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If I write a put and the stock tanks, how do I, initially offset (at least partially) the assignment risk? In other words, what do I buy (a put or a call) when I write the put? What is the maximum loss (including commissions)?
Assignment is an obligation when selling a put. You can't prevent assignment if the stock falls under your strike, not without buying back the put option. If you are close to expiration and don't want to buy the stock, you should just buy back the put.
Many ways to hedge when opening the position. For writing puts, the most common way is probably using a vertical - that is when you buy a lower put to limit your risk when selling a higher strike put. Example, stock is at 100, you write a put at 90 strike for $2. You hedge by buying a 85 strike put for $1. Your maximum loss is difference between strikes minus your credit when opening the position (90 - 85 - 1). Most you can lose is $4 a share. Without using the vertical, your maximum loss would be $88 a share.
Some suggestions: always calculate your maximum possible loss on any position. Do not assume a far out strike will never hit - if there is a buyer there is a chance it will go there. I've been surprised many times when a very fat premium on an 'unlikely' option ends up with the stock price going there - someone knew something you did not. Avoid trading options that are close to expiration if there is low volume ( you may be stuck without a decent price to close out your trade).
So if I sell a put and buy a put (same expiration date, different strike prices) and, before expiration, the stock tanks and the put that I sold is assigned, does the broker (TD Ameritrade) automatically closes the put that I bought?
Besides the options fees, am I liable for stock buy/sell commissions?
So if I sell a put and buy a put (same expiration date, different strike prices) and, before expiration, the stock tanks and the put that I sold is assigned, does the broker (TD Ameritrade) automatically closes the put that I bought?
Besides the options fees, am I liable for stock buy/sell commissions?
Doctor T
There is an automated exercise process but I’d recommend if you want to be exercised you ask for it. If you were long and short it’s possible for you to be exercised on the short and the long expire
So if I sell a put and buy a put (same expiration date, different strike prices) and, before expiration, the stock tanks and the put that I sold is assigned, does the broker (TD Ameritrade) automatically closes the put that I bought?
Besides the options fees, am I liable for stock buy/sell commissions?
Doctor T
I'm not sure what the commissions are for your broker, but I have to pay a $15 fee if assigned. Very likely your broker will also charge a fee.
As for automatically closing out the put you bought - that probably depends on the broker so I would ask them directly. I've never gotten to the point of allowing that to happen to me - I always close out positions myself. If the put you bought has value at expiration and you were assigned stock, I would assume it would be assigned back out for the gain (closing all your positions) but different brokers may have different rules.
Also, if you don't have the cash in your account to cover assigned stock you may be forced to sell the stock before you have a chance to use your purchased puts to sell the stock. Hope that makes sense. For example, options can be assigned before expiration. So if you are assigned before expiration, then have to sell the stock (due to not having enough cash), then you'd only have the lower strike puts you bought. I've never been in that situation but from what I've heard, the broker will close out a put that has value but not at a good price. They will just go with the market price which can be pretty crappy price.
I'm not sure what the commissions are for your broker, but I have to pay a $15 fee if assigned. Very likely your broker will also charge a fee.
My broker can also assign partially - for example, I have 10 puts sold and 400 shares are assigned at first, then another 400, then another 200 shares. That means 3 assignments = $45 in fees, ugh.
So general rule - you want to control what happens and close out in your interest. Even if you know the automated rules on assignment, you should still maintain control by closing out positions before expiration.
My broker can also assign partially - for example, I have 10 puts sold and 400 shares are assigned at first, then another 400, then another 200 shares. That means 3 assignments = $45 in fees, ugh.
So general rule - you want to control what happens and close out in your interest. Even if you know the automated rules on assignment, you should still maintain control by closing out positions before expiration.
I believe that’s because the OCC dictates when the assignments occur and then the broker has to allocate randomly or fairly however the rule actually stipulates
When selling verticals, I either 1) close the position within 14 days of expiration, or 2) roll it out to a later expiration if I am underwater. I typically enter a position with an expiration 30 to 45 days out and then adjust as needed. I've never been assigned.
When selling verticals, I either 1) close the position within 14 days of expiration, or 2) roll it out to a later expiration if I am underwater. I typically enter a position with an expiration 30 to 45 days out and then adjust as needed. I've never been assigned.
So really you are selling 15-30 day positions. Why may I ask do you always close w/in 14 days of expiry when selling?
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