December 7, 2018

How To Deal With An Exercise/Assignment Position

Dealing with a losing trade.  It’s not fun and certainly, no one looks forward to dealing with them.  It’s a fact of life for a trader and you must learn to deal with them or you will never be ultimately successful.  But, you also need to be informed (and thus empowered) to deal with the risks you actually have on.  Take our example in Tiffany & Co (Ticker: TIF).  We had a put spread position on.  We sold the December 7th weekly expiration 93.5/95 put spread and we collected a credit of $0.80.  The maximum profit we could have made was the $0.80 of premium we collected and the maximum risk was the width of the spread less any premium collected or $0.70.  That was our risk, period.  Here’s a look at the daily chart:

Obviously, this is not a great place for the stock to be at expiration.  In fact, it’s the worst-case scenario.  But, we never leave ourselves undefined nor undue risk.  Two things could have happened.  You could have been assigned early on your short 95 puts.  That would get you long the stock at $95.00.  But remember, you have long 93.5 puts which allows you to get short stock at $93.50 and that will wash out the stock position and realize the loss of $0.70.  If you didn’t get assigned on any of your 95 puts, you would simply let the spread expire at expiration, you would be assigned on your short 95 puts, you would exercise you long 93.5 puts and would still realize you max loss of $0.70 with no resulting stock position.  Defined and undue risk.  One of the keys to becoming a successful trader.

about the author:

Mike Shorr

Since 1994, Michael has been an on-the-floor market maker, Vice-President of Interest Rate Derivatives for Knight Financial Products and Director of Education and Options Instructor at Trading Advantage. He makes the oftentimes complex world of options and trading accessible to the novice and advanced trader alike. Michael has a Bachelor of Science degree in Statistics and Finance from the University of Illinois Champaign-Urbana. He presently is Director, Trader Education at ProsperTradingAcademy.

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