Assigned on a put credit spread: what to do next

What you hold now

A put credit spread is a short put with a cheaper long put below it. When the short put is assigned early, the 100 shares per contract land in your account at the short strike, and the long put stays open. Shares plus a long put is still a position with a floor: below the long strike, the put gains one for one with what the shares lose.

Early assignment usually happens when the short put is deep in the money with little time value left (see what happens when a put is assigned). It does not change your worst case. The most you can lose is still the width of the spread minus the credit, as long as you keep the long put to expiry.

One practical point: buying the shares takes cash or margin you may not have set aside, because a spread only reserved its width. Check your account the morning it happens. Some brokers will sell the shares or exercise the long put for you if the account cannot carry them.

Your real breakeven

Take a made-up example: you sold the 50 put and bought the 44 put for a credit of 1.20, and the stock fell to 40. You were assigned 100 shares at 50.

Your cost on the shares is the strike minus the credit: 50 minus 1.20 is 48.80. The credit already paid for the long put, so it is not counted twice.

The long put is something you own. Whatever you get for it comes off that cost. With the stock at 40, the 44 put is worth about 4, so selling it would bring your cost on the shares down to about 44.80.

If you hold the long put to expiry and the stock is still below 44, it is exercised and your shares are sold at 44. You are out with the spread's maximum loss: 50 minus 44 minus 1.20 is 4.80 a share, or 480 a contract. If the stock is back above 44, the put expires worthless and you keep the shares at 48.80.

Keep the long put or sell it

A long put that is deep in the money is worth almost exactly how far in the money it is. There is little time value left to lose, so holding it to expiry costs almost nothing. What happens next depends only on the stock:

If the stock stays where it is, selling now and selling at expiry come to about the same thing. If it falls further, holding wins: the put gains what the shares lose. If it rallies back above the long strike, selling now wins, because the put expires worthless.

So selling the long put early is a bet that the stock goes up, with the floor removed. The lower breakeven it shows is the price of the insurance you gave up, not a profit. If you want out at a known worst case, hold it. If you want to keep the shares whatever happens, sell it before expiry, because a put left in the money at expiry is exercised automatically and your shares go with it.

Do not sell a covered call yet

The natural next step is to sell a call against the shares. Wait until the long put is gone. If the long put is exercised at expiry, your shares are sold, and any call you sold for a later date is left with no shares behind it: a naked short call, with no limit on the loss.

Once the long put has expired or been sold and you still own the shares, you hold an ordinary assigned position, and the choices are the same as after a cash-secured put.

If you keep the shares

We replayed 1,954 assignments under water on 40 tickers since 2016 on real option quotes, and followed four moves for about twelve weeks (the full table, by ticker and size of drop, is on the assignment tool). Pooled, after a drop of 5 to 10%, calls struck at the cost basis had a median of +0.4% against -3.2% for holding with no calls, and got back to the basis 53% of the time. After a drop of 20 to 30%, calls at the basis had a median of -15.7%, holding -17.4%, and calls at today's price -19.4%, called away 89% of the time.

Calls struck at today's price collect four to seven times the premium, but they lock in the loss when the shares are called away. Calls at your cost basis collect little, and keep the whole recovery up to the price you paid. The bad tail is about the same for every move that keeps the shares: after a 20 to 30% drop, about one in ten lost 40% or more.

Before you pick a strike, the strike check shows how often a price that far away was reached in the time you have.

What to take from it

A spread that reaches its maximum loss is the trade working as designed: you chose that worst case when you opened it. What decides whether it hurts is size. Keep the maximum loss of every spread small enough to take calmly (see position sizing for option sellers), and an early assignment becomes an inconvenience rather than an emergency.