How to repair multi-leg strategy if you get assigned

[yanoshi]

 
Say I have an options strategy which requires me to hold a Synthetic short stock position for 1 year. 

So that's: a Long put with 1 year expiration + a Short Call with 1 year expiration, with both at the same Strike price. 

My strategy requires me to hold it for at least 1 year. 

However, lets say 6 months into the year, my short call is deep in the money and gets assigned, so I am obligated to fulfill it. Now my multi-leg strategy is broken as my short call position is gone. How would I go about reconstructing it so I can continue on the position for the rest of the year?

Would I just Instantly sell the same calls at the same strike price with the same expiry? I assume the credits from selling the same calls would essentially cover the loss from the assignment, and the position would continue on? 

Thanks

Edited March 15, 2017 by yanoshi

[Yowster]

@yanoshi- For this scenario to happen using longer dated options a year out when you opened the trade, the trade would have to be down by almost 100% (based on the margin requirement of the uncovered short call).   The only was you would have assignment risk is if there is basically no premium left in your short call - at the only way that would happen would be for it to be very deep in the money.  And if that were to happen your long put would likely be worth close to nothing.    I would think you would have closed this synthetic short well before the losses got this high.

[yanoshi]

20 minutes ago, Yowster said:

@yanoshi- For this scenario to happen using longer dated options a year out when you opened the trade, the trade would have to be down by almost 100% (based on the margin requirement of the uncovered short call).   The only was you would have assignment risk is if there is basically no premium left in your short call - at the only way that would happen would be for it to be very deep in the money.  And if that were to happen your long put would likely be worth close to nothing.    I would think you would have closed this synthetic short well before the losses got this high.

 

 

 

Thanks for your reply. 

However, regardless of how large my paper loss is on my short call, I still wish to hold this position until expiry, as it is part of a wider strategy. 

So if I get assigned on my short call when it is deep in the money, I would realise a large loss. However my question is, if this happens, could I just instantly sell the same calls with the same strike & expiry? As the option is deep in the money, the calls would have high intrinsic value and so the credits from that would surely almost cover the losses from the assignment? And so then my synthetic short stock position would continue on ... (?)

[Yowster]

1 minute ago, yanoshi said:

Thanks for your reply. 

However, regardless of how large my paper loss is on my short call, I still wish to hold this position until expiry, as it is part of a wider strategy. 

So if I get assigned on my short call when it is deep in the money, I would realise a large loss. However my question is, if this happens, could I just instantly sell the same calls with the same strike & expiry? As the option is deep in the money, the calls would have high intrinsic value and so the credits from that would surely almost cover the losses from the assignment? And so then my synthetic short stock position would continue on ... (?)

@yanoshiIf you would sell the same calls again with the same strike & expiry you would very likely just get assigned again (since the calls would have basically all intrinsic value and no time premium).   But note that after this assignment, your synthetic short has turned into a real short position since you will be short the actual stock.   So, if you want to continue the short you would have two options:

• Just stay short the stock and don't do anything further with short calls.  Of course, you would likely be paying margin interest on the short stock.
• Buy back your short stock at a large loss, and then re-establish the synthetic short using the current ATM strikes.

[yanoshi]

17 minutes ago, Yowster said:

@yanoshiIf you would sell the same calls again with the same strike & expiry you would very likely just get assigned again (since the calls would have basically all intrinsic value and no time premium).   But note that after this assignment, your synthetic short has turned into a real short position since you will be short the actual stock.   So, if you want to continue the short you would have two options:

• Just stay short the stock and don't do anything further with short calls.  Of course, you would likely be paying margin interest on the short stock.
• Buy back your short stock at a large loss, and then re-establish the synthetic short using the current ATM strikes.

 

If I was assigned early, I would technically be keeping the small time value that's left. if I were to cover my now short position at a loss, and then sell the same calls with the same expiry and strike, I would be receiving an amount essentially equal to the amount I lost from covering, Plus the time value portion of the calls I just sold. 

So doesn't it all workout well in the end?

[Yowster]

17 minutes ago, yanoshi said:

If I was assigned early, I would technically be keeping the small time value that's left. if I were to cover my now short position at a loss, and then sell the same calls with the same expiry and strike, I would be receiving an amount essentially equal to the amount I lost from covering, Plus the time value portion of the calls I just sold. 

So doesn't it all workout well in the end?

@yanoshiThe only way you are going to get assigned if there is basically zero time value left, so there will be no time value in the calls you are selling beyond a penny or two.   So lets say you go short the same strike & expiry again and use the proceeds to cover your short stock.  Guess what, you are extremely likely to get assigned again (probably the next day) because the same reason you got assigned the first time will happen again - no time value left in your short call.    If you want to remain short you will either have to stay short with the stock as a result of the assignment, or (if you want to have a synthetic short via the options) buy back the short stock at a big loss and construct you new synthetic short using options that are at ATM strikes.

Edited March 15, 2017 by Yowster

[yanoshi]

3 minutes ago, Yowster said:

@yanoshiThe only way you are going to get assigned if there is basically zero time value left, so there will be no time value in the calls you are selling beyond a penny or two.   So lets say you go short the same strike & expiry again and use the proceeds to cover your short stock.  Guess what, you are extremely likely to get assigned again (probably the next day) because the same reason you got assigned the first time will happen again - no time value left in your short call.    If you want to remain short you will either have to stay short with the stock as a result of the assignment, or (if you want to have a synthetic short via the options) buy back the short stock at a big loss and construct you new synthetic short using options that are at ATM strikes.

 

That's true, I would probably only get assigned at expiration, or close to it as there is little to no time value left. That is all fine as stated in my original post that my intention was to hold this synthetic short position until expiry. I was just asking about being assigned well before expiry, say when it still has 50% of its time left to expire. 

[Yowster]

1 minute ago, yanoshi said:

That's true, I would probably only get assigned at expiration, or close to it as there is little to no time value left. That is all fine as stated in my original post that my intention was to hold this synthetic short position until expiry. I was just asking about being assigned well before expiry, say when it still has 50% of its time left to expire. 

@yanoshi - Yes, the only way you would get assigned when half the time is still left is if the trade is a huge loser.   People sometimes fear assignment risk, but it really only comes into play if the option is so deep ITM that there is zero time value left.   If you would happen to get assigned on an option that still has time value left, then that would be a good thing as you would essentially get to keep the money associated with the time value.