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Ask the Institute

DATE: March 18, 2013

QUESTION:

Can you explain what happens when you get assigned on a credit spread?

ANSWER:
As you may already know, a credit spread is a vertical spread in which you sell an option that is closer to the money than the option that you buy. For example, if stock XYZ is currently trading at $54 per share and suppose you sold the 50/45 put credit spread. This would mean that you sold the 50-strike put and bought the 45-strike put. Now suppose that a few days later, the stock dropped to $42 per share. As a result, your credit spread is now completely in-the-money. And, now let's suppose further that you got assigned on your short 50-strike put. By being assigned, this means that your short 50-strike position disappears, as it is converted into 100 shares of long XYZ stock for $50 per share.

While you are still long the 45-strike put, what might you do now? That depends partially on what you want to do, on how much money you have in your account, and on what arrangement you have with your broker. One alternative is to completely close out your position by selling your stock at the current level and selling your long 45-strike put. To learn more about what happens when you get assigned on a credit spread, view this week's segment of "Ask the Institute."


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