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Exercise, Assignment and Spreads

Posted by Pete Stolcers on March 10, 2009

Option Trading Question

Today Rick W. asks, “I don’t understand what I’m supposed to do when I have a spread and I get assigned on one leg of the trade.”

Option Trading Answer

This is an involved piece. First let me define two terms. Exercise is what the buyer of an option does. They use their right to buy or sell a stock at a specific price. Assignment is what happens to the seller of an option when they are forced to buy a stock or sell a stock at a certain price. If you are long an option you have rights, if you are short an option, you have an obligation.

Let’s say that you are short the 50 - 45 put credit spread and the stock (ABC) is trading at $43 - ouch. It doesn’t matter what you sold it for, this can’t be a good trade. If the 50 puts are trading for $7 (parity) you run the risk of being assigned. If the traders who are long the puts decide to exercise their right to sell the stock at $50, the Options Clearing Corporation (OCC) determines which firms will be assigned and each brokerage firm has a standardized lottery process to determine how the assignment will be allocated across the accounts. As long as the 50 puts carry some premium, this risk is minimal. The reason is simple, the owner of the puts can get more by selling them in the open market.

You come in one morning and you are long ABC stock via overnight assignment of the $50 puts. You have three choices. One choice is to sell the stock and sell the put again. Bad move. Never do this. The options are already trading under parity and now that the option is in play, you will probably get assigned again. The second choice is to exercise the 45 puts that you are long. This action allows you to sell an equal number of shares that you are long. If you were assigned on 5 puts and you are long 500 shares, you would exercise 5 of the 45 puts. Now you are “flat” the stock and if you do it the same day, you are exempt from having to put up the margin for the long stock (rule: same day substitution). This action makes sense if the stock is trading below $45. The third choice is to simply sell the stock in the open market if it is trading above $45. If it is done the same day, it also qualifies for the margin exemption.

If the risk scares you, you can always place an order to buy the spread in for $5. That is the max that it can ever be worth and you should not pay more than that no matter what the screen (bid/ask) shows. I do not advocate doing this because in essence you are giving someone a free call. They sell the spread for $5, the most it can be worth. If the stock reverses, they will participate in the rally - WITHOUT TAKING ANY RISK.

The risks and approach are much different for cash settled products like the OEX. That might be a future article. A stock that is closing right at the strike of the cheap leg of a spread on expiration Friday also creates a problem that will be covered in the future.

If you are having issues with a position this expiration, post a comment and let’s take a look.

Option Trading Comments

  • On 12/19, Andy McArthur said:

    If you’re assigned last minute though can the broker automatically exercise the other leg of the spread or is it possible for time to run out on you?

  • On 12/21, A. Akber said:

    Similar Question to Andy’s.
    If I am long (abc @ 45) and short (abc @ 50) and abc is at 53 at 3 pm, I know the short will be assigned. Do I need to exercise the short before market is closed or is it exercised automatically over the weekend?

  • On 12/21, Pete Stolcers said:

    Any option that is $.05 ITM will be auto excercised. No action required. It’s the options that close right at the money that require attention.

  • On 01/25, Cozzie Motto said:

    I bought a covered call on 500 sh of VLO with strike price of $50 and received 12.70 sh up front to open the call.  I know that the share can be called away when they go to $50 or more.  It is doubtful that the shares will be called away until they go above $62.70. because that is the purchaser’s break even point.  At what point or what event will cause the purchaser to call my shares?  Is it going to be the first major pull-back above the break even point?  What usually happens.  My covered call expires in Jan. 2010. What is my best strategy at this point.

  • On 01/28, Pete Stolcers said:

    When the options go in the money and trade below their intrinsic value, you run the risk of assignment. That usually does not happen until they are front month. In the Categories section of my blog, I have articles written about assignment. You can also used the search feature to find related articles. They will give you a detailed answer.

  • On 02/14, Doug Ankele said:

    Hello,

    When is a good time to sell to close? Obviously,as much over the strike price as possible, but does the value of an option decrease after hitting the strike price as you get closer to the expiration date? I’ve heard something about time value.

