After spending quite a bit of time attempting to simulate what our portfolio might look like if we let the short in-the-money puts get assigned, I’ve come to the conclusion that we can’t really know until we see where our positions are trading tomorrow, after SPY goes ex-dividend. In theory, the extrinsic value of deep-in-the-money puts should go to zero, and the July ITM puts should lose less than June, which would make closing our positions as good as or better than letting them be assigned.
But reality doesn’t always conform to theory, especially in the options world. Again, assignment is an (unlikely) last resort—but one important conclusion can be discerned from simulations of the assignment scenario: The resulting position would have significant positive delta, which we would need to hedge before the close on Friday. Members who decide to take assignment, if we go that way (a big if), would require additional capital, on the order of $5500–$6000 per $2500 allocated to each calendar position, over the weekend. Anyone who doesn’t have enough free margin probably will want to flatten out tomorrow.
Even though we probably won’t go the assignment route this month, I thought I’d take this opportunity to dispel members’ fears about being assigned, which will be the subject of the next post.