What Happens If One Leg of My Option Spread Gets Assigned?

Episode 114

That notification pops up, and you feel that little jolt of anxiety. Even experienced traders can feel a moment of panic when they see they’ve been assigned early. But is it really a disaster, or just a procedural step you need to manage?

What happens if one leg of my option spread gets assigned?

In this deep dive, we demystify the mechanics of early assignment on option spreads. We explain exactly what happens to your account when a short leg is exercised (hint: you might be short stock, but you still have a safety net), why "American Style" options make this possible at any time, and the two main triggers for early assignment: dividends and deep-in-the-money expirations.

We also break down the crucial "margin shock" that catches many traders off guard and provide a 5-step "Don't Panic" checklist to resolve the position calmly and efficiently.

This episode references the Ultimate Watch List for selecting better stocks. You can find that resource at weloveoptions.com/stocks.list.

After listening, how will you change the way you monitor your short strikes during ex-dividend weeks?

Key Takeaways

It’s Not the End of the World: Assignment turns your short option into a stock position (long or short), but your long option leg remains as a hedge, capping your maximum risk.
The "Dividend Trap": The most common reason for early assignment on calls is the ex-dividend date. Buyers exercise early to capture the dividend payment.
The Margin Spike: When assigned, your position morphs from a spread (low margin) to a stock position (high margin). This often triggers an immediate margin call, requiring quick action to fix.
Three Ways to Fix It: You generally have three choices: 1) Exercise your long leg to offset, 2) Close the whole position by buying/selling the stock and selling the long option, or 3) Hold the stock (risky).
American vs. European Style: Remember that most US equity options are "American Style," meaning assignment can happen any day before expiration, not just on Friday.

"It's that little jolt of anxiety, maybe even panic, when that assignment notification pops up... It’s that kind of 'Uh oh, what now?' feeling."

Timestamped Summary

(02:08) The "Anytime" Rule: Explaining American Style options and why assignment isn't just an expiration day event.
(03:23) Why It Happens: The role of dividends and deep ITM positions in triggering early assignment.
(05:44) The Play-by-Play: A concrete example of what happens when a short call in a spread gets assigned.
(08:21) The Margin Shock: Why your broker might issue a margin call immediately after assignment.
(10:12) The "Don't Panic" Checklist: A 5-step guide to resolving the situation.

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Published on 1 week ago

Podcast Episode Details

What Happens If One Leg of My Option Spread Gets Assigned?