    Thanks,

    Doug

  • On 02/15, Pete Stolcers said:

    Doug -

    As long as the stock is going up, the call option will increase in value. The time component will be a smaller portion of the overall option price because it is picking up actual value (intrinsic value) as is crosses over the strike price. For instance, an at-the-money (ATM) option that is trading for $2.00 is all time premium. Once it is $2.00 in-the-money (ITM), it might be trading for $3.50. The option has intrinsic value of $2.00 and the time component is only $1.50. The time component has gone down, but the total price of the option has gone up. Don’t get hung-up on this concept.

    As for the trade, get out when the stock stops doing what you expected. If the market is up and the stock is down, that is a great sign to take profits on a call. If you have big gains and the stock stalls, start taking profits. If the market is flat and the stock is surging higher, stick with it.

  • On 03/11, Charles said:

    What could be the possible outcomes for the following equity option trade…

    long VLO Junu65Call@1.50
    short VLO Jun45Put@2.21

    Thanks in advance.

    Charles

  • On 04/03, Chris said:

    Can i find ATM options in the market?i am interested of making straddle strategy

  • On 04/03, Pete Stolcers said:

    I am not a big fan of straddles, but there are times when they work well. Due to the naked margin requirements and the risk, straddles are buy side only strategy.

    They are most effective during low volatility environments. You can buy cheap volatility and search for surprise movements - like earnings. Right now, the IVs are high and it is a tough way to make money.

    If you are going to attempt it, you have to find a system that identifies potential explosive moves. I know a few traders who use to search for Board of Directors Meetings with the idea that a big announcement might be forth comming. It worked, but the last time I heard, that system played out and Market Maker firms adjusted the IVs ahead of the meeting. I also know traders who buy straddles ahead of an FDA hearing on one trick pony biotech firms. You will pay through the nose for that straddle, but the moves are big. The point is, have a system.

    I wrote and article on straddles. Please use the search feature to find the post.

  • On 05/03, sen said:

    I buy jun 35 and sell may 35 calls for GE establishing a calendar spread. Let us say the stock hits 36 and the buyer of may 35 calls decides to exercise to option how does the process go? I am new to spread trading and i would like to know the risks associated with the same.

  • On 05/05, G.N. said:

    "I bought a covered call on 500 sh of VLO with strike price of $50 and received 12.70 sh up front to open the call.  I know that the share can be called away when they go to $50 or more.  It is doubtful that the shares will be called away until they go above $62.70. because that is the purchaserís break even point.  At what point or what event will cause the purchaser to call my shares?”

    Pete,

    to confirm Cozzie Motto’s comment above; the reason why chances are low he’d get assigned on his short $50 calls before expiry if they’re ITM, regardless of being at/above 62.70 or between 50 and 62.70 is not because 62.70 is the purchaser’s B/E point - assignment is a lottery process and Cozzie has no idea how much his would-be assignor paid for his long $50 calls, perhaps his cost basis was much lower (12.70 has no bearing on anyone except the premium receiver.)

    The reason is simply that exercising an ITM contract before expiry results in loss of time value - the purchaser can sell his long $50’s for more than intrinsic value in the market. (The more technical reason is that it never makes sense to exercise an ITM option before expiry unless receiving dividend from being long stock can cover the long stock’s cost of carry in case of exercising long ITM call or, in case of exercising long ITM put, the interest rebate received from stock short sale can offset dividends now owed from being short stock.)

    Am I correct in this?

    Thanks,
    G.N.

  • On 05/05, Pete Stolcers said:

    G.N. is correct. Assignment comes down to simple math. The $12.70 credit has nothing to do with option assignment. If the stock is $1.00 in-the-money and the stock options are trading @ $.95, the holder of the stock option will exercise his right and sell the stock in the open market for a nickle more than he could get by selling the option in the open market. In this scenario, someone will get assigned and it might be you. Conversely, if the option is trading at $1.20 with the stock $1.00 ITM, there is time premium and the holder of the option will not exercise, he will sell the call option in the open market.

  • On 05/05, Pete Stolcers said:

    Hi Sen,

    The process goes like this: you come in the next day and you are short GE (via assignment) and long the June 35 calls. At that juncture you have one day (same day substitution) to buy the stock and avoid having to put up the margin requirement for the short stock position. If you did that, you would be flat the stock and long the June 35 calls. You can either hold the options if you think the stock will head higher or sell them to unwind the position.

