Necessary Action/steps After Spread Expired

[Ter1717 10]

I am a newbie in option and have been learing all the option basic and strategy ( credit spread , iron condor etc..) . i have started papertrade and has since move to live trading via thinkorswim platform. I have some question regarding action/steps* needed after expiry and seeking enlightenment and assistance.

 

I understand a credit spread is loss limited but need to know what step or action* one need to take* to ensure the loss is limited after expiry. ( Assuming I did not* do any rolling or cut-loss and let the spread expiry ....)

 

eg:* Bull Put Credit* spread*

short a PUT at* $60 and* long a put at $50,* stock price at $70 - Max loss will be $10 per option unit of $10X100.

 

(1)At expiry, stock price at* $52, so only* the short put is ITM.

What does one need to do to ensure the loss will be as expected at $800 ? ($60-$52 = $800)

ie: as the* PUT60 buyer will most likely exercise the option* and I will be "assigned",* do I need to pick up the stock at $60 (which means I need to have $6000 in acct) and then resell it* at the market price $52* so that my loss will be $800 as anticipated ?

 

(2) At expiry,* stock price at $40.* so both short and long put are ITM.

Again, my* short put $60 will probably be assigned , do I need to exercise my long put$50* so that my total loss will be $60-$50 = $1000 as expected......

 

Hope this is not too stupid a question but it can be a real life situation when one left the spread go expiry due to some reason and I will appreciate any one that can hlp shed some light to my question ...

 

Thanks.

[straddle 10]

For options that require physical assignment (ex equity options,option on a specific stock) its better to sell them in the expiry date to avoid assignment . Buying the stock will require funds available and you will have to pay commisions .

 

Index options are cash settled do there is no problen with assignment

[SIUYA 11]

as straddle says....

best to close out these positions on the last day....usually cheaper, less risk and hassle.

 

Always check with your provider!!!!!

You will also find other issues that will cause problems if the underlying closes exactly on a strike.

[hackertrading 10]

Hi,

 

If you have a spread, you'll generally not have to do anything. Most brokers (and thinkorswim) will automatically match your short position with your long position and do an automatic assign/exercise for both those Options. Your Bull Put is a defined risk spread, so you'll not lose more than the maximum loss for that spread.

 

You also have to bear in mind that assignment can happen anytime before expiry also. This is called the American style and applies to all stocks and ETFs. Index products (like SPX and RUT) are European style Options, are cash settled on the day of expiry and not before.

 

As others have said, it may be best to close your Options before expiry. Also if you feel that your credit spreads are getting into trouble, you should adjust them. Taking the max loss on a credit spread will blow up your account very quickly. In credit spreads, its very important to know how to adjust spreads, and more info about adjustments can be found here. As a newcomer to Options, I'd urge you to get educated and learn the mechanics of Options and credit spreads thoroughly before you put trades of size. I think you should continue to paper trade for some more time. Hope this helps

 

Hari Swaminathan