Think of it as an entirely new position. The call spread is now gone. If someone said to you, hey El Ocho, I'm going to sell you some calls at parity and let you short the stock at the same price. You won't have to pay commission on this trade. You will receive a short stock rebate on your short stock, which will make the trade profitable no matter where the stock goes. You can't lose money on the up side but you can make even more money on the downside. Would you do this trade? This is the position you would have after the exercise. The only question is there a short stock rebate or hard to borrow fee or dividend.
Yup. The stock tanking hard is his free option. If he wasn’t assigned when the stock got to 59, he should be afraid that the stock sells off to below 50 and he will lose his entire premium.
Yes but the premise is he was assigned. If the feeling that the stock will now tank hard below $50, in this hypothesis it may still be better to close the bull call spread and then open a new bearish position with more time to expiration since the assignment occurred often because (1) time to expiration is short and time value premium is gone or (2) the spread is waaay ITM.
I would close the spread and open a new bearish trade if you truly thought it would tank. If you are assigned it often means one of two things: (1) time to expiration is close and time value premium is nil - so you are almost out of time and odds of stock moving way back below your long call are slim. If you think stock could retrace then open a bearish position at higher level maybe with more time to expiration since it is a new position bias (2) stock moved way ITM and the short call was pretty much intrinsic value plus not much time to expiration - Again odds of stock making that huge swing are slim but if you think it will retrace by a noticeable amount then close bull spread and open new bear spread with more time and at higher strikes. The point is just because the position in theory gives you a potential extra income if stock tanks, the reality of why you were assigned indicates small probability of results. You will always be better off closing the position and then concentrating on a new position with more time and better strikes relative to where the stock is now. I always favor banking max profit and then looking at stock anew at the new level based on analysis of the underlying. If you have just 3 days to expiration then sure hold on and see what happens but that is not taking a realistic trading approach. The thought process behind it is not a long term winning one IMHO.
Definitely. I was responding to the point that why would he not exercise the long option. If his view changes after being assigned he should change his position. But if his view is the same, he should hold the assigned stock + option because his new position is strictly better than his old position.