    As a side note, if the options ever go deep in the money, and they are trading at parity, you can simply exercise the June 35 calls (you were short stock at $35 and now you willbe buying stock at $35) and you will be completely out of the position. Your loss will be the debit you paid for the calendar spread. As long as the June options have time premium, the first process should be used to unwind the option trade.

  • On 05/14, edward said:

    I am long Iron condor position- may 2008 RUT670/690/740/760. RUT IS @742-743.My upper breakeven point is 742.50. I was considering closing the trade but the 740 call is about $6.00.
    Question- if RUT stays at this level on expiration, all the other legs except the 740 will expire worthless, will my acct. be debited the amt that the 740 is in the money? In this case $2-3 per share since it is a cash settled option or are my at risk of futher losses if RUT CLOSES @ 742.50.

  • On 05/15, G.N. said:

    RE: Sen’s question

    The first process (buying the stock, avoiding margin via same day substitution, keeping the long June 35 leg untouched in case stock moves higher) assumes that there’re sufficient funds to cover the transaction.

    Too often the retail investor with an undercapitalized account, when faced with the sticky situation of assignment, is lulled by the false sense of comfort thinking they can always just exercise the long calendar leg to obtain stock required for deliverance, resulting in loss of time value on that long option leg, plus incurring extra transaction commission.

  • On 05/15, Pete Stolcers said:

    To G.N.’s point, it is usually better to buy the stock and sell the calls in the open market to capture the time premium in the options.

    If the June options are deep in the money and they are trading at parity, just exercise them to exit the position.

  • On 05/15, Pete Stolcers said:

    Hi Edward,

    You say you are long the iron condor. That would imply you are long the closer to the money options.

    Next, you ask if you will be debited by the amount that the RUT is across the 740 strike at expiration. The two statements conflict.

    When you sell the closer to the money strikes, you are short the iron condor.

    Either way, if you are long the 740 calls, they will be auto-exercised for cash at expiration. If you are short the 740 calls, you will be auto-assigned and debited the abount they are in the money.

  • On 05/15, Edward said:

    Sorry for that- I am actually short the 740 calls and long the 760 calls (short the iron condor) but I get your point.
    Thanks for your reply.
    BTW, great and very informative site.

  • On 05/15, Pete Stolcers said:

    Not a prioblem, I figured as much. I’m not a big fan of iron condors, I hope they are working out for you.

    Please spread the word about my blog. I don’t advertise and traffic is my only motivation.

  • On 08/18, Dennis Pattillo said:

    What % of options expire worthless each month, as opposed to being excercised or closed out?

    Thanks

  • On 08/18, Pete Stolcers said:

    I don’t have those statistics, but you will most likely find them on the CBOE website.

    If your question is trying to determine if selling is a more affective strategy because more options expire, be careful with that conclusion!

    Hedge funds buy tons of protective puts as a hedge and they want them to expire. Also, options that expire wothless 90% of the time just need to produce profits 10% of the time to be profitable.

    The example would be selling out of the money puts on a stock for $.30 that expire worthless 9 times. Then, there is an event where the stock drops $12 and the options go to $8.00. That one trade made it a losing strategy eventhough 90% of the trades were profitable.

  • On 10/15, Allen said:

    Hi Pete, I have this very same situation right now with FSYS Oct 45/40 short put spread (5 contracts.) Sold the spread when FSYS was 53 and thought I had adequate MOS. FSYS sank to 28 and I was assigned early on the 45 puts. Did not know there was any advantage to exercising the long leg on the same-day so I let it ride on the off-chance there is a freak rally that takes FSYS above 40 by expiration. Fortunately I have stable adequate margin assets. However, I am considering selling 1 of my 5 Oct40 put contracts and letting the others get assigned automatically at expiration so I hold 100 shares. Does that make sense? Or should I just buy 100 shares on the open market come Monday.

  • On 12/24, Robert B. said:

    Suppose I have a vertical “credit” spread as follows:

    Short 50 Call
    Long 55 Call
    Underlying at 54.

    Now suppose I am assigned on the short 50 call so the following day I find I am short the underlying stock.  If I decide to simply do nothing and keep the short stock for the duration of the spread, do I have to meet INITIAL short stock margin requirements or am I immediately at the lower MAINTENANCE short stock margin requirement? 

