Avoiding Early Assignment on Naked Puts

This article on avoiding early assignment on naked puts is part of a series - see also Naked Put Assignment Overview (Part 1) and How to Repair an Early Naked Put Assignment (Part 3).

Early Naked Put Assignment Scenarios

Now there are basically two scenarios where early assignment might take place, although both scenarios share a common denominator. And that common denominator is when the "time value" portion of the put's premium nears zero.

If time value remains on the put, it makes more sense for the put owner to simply sell to close the put and then sell the shares because that will produce more cash in the end.

If, however, there is very little time value premium remaining (i.e. the put is comprised almost entirely of intrinsic value, or the amount by which it's in the money), then from the put owner's perspective, it's probably going to make more sense to just exercise the put, pay one commission, and just just be done with it. Especially if there are other opportunities for his or her capital.

Monitoring your in the money naked/short put position is always a good idea in case your trade slowly creeps in this direction. But there are a couple other "big event" type occurrences you'll definitely want to pay close attention to.

A scheduled earnings release is one such event, especially when the market is disappointed after the fact and there's a significant drop in the share price. In such a situation the "time value" on a put takes a double it.
The first hit is that much of the elevated levels of expected or implied volatility is expended once the uncertainty of the earnings has been resolved.
And second, in the case where the share price drops following the earnings release, the deeper the put goes in the money - the farther the share price trades from your strike price - the less time value is included in the put's premium.
Something similar occurs on the ex-dividend date, and the higher the dividend/dividend yield, the more pronounced the effect becomes.
Recall that the ex-dividend date is the date on which purchases of the shares no longer qualify you to receive that quarter's dividends.
So if I own the underlying shares on which I also own a protective put, and I want to unload my shares, I'd be crazy to exercise my put prior to the ex-dividend date because I'd screw myself out of receiving the dividend.
But on the ex-dividend date, all that changes. At that point, I'm free to exercise my put, unload my shares at the agreed upon strike price, and still be able to look forward to receiving my dividends on the upcoming payout date.

Avoiding Early Assignment on Naked Puts

So the easiest way to avoid early naked put assignment is simply to roll or adjust your trade as soon as the risk of early assignment increases (as detailed above).

Something to think about - if you roll just prior to earnings or the ex-dividend date, the time value part of the premium will still be at an elevated level.

I prefer instead to roll immediately after the event in question occurs - that way when I roll, I'm buying time value at depressed levels and reselling or rewriting in the future when time value is once again elevated - maybe I even go out another 3 months to catch the next earnings and/or dividend cycle.

But be warned - the longer you wait after such an event to roll or adjust a position, the more time you allow hedgers out there to exercise their put.

So what happens if you actually do get assigned? Check out Part 3 of 3 part series - How to Repair an Early Naked Put Assignment.

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