Calendar Spreads Question

[JasonW 10]

I'm worried about premature exercise of American style options on any calendar spreads. Let's take a simple example. Suppose I've put on a SPY calendar call spread with same strike with the short side expiring in five days and the long side expiring in about a month. Obviously the basic idea is to make money on the faster time decay on the short side compared to the long side.

 

Yet suppose the stock suddenly goes into the money while I'm not watching and - adding the fatal blow - the counterparty decides to exercise the short option.

 

Then wouldn't the OCC exercise my side to honor this counterparty's request?

 

This would incur potentially large losses since all of that time value on my long option would be lost when it is exercised.

 

A reality check, first of all: Is this the true situation. Is this what OCC actually does? (I've never done calendar spreads before so this kind of thing was never an issue) Also, does it make any difference if the options are cash settled?

 

Finally, is there a way to avoid the exercise of my long option? I just want to honor my side of the contract by buying and supplying the stock (or cash equivalent) at the specified price... I definitely do not want to exercise the option losing all of that extrinsic value.