    Thus, if my trading account had enough extra spending power for the MAINTENANCE of the short stock position, but not enough for the INITIAL stock margin requirements, if I do nothing am I liquidated (even though I do meet the MAINTENANCE requirement)?  Since I am doing nothing, I still have the long call covering the position (other than the five-point spread) so the risk is pretty comparable to my original options-only spread. 

    So, which is it?

    Thank you.

  • On 12/26, Allen said:

    Robert,

    I would think your broker would require you to maintain INITIAL margin requirement for the short-leg of your vertical until that leg is assigned or closed. Once assigned you are at the MAINTENANCE level until the short-stock postion is closed.

    The long call option has time value even though it is OTM and that contributes to the value of your marginable equities.

    Best.
    -Allen

  • On 12/28, Pete Stolcers said:

    You have to post the initial margin requirement (half of the stike price = Reg T). You will not get release from your long call position because options are not marginable, they have to be fully paid for. As long as you have the money to cover the initial margin requirement for the short stock (and the stock is available for a short), your broker will let you carry the position. If not, they will force you to cover.

  • On 03/01, michael garrett said:

    I have 8 Gld leaps with a strike price of 105 and if I sell the front month of the strike price that is greater than my strike price what will the amount I will receive for my leaps if on expiration day the front month is above its strike price?  Will I be able to keep the gain between the two strike prices and the time value of the leap or do i loss all the time value of premium that I paid for it if the front month is exercised?

  • On 03/02, Pete Stolcers said:

    With regard to the GLD question, if you create a diagonal spread where you are long a lower strike price call with lots of time and you sell a near term farther out call against it, you have to be careful. If the stock rallies up to the short strike, you have to buy the short call in. You don’t want to exercise your longer term call because it will have lots of time premium above its intrinsic value. Once you do that, you have to decide if you are going to sell your long term call to exit the trade or if you are going to sell a farther out front month call against it to re-establish the position.

    For diagonal spreads, I never like paying more than the difference between the stike prices. That way I am assured of a profit if I get the direction right.

  • On 04/11, Lingzi said:

    Hi ,

    Can u please help to address the following two questions, thanks

    1. In the bull put spread for front month, if ABC is now trading at the money, $50 or near the money, $51, What will be happened, if I do not close the spread postion before option expires?
    I heard that I shall let the spread expires and collect the whole premium. Is it correct?
    2. If the stock is in the danger zone: Trading between $50-$45 when the option expires, Will I get excersied on my short put?

    Thanks/Lingzi

  • On 04/13, Pete Stolcers said:

    That is correct. If the stock closes above $50, you keep the premium and the puts expire. If the stock is below $50, you have to buy back your $50 puts or you will get assigned. I go into great detail about spreads and expiration. Please use the search feature in my blog to find those articles.

  • On 05/01, Chris said:

    Hi Allen,

    First off, thanks for this site, I’ve learned a lot reading through it. 

    I’m afraid my trade was fairly simple as I used options quite sparingly over the past few years, and have apparently never known the real hidden danger of options.  I just bought straight puts. 

    On March 20th, I was having a pretty good day and thought that I would take a long shot on CME falling.  I put in an order for 100 puts strike 230 at .10 and they filled for $1,000.  (Right not the obligation) In the last seconds of the day the shares plunged and ended at 228.62 putting me in the money $1.38/share...but with no time to sell.

    I’d never had this happen before.  I looked it up and read the statement please have sufficient liquidity or shares in your account.  I had neither, so I called the broker to see how I could get the difference.  The first lady said they would auto-exercise.  I asked if I would need $2.3 M in the account and would I receive the difference (like an index option) and she responded they would auto exercise after talking with her manager. 

    I was unsure, so called back.  The gentlemen said he thought I did need the $2.3M or the shares, and they wouldn’t extend it on an account with $32K in it (Sensible enough) but was not sure.  He suggested I wait until Monday and call the options desk. 

    On Monday, the stock gapped up pre-market.  My account sold at 230 and bought back at 235-236, losing all my money and then some. I guess this is normal.  My question is, what are the limits of margin.  If $1K got me $2.3MM, would $10K get me $23MM?  Is there a limit?

