How to Repair
an Early Naked Put Assignment

This article on how to repair an early naked put assignment is the final installment of a 3 part series - see also Naked Put Assignment Overview (Part 1) and Avoiding Early Assignment on Naked Puts (Part 2).

How to Handle Early Naked Put Assignment

I personally write a lot of naked puts, and a fair number of them wind up in the money (I tend to write at the money puts rather than out of the money puts - which I explain in greater detail in The Essential Leveraged Investing Guide).

And yet, I've only been assigned two or three times in all the time I've done this. So I don't consider early assignment a huge risk. But I also actively monitor and adjust/roll so that probably further lessons the risk.

Still, anytime you get assigned early, it's probably not something you were either expecting or hoping for. No doubt about it - it can be a real inconvenience.

If you actually want to own the shares, then it may be no big deal. But if you weren't planning on owning them yet (and this will make sense to Leveraged Investors), or if you didn't want to own them at all (i.e. income traders), I offer the following technique that I call "Unassignment."

Unassignment is not ideal because of the extra commissions involved, but it has the advantage of allowing your to still produce positive long term returns (positive, yes, lucrative, perhaps not).

Quality, Quality, Quality

Adjustments, rolls, repairs, unassignments - these are all based on the assumption that you're dealing with a high quality business in the first place.

Unless you're talking about an extremely overvalued situation, the shares of high quality, consistently profitable, growing businesses will eventually "come back." So you can afford to stick with a trade that initially goes against (and even stays against) you.

But trying to repair a losing trade on a less than high quality company is something you do at your own peril. You might be better off cutting your losses and walking away before those losses escalate.

Great companies come back - all other companies eventually go away.

Again, I consider early naked put assignment a low risk event providing you monitor your trade and adjust/roll when conditions warrant. And, in fact, I've only had to unassign myself when I neglected to do just that.

How Does Unassignment Work?

What I call Unassignment is pretty straightforward, if not entirely commission-friendly - I simply sell back the shares I was assigned and then rewrite a new put, most likely at the same strike price, but in a later expiration cycle.

The later expiration date is important - if you set up the position identical to what it was, you could easily experience yourself getting assigned early yet again.

Instead, the transaction can be seen as a roll, although admittedly less efficient than if you'd rolled prior to the assignment. The important thing, however, is that it doesn't require you to take a loss.

I spell out my accounting methods in greater detail in the Essential Leveraged Investing Guide Package, but basically when I roll a position, I "book" the income received from the initial trade and then roll the expenses of closing that trade into the new position.

As long as I can maintain a "net credit" on each roll, the trades continue to "book" profits.

So let's see an example of what I'm talking about. Suppose you write a $30 put on a stock, receive $1/contract in premium, and then the stock drops to $26.50/share following a disappointing earnings announcement with a week or so to go prior to expiration. And then you get the dreaded notification that you were just assigned.

Cost of Assignment	-$3000
Sell Assigned Shares	+$2650
Write New $30 Put @ $4/contract	+$400
Total Net Credit	+$50

Now the above is a quick example by way of illustration. You'll note that I'm assuming I can write a $30 put (which is $3.50 in the money) for $4/contract. Maybe I can get a better price, maybe not. And maybe I have to go out 3 months, maybe longer. And don't forget commissions.

Now, I don't want to tie up capital for a year or more, but I really hate booking a loss. You'll really need to run the numbers yourself and see what kind of an annualized return your new net credit equates to. If it's less than the dividend yield, you might be better off just keeping the shares (assuming you were going the value investing with options route vs. the straight income trading route.

Finally, it's a good idea to consider the advantages and disadvantages of Unassignment in general along with the numbers involved in your specific scenario:

Pros - Continue to generate a positive net credit; No booked loss
Cons - Lower rate of return than standard roll; ties up capital that might be put to better use

Last Word - Whether you value invest with options, or just trade for the income, focusing on high quality companies will make your life, your trades, and your adjustments a whole lot easier.

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