This week's question:
DATE: November 13, 2015
If I have a 65-60 credit put spread and am assigned on the 65 put, can I sell the shares rather than exercise my 60 put?
A credit put spread strategy involves being short a put option and long another put option with the same expiration but with a lower strike price. The short put generates income, whereas the long put’s main purpose is to offset assignment risk and protect the investor in case of a sharp move downward. Because of the relationship between the two strike prices, an investor will always receive a premium (credit) when initiating this position.
If an investor has a 65-60 credit spread where the 65 strike put is assigned, then the credit put spread becomes a new two-part position. Part one is being long 100 shares that comes from the assigned 65 strike put. And, part two, the long 60 strike put remains in place. By selling the shares, rather than exercising the 60 strike put, one is now simply long the put. And, in the language of options, this is known as managing a two-part position. To learn more about managing credit put spreads, view this segment of "Ask the Institute."