    Thanks,

    Chris

  • On 05/01, Phil said:

    Hi Pete,
    Ideally,when is the best time to sell put credit spreads? I know time decay is important, but i also want to get maximum value from the spread itself.  Would you suggest 2 weeks before expiration?

    Thanks so much for your site. I read it every day.

  • On 05/07, Pete Stolcers said:

    I like to sell put spreads 2-6 weeks out. That way I can take advantage of accelerated time premium decay. Ultimately, the distance out of the money and the time to expiration are a function of your market opinion and stock opinion. If the market is in a strong rally and the stock has broken out above major resistance, you can be more aggressive and sell a front month at the money put spread. If the market is choppy and the stock has no momentum, you might need to go 6 weeks out and sell a put spread that is 2 or 3 stikes out of the money.

  • On 05/07, Pete Stolcers said:

    This response goes to Chris.

    When you are long options you are in complete control of the situation and consequently, you must have the funds in your account to cover the stock margin if you exercise.

    A brokerage firm will not take the the risk of having your account go debit if the stock moves adversely on the next open. I imagine you agreed to meet the margin requirement if they exercised your puts. Otherwise, the frim would have enourmous risk Monday morning on a 10,000 share position on a $230 stock. A $20 move would lose $200,000 for them and you could walk away.

    Your choice (again you are in control) was to call them and ask them not to auto-exercise the calls or to sell the calls at any price you could get before the bell. There is an exercise cut-off after the closing bell, but you did have some time to try and buy 10,000 of stock in the after hours market for less than $229.90. Then you could have exercised your puts and made a profit. That might not have been possible since CME is very volatile and the liquidity dires up after the closing bell.

    If you have a position in a front month option, you have to be on your toes.

    I’m sorry to hear of your expensive lesson.

  • On 05/08, Chris said:

    Hello Allen,

    Thank you for the information.  I’d just like to correct something though.  I agree that I need to be in control of my account, and my very material misunderstanding of how the options worked (I thought it was similar to index options at expiration) cost me, but I definitely did not tell them I would cover it on Friday or have the means to.  Actually I asked the opposite (I have it on tape even) because I knew I didn’t have the funds.  I wasn’t even sure why it was necessary to have so much cash/shares.  After the two conversations I thought I would either get the difference between close and strike, get a portion of the difference based on the amount I would have been able to afford or get nothing because I had no money.  I was quite surprised on Monday as I didn’t even realize I had exposure beyond the $1,000.  Even my listed assets info given to them had <$50K listed in liquid assets and <100K net worth. 

    I was certainly dumb, but not dishonest.  And Ameritrade will get their money eventually for the debit, but it’s in payments over many years or until I become less insolvent.

  • On 05/08, Pete Stolcers said:

    Chris,

    I would get an attorney if I were you. I’m sure they are covered by such an event in their account agreements if no contact is made by the customer.  However, if you specifically told them not to auto-exercise just after the closing bell, you have a case and you should only be out the $1000. 

    Again, sorry for your loss - especially since it should have made money.

  • On 05/12, Lily said:

    Dear Pete,

    I just read your blog today. You said that it is time to take some profits from bull put credit spread. I currently have a bull put credit spread, the long position is 92% gain and the short position is 95% loss. overall, this spread works fine now, but as the nasdaq is falling, Do you suggest that I close this spread now? Can I still keep my gain? or shall i just let it go expires and keep 100% premium i received?

    Thanks/Lily

  • On 05/13, Pete Stolcers said:

    On a credit spread, when both the short and long are practically worthless, that is a great trade. Congratulations!

    Yes, I would close the trade down. You’ve made all you can and given the market risk, why chance it.

    The market looks ready to roll over and who knows how far it can fall.

  • On 11/24, Jane said:

    Hi Pete,

    First of all, thank you very much for this informative website. I have learnt a lot reading through articals. Your explanations are thorough and insightful.

    I am a beginner in option trading. I have been mostly writing naked puts 1-2 strikes away from the current price on only a handful stocks. The output is exactly as you mentioned: lots of small wins and a couple of huge losses. Fortunately I was fine to own those stocks when they moved against me...... I think most of my gains so far are still beginners luck.

    Thinking of adopt the bull put credit spread strategy:
    1) they seem to lower the margin requirement of the short leg
    2) to hedge against big drop.
    Does this make sense?

