Vertical spread and assignment risk

Discussion in 'Options' started by a529612, Nov 14, 2006.

  1. Say you do a bull spread DITM on both legs and the underlying is trading well above the BEP. How do you handle assignment risk for the short leg if you don't have equity to buy the underlying when it gets assigned? Do you just exercise the long leg if you get a house call?
  2. MTE


    If you are assigned on a bull call spread then just exercise the long to cover the assignment. The only problem is when you are assigned due to the dividend, as by the time you realize you were assigned it's too late and no matter what you do you will still be responsible for the dividend.
  3. Also, if you don't have enough equity to cover the assignment, your broker will automatically exercise your long leg. But as MTE said, you still have to cough up the dividend if there was one (happened to me once, not a nice feeling but taught me to check for dividends on ALL of my equity option positions, lol).
    Daddy's boy
  4. Got popped for one of those myself once...

  5. When the broker exercises the long leg for you to cover the short leg assignment, don't you have to have the equity to buy the underlying stock?
  6. No. You are assigned on the short call, meaning you have to deliver stock to the call owner at that strike. You then exercise your long call, meaning you buy stock from the call seller at that strike. So, you owe stock and you buy stock, the two thus net off to zero. All you end up paying is commission for the stock transaction and of course the loss you incur in the differences between the strikes.
    daddy's boy