Short Put Assignment – How To Avoid It & What To Do If Assigned

You probably sold a Put Option thinking the market would go up.

But now your Short Put is In-the-Money (ITM) and you’re either in danger of getting assigned, or you may have already been assigned the shares.

If you’ve already been assigned, you may be panicking now.

That’s because the unexpected assignment of the shares made your cash balance negative and you could be in danger of a margin call.

In both cases what do you do?

How do you avoid getting assigned if your Short Put is now ITM?

What do you do if you’re already been assigned the shares?

And what do you do if you get a margin call?

What To Do If You Get A Margin Call?

So the most urgent matter to address is if you get a margin call.

If you get a margin call, you want to deal with it immediately.

That’s because if you don’t do anything, your broker can liquidate your positions to meet their margin requirement.

That could mean closing out other positions other than your Short Put position.

So if you have multiple positions, the broker could randomly close positions in your account.

At this point, you have two choices.

The first choice is to add more funds to meet the margin requirement.

The second choice is to close out positions on your own to meet the margin requirement.

According to FINRA (Financial Industry Regulatory Authority), you have two to five days to meet the call:

That should be more than enough time to transfer funds into your account (if you still have more funds), or to close out positions in your account to meet the margin call.

What To Do If Your Short Put Is Assigned

If your Short Put is already assigned, that means you’re now Long 100 shares per Put Option.

In this case, to reverse the assignment and reinstate your original Short Put position, you need to do two things:

• Sell the shares.
• Sell a Put at the same strike but with a longer DTE.

And you do these two things simultaneously in a single order ticket:

By doing it in a single ticket, you do not have any spreading risk because they will move in tandem.

So when you do this, you will reinstate the same Short Put strike but with a longer DTE.

With a longer DTE, there will be more extrinsic value in your Option, which reduces the chances of getting an early assignment.

When You’re In Danger of Early Assignment

The next thing to know is exactly when you’re in danger of getting assigned.

It doesn’t mean that if your Put is ITM, you’d automatically be assigned.

In fact, it’s very rare to get assigned.

The only time you’re likely to get assigned is if the following happens:

• Short Put is ITM.
• And extrinsic value is very little.
• And very few DTE (days to expiration).

The biggest factor that determines whether you have a likelihood of getting assigned is if your extrinsic value is very little.

That’s because when the extrinsic value of the Put is very little, it may not benefit the Put buyer to hold on to the Option.

But as long as there’s still a decent amount of extrinsic value left, you’re unlikely to get assigned even if your Put is ITM.

Understanding The Mindset of Put Buyers

To understand this a little better, we need to get into the mindset of Put buyers and see when they would likely exercise.

Let’s assume you sold a Put on AMZN at the strike price of 120 for $2.00.

Now, let’s switch to the Put buyer’s perspective.

That would mean that the Put buyer bought a Put at the strike price of 120 for $2.00.

The next step is to understand why did this person buy a Put Option.

In general, there are two main reasons why someone would buy a Put Option:

• To speculate a move to the downside (either as a single Option or part of a spread trade).
• To protect their Long stock position.

Next, we want to map out the different scenarios that can happen and see if the Put buyer would actually exercise their Option in each of the scenarios.

Scenario 1: The stock drops to $115.

Let’s say the stock drops to $115 and the Put Option is now worth $6.00.

So that’s a $4.00 increase in the Put’s value.

Of the $6.00, the value is divided into intrinsic value and extrinsic value:

• Intrinsic value = $5.00
• Extrinsic value = $1.00

When the Put buyer bought the Put, it was just $2.00 of extrinsic value (no intrinsic value because it’s OTM).

After the stock dropped to $115, it gained $5.00 of intrinsic value and lost $1.00 extrinsic value.

Here’s a question for you:

If you were the Put buyer, would you exercise your Put Option?

To know the answer, we want to compare the two choices a Put buyer has at this point.

The first choice is to exercise the Put Option.

By exercising, the Put buyer would either be Short 100 shares at $120, or if the Put buyer already has 100 shares of the stock it would be sold away at $120.

In both cases, when exercising, the Put buyer immediately forfeits the extrinsic value of $1.00.

So if he became Short 100 shares at $120 and immediately sold at $115, his profit would be $5 per share minus the $2 he paid for the Put, which equals $3 profit per share.

If he initially already had 100 shares of the stock, he would be saving $3 loss per share.

The second choice is to just sell off the Put Option.

By selling the Put Option, the Put buyer would have made $4 (bought for $2 and sold for $6).

So in this scenario, it would make more sense for the Put buyer to simply sell off his Put Option than to exercise it.

Scenario 2: The stock drops to $105 with 30 DTE.

In this scenario, the stock has dropped significantly but there’s still 30 DTE left in the Put Option.

The value of the Put has now ballooned to $15.05:

• Intrinsic Value = $15.00
• Extrinsic Value = $0.05

The Put is now deep ITM and there’s very little extrinsic value left.

However, there are still 30 DTE left in the Put Option.

If you were the Put buyer, would you exercise the Put?

In this scenario, it still is unlikely that you’d get assigned because there are still many days left to the Put’s expiration.

If the Put buyer anticipates the stock to fall further, it still makes sense to hold on to the Put until it’s closer to expiration before making a decision to exercise or not.

And if he exercises it, he will forfeit the $0.05 in extrinsic value (which is an additional $5 in profit).

Furthermore, exercising can incur further charges.

So in general, Put buyers would rather just sell off the Put than exercise it.

Scenario 3: The stock drops to $105 with 7 DTE.

In this scenario, the stock also drops to $105 but there’s 7 DTE left.

The value of the Put is now $15.01:

• Intrinsic Value = $15.00
• Extrinsic Value = $0.01

In this case, if you were the Put buyer, would it make sense for you to exercise the Option?

The answer is yes.

That’s because there are not that many days left to the Put’s expiration.

And there’s pretty much no extrinsic value left.

So if your Put doesn’t have much extrinsic value left and there are not many days left to expiration, then it’s highly likely you’d get assigned.

So how do you avoid early assignments?

How To Avoid Early Assignment

The best way to avoid any early assignments is by simply rolling your Short Put.

There are two ways to do this:

• Defensive Method: This method is to proactively roll your Short Put out & down the moment it gets breached to avoid getting ITM. This way you will always keep the delta below 50 so there’s no chance of an early assignment.
• 21 DTE Method: Since we already know that it’s unlikely for an Option to be exercised when there’s still more than 21 DTE left, we only look to roll around the 21 DTE mark. Oftentimes, the Put could be ITM before the 21 DTE mark but is OTM by the time it’s 21 DTE. So if at 21 DTE the Put is ITM, we roll. If it’s OTM, we do nothing and let Theta do its work.

When you use these two methods, the chances of getting assigned on your Short Put get reduced significantly.