Getting Assigned on a spread — Here is how it is done.
So, if you’re like me and not currently in possession of 100 shares of SPY, are trading spreads on it, here is what happens if say, your short position and long position both fall ITM and your short position becomes assigned to you. Early or at expiration.
- First that happens is Robinhood sells 100 shares on your behalf to whoever owns your short position. This leaves you with you a deficit of whatever it cost to buy 100 shares. So, without a fee of any kind, they literally hook you up with 100 shares of SPY that are worth nearly 50k of shares. That said, you still owe them though.
- You can either sell those 100 shares given to you from Robinhood via the market if, at the day of assignment, SPY magically jumps above their short put strike. If this happens and you sell those 100 shares above the short put strike, you’ll not only pay off the debt you owe to Robinhood, but you’ll have a profit. However, I wouldn’t wait longer than a day to hope this happens. If it’s undoubtedly clear that SPY isn’t going to jump up past the short put strike, then it’s likely you’ll need to exercise your long put with the 100 shares Robinhood fronted you.
- When you exercise your long position with those 100 shares Robinhood got you, this comes with a massive opportunity cost assuming your long position is months away and a hefty cost. When you exercise, you lose your long position and the opportunity costs that come with it. So, for a calendar diagonal, the longer out, the steeper the losses will be on opportunity costs. However, on the contrary, you’re clearing your debt (assuming your long position is either at or further ITM than your short put). This is good with the respect that you’re still making something back, you’re not in crazy debt and if you do it right, you can still re-coup your losses. It would be nice if the difference was so much, that whatever it is, it’s more than what you paid for (net total) for your long position.
- You decide to buy a long SPY put @ 450 on 20 May 2022. The cost is $3,778. To pay this off, you decide to sell a short put at strike 418 for 3/18 which gives you +$768. So, your net cost is $3,010 to your long position. Between 3/14 – 5/20, you have 9 weeks and 5 days which for every week, you can sell two SPY puts each week which, over this time period not only pays off the cost of the long position within a few weeks, but with the remaining weeks, that’s all profit. Now, let’s just assume that the next day after buying your first short position, 3/18, SPY magically drops from 420 to 390 and the owner of your short put has decided to assign the position (exercise their position). Since, I have to buy 100 shares of SPY at 419 and I don’t have the cash or stock to do this, Robinhood fronts me the 100 shares which gives me a deficit of ($41,900). Now, there are two ways to rectify this debt. I can either sell the 100 shares outright to the market or I can exercise my long position with those 100 shares. If I decided to exercise my long position, I would take these 100 shares given to me from Robinhood and my long position which allows me to sell 100 shares at $450 per share which means I get $45,000. With $45,000 in cash, I cover my debt to Robinhood leaving me with a surplus of $3,100. Now, here’s where opportunity cost happens: Originally, I paid $3,010 for that long position (after selling the short position). With the surplus difference made from exercising my long position ($3,100) to pay off the short assigned position, I am left with a $90 profit when we factor in how much it cost to buy the long position (plus what I sold the short put for). Even though I have technically $3,100 in cash, with opportunity cost, I actually run a significant negative because of the opportunity cost this long position could of brought me. Assuming SPY hovered between 410 and 430 until May, this would of been $400-$600 (maybe more, maybe less) the long position would of been paid off in a few weeks with several more all for making profit. For example, if I paid off the long position in 4 weeks, I would have 5 weeks of selling two short positions each week that would be all profit never minding what intrinsic value my long position has itself. If I made (hypothetically), $800 a week, paid off my long position by week four, I would have five more weeks to keep selling two options each week. If the price per short position was $400-$600 for, we’d be looking at roughly a 5-7k grand profit by May. So, I lost the potential to make this amount because the original cost for a long SPY @ 450 on 20 May 2022 was $3.7k. I have $3.1k after everything happened and no long position.
- The opportunity cost ultimately lost was $9,000 plus (or minus) whatever the premium would yield itself provided the long position benefitted from the direction SPY moved up to then. So, this is why getting assigned early on a calendar or vertical spread early sucks! Even though I can do the same thing again with $3,100, I won’t make as much as I could of before. By looking at this situation in terms of opportunity costs, I was able to see what I could of made versus what I ended up making because of someone’s choice to assign me.
Consider everything said above. If assigned, you’re given 100 shares by Robinhood and now in debt -$41,900. Let’s assume all this happens on a Friday after the closing bell and that 3/18 419 Short SPY put expires ITM. The person has 100 shares of SPY and the position gets exercised. The closing price of SPY is $390 and come opening bell Monday morning, SPY magically gapes up to 425. I can now sell all 100 shares of SPY for $42,500 and cover my debt plus make a profit while keeping my long position. This is literally the best case scenario. I don’t have the exact time Robinhood waits around for you to fix the debt, but I’d imagine by within a day, any cash, stock and other positions you have open all become liquidated to help pay the bill they financed for you.
If you’re new or slow, or both, and you happen to sell 100 share below 419, you’ll not only be on debt to Robinhood still, but you’ll now not be able to exercise your long position to close the short position.
-What happens when my short position becomes assigned via Robinhood? Robinhood fronts you the money and buys the 100 shares at whatever strike price the short position is at. This comes without a fee.
-If SPY, the day off, magically increases above the short position’s strike price, you can just sell those 100 SPY shares given to you by Robinhood to clear your debt to Robinhood (and keep any remaining profit if it is higher than the short’s strike price).
-If SPY clearly isn’t going higher than the short put the day your assigned or even after and you don’t exercise your long position with the 100 shares given to you from Robinhood, they will start liquidating your portfolio, cash, and anything else that can pay the balance.
Submitted March 14, 2022 at 08:01PM by girthygirthmonster