that defines the most popular options strategies and the risk involved in each. Easy and fast reading. Hope this was helpful. I'm sure there will be others giving their advise too! Good Luck trading! Rick
And at this point you have reached maximum profit so it's best to close the entire position. Rule of thumb: When the short leg reaches ITM close the position on both a Debt and Credit spread. ----------------
Assignment is not always undesirable. Short options are not likely subject to early assignment as long as there is time premium in the price. European style options do not have early assignment risk. Regarding any rule of thumb or any aspect of your trading plan - it is entirely up to you.