    Also, is there any risk to get a margin call if my short leg got assigned? E.g.
    sell 50$ put and buy 45$ put for 10 contracts. If the stock price drops to 48$ and I get assigned 48*10*100=48000 (exceeds my cash balance in the account)......
    If I exercise my 45$ put the same day of the assignment, will I get away from having to purchase the stock with 48000$ cash?
    If the price drops to 52$/50$/48$/45$/44$(5 different cases) at the last second of the expiration day, will my 50$ option gets assigned and 45$ option gets auto-exercised?

    Thank you in advance.

    -Jane

  • On 11/24, Pete Stolcers said:

    Selling out of the money put spreads (bullish put spread, put credit spread) is very effective. You are able to leverage the position because your margin requirement is smaller. This is where most people go wrong with the strategy.

    When you sell naked puts, you are in the mind set that you will gladly take assignment and you will ride out the storm with a stop on the stock price. With put credit spreads, you have to be more careful because you might not have the capital to take assignment. I like to have multiple support levels above the strike I sell. As those price levels fall, I need to buy back my spread and move on. The short strike price is often my last line of defense. If violated, I need to get out.

    If you are assigned on any short option, you have a day to cover the stock position (sell long stock or buy short stock) without having to put margin up. This is called same day substitution. If the spread is all the way in, yes you could exercise your long put.

    I use this strategy extensively in my Level 2 and Level 3 services. For more info on them, please go to http://www.oneoption.com

  • On 06/11, Greg said:

    Hi Pete, this is a great site!

    I want to implement put credit spreads inside
    my Roth IRA.

    My plan is to
    1) buy 1/2012 Microsoft puts, strike $22.50
    2) sell 1/2012 Microsoft puts, strike $20.00

    Microsoft is currently at $25.55 so by buying
    the $22.50 put first, then selling the $20 put, I should be perfectly hedged.

    Let’s say the stock drops to $18 in 18 months.

    At some point my short put will get exercised and I will need to exercise my offsetting long put.

    Is there anyway this can blow-up on me? I
    won’t have the cash to accept assignment. The
    only hedge I have for my short puts is exercising the long puts.

    I want to get exercised out and collect my $250 but I am worried about not hearing about a short exercise in time to do an offsetting long exercise.

  • On 06/15, Pete Stolcers said:

    The only way that this can blow up is if the stock never gets below $22.50. Then you lose the debit you paid for the spread.

    Once you are assigned on the $20 put, your broker will notify you. Then simply exercise your $22.50 to close the position. There is nothing that can go wrong with this part of the trade.

    The debit paid for this spread is your max risk. That is why they will let you do it in an IRA.

    Good luck.

  • On 03/22, Bill said:

    Hi Pete,

    Not sure if this thread is still open for questions. Anyway I would like to understand how assignment may works against me on a long butterfly call position on AAPL Apr 11 340/350/360 if the stock moves to $355 before expiration? From what I understand I could potentially be assigned and if thats the case what would be the best strategy to exit if I don’t have the capital to fund the purchase of 200 shares of AAPL?

    If there is no assignment on expiration, how would the brokerage generally close out my position if it is ITM? will they exercise automatically for me on both long and short legs, or simply cancel off one another and pay me the ITM premium?

    Thanks much!

  • On 03/22, Bill said:

    Hi Pete,

    Should I sell OTM PUT spreads below the current stock price instead of buying ITM Call spread if I think the stock will trend lower?

    eg. LVS is trading at $38+ and I take the view that it would trade between $36 to $38 in the next couple of weeks. So I can buy a Butterfly Apr call at $36/37/38 and hope that at expiry stock price would close at $37. However, as soon as I bought this spread I run the risk of being assigned on the 2 short $37 call.

    So instead I can sell a Butterfly Apr PUT at $36/37/38. In this case I won’t have to worry about assignment on the 2 short $37 PUT yet the profit profile remains the same?

    Thanks for your insight.

    Bill

  • On 03/22, Bill said:

    sorry, in my last posting on LVS, i meants buying a $36/37/38 butterfly PUT instead. I would have sold 2 OTM $37 PUT if the stock price is trading at $38+ now.

  • On 03/25, Pete Stolcers said:

    Early assignment only happens when the options are trading at parity or a discount. Look at the intrinsic value and you will know if you run the risk.

