Question about how to avoid early assignment on SPY credit spreads or iron condors that have gone in-the-money ITM

Question:  I read your FAQ section and learned a lot about credit spreads, iron condors and how to adjust them.  Thanks!  I have a question about your rolling method. When you roll deep in-the-money (ITM) credit spreads to the following month, how do you deal with the risk for early assignment? I understand there is still time value in the premium so it should not happen but it could happen for one of the ETFs that you trade such as the SPY.

Answer:  We do our best to use European style options when opening credit spreads and iron condors where they cannot be exercised until the last day before expiration;  so for example  if the market crashes and our bottom bull put spreads go ITM we will be safe against early assignment.  The negative is that we have to go through the settlement process, which has a lot of uncertainty.  For options on the SPY that trades American style, yes, if it goes ITM it is a concern that it will be assigned and the best we can do is monitor the time value to make sure we complete our roll before time value decays too much…usually down to 5% or less is when we will do the adjustment.

Another option is to close out the ITM SPY bull put spread, lock in the loss, and open  in-the-money MNX or RUT bull put spreads  (assuming that the market crashed where our bull put spreads went ITM) for a high credit, in essence swapping out the American style options for European style options.  This will take extra cash, though.

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