    If assigned on the $350 call, you will be short stock. You will either need to buy the stock back or resell the calls. Since you were assigned once, chances are you will be assigned again. Do not resell the calls. Exercise the $340 calls (half of the position) and buy the remaining shares. What you do with the $360 calls will depend on market conditions and the price action of the stock.

    If any strike is in the money after the close on expiration, you will be auto-assigned/exercised.

    I don’t want to comment on your LVS trade. This blog is for education, not trade advice.

    I will note that you seem devoted to butterflies. I don’t use the strategy much. Too many commissions, slippage and adjustments. There is not one best option strategy. Each situation is different and you need to have a variety of strategies, not just one. Your opinion on the direction, magnitude, duration and IV will lead you to the best strategy.

  • On 03/30, Bill said:

    Hi Pete, thanks much for your insight.

    I am not particularly devoted to Butterfly, but find that it can be profitable on range-bound stocks at a relatively low cost. My worry is the 2 short calls becomes parity at expiration and get assigned.

    On a separate note, will market maker widen the bid/ask spread on expiration day?

    Cheers!

  • On 03/31, Pete Stolcers said:

    Yes, Market Makers will spread out the bid/ask on expiration. They want to avoid getting picked off. It is often more effective to get out of long options positions via exercise with a stock offset.

    As for the idea of trading rangebound stocks, it does not fit my style. I look for stocks that have momentum and I take a directional stance.

  • On 04/20, Bill said:

    Hi Pete, I am short on APR weekly AAPL 350 Call which expires on 21 Apr 2011 Thursday. The stock closed at 342.41 at 4pm on 20 Apr 2011 Wed, but after hour trades push it to $353 so I am $3 ITM now so risk being assigned.

    can the option buyer exercise after 415pm on Wednesday after the extended hour trading, or must he waits till the trading hours of Thursday?

    I am also long on May 11 $360 call which closed at 4.25 on Wednesday. Assuming I don’t get assigned over night whats my best approach on Thusrday, when the stock rally above $353? I could perhaps buy back $350 APR4 11 Call and sell the $360 May 11 Call to prevent from being assigned?

    Thanks much for your helps.

    Bill

  • On 04/20, Bill said:

    Hi Pete, I noticed on or near espiration ITM options sometime can be sold below intrinsic, any explanation for that?

    thanks!

    Bill

  • On 04/21, Pete Stolcers said:

    Please search the archives for and article - Epxpiration Rip-off.

    This is common.

  • On 04/21, Pete Stolcers said:

    Each brokerage firm has its own exercise cut-off. In general, the notice has to be submitted 30 minutes after the close or earlier. If the option has ANY premium, you won’t be assigned.

    Yes, you can unwind the position at any time buy buying the April $350 calls and selling the April $360 calls.

    If you were assigned, you can unwind the position by buying the stock (you are short) and selling the April $360 calls. If the $360 calls are in the money and are not trading with any premium, you can simply unwind by exercising them. Unfortunately, in this case, you will suffer the max loss on the position and there is no way around it.

    It is a good practice to stop credit spreads out before the stock moves across the short strike price.

  • On 06/24, francis said:

    Hi Pete, you have done a great job on educating novice like me.

    I am long on a diagonal spread shorting the front month AAPL 335 Call JUN4 which expires OTM and closed at $0.01 today. I didn’t do anything to close out the short leg as I assume it will expires worthless, is this a good practice? Then why would anyone want to pay even $0.01 + commission on this last day of trade when the stock closed at about $326?

    Note that there was an Open Interest of 9000+ contracts today.

    Thank you.

  • On 06/27, Pete Stolcers said:

    Yes, let it expire when possible. Save yourself the commission and the premium.

    People buy OTM options back on expiration to release margin so that they can put on a new positions. There are some speculators buying those as a lottery ticket, but that volume is usually small.

  • On 10/13, Derrick said:

    Pete - I stumbled upon your blog, great info! After reading I’m still having a tough time understanding the mechanics of options.  I am trading in an IRA that cannot hold short positions.  What happens when a stock is trading at $26, I am short the $25 calls on a calendar spread.  If I get called away, I can’t actually be short the stock (IRA rules), so what will happen?

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