Credit Spread Assignment - Help!

[atfourty]

Hi,
Sorry, but, i didn't know who else to ask this ( my brokerage, tradeking, is closed on weekends for customer support), would really appreciate your input.

On friday, while SPY was trading at 204.32, i did a bull put credit spread. To wit, Sold a SPY 204 put and bought a SPY 203 put. At closing, SPY traded to 204.25. So, naturally, i thought that i was safe as both puts would expire worthless, instead, my long put (203 SPY) expired worthless, but, i got assigned on my short put (204 SPY), $20,400 (yikes). How is that possible?, when SPY closed at 204.25 ?

Thanks

 

[Fermion]

I try to close out my option spreads early to minimize assignment. I know it is tempting on a bull put spread to want to avoid transaction costs and let it expire worthless but when it is very close to being in the money there is a danger of exactly what happened to you. Now you are stuck waiting until Monday to sell the shares and hoping that bad news doesn't come out Sunday and cause SPY to open at $198.

I also prefer bull call debit spreads even though they require the extra transaction to close out. Early assignment on those just puts you short a bunch of shares and you own the deeper call to cover those. If the market shoots up before you can cover the short, you can just exercise the calls to cover the short shares.

 

[Rothman]

Looking at SPY chart for the day it was in fact below $204, it hit $203.52 earlier in the day. So I'd say you are in fact exposed, think good thoughts for a smooth open Monday morning.


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[Senator]

You sold the 204, which gave you the obligation to purchase SPY at 204. You should have been safe, as the closing was 204.25. BUT, the put can be assigned, even though it doesn't make sense.

I had a covered call that was assigned once. The buyer took my shares, even though they could have bought them on the market cheaper, without buying the time component.

You will be forced to buy SPY at 204 and sell right away, or just buy another PUT at 203 for a $1 risk on the trade, plus the premium. Or hold the shares. Or sell a call on them. After hours it closed at $203.86.

It's been a while since I have played with options, I was mostly a covered call guy. Keep rolling the calls until they expire. It a fast moving upward market, it is difficult at times.

 

[MRG]

Looking at SPY chart for the day it was in fact below $204, it hit $203.52 earlier in the day. So I'd say you are in fact exposed, think good thoughts for a smooth open Monday morning.


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+1
My understanding is it doesn't have to be the close price. If the owner of your naked put closed out his position you get assigned.

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[clifp]

I had a similar thing happen to me got assigned an SPY put when the market opened much lower but rallied late in the day to close out of the money. SPY continued to up the next I sold made money. I have had the opposite happen and lose money, although it was more complicated so I forget the details.

I have had in the money options exercised almost two full weeks ahead of the exercise dates, it happens. One of the risks of options.

 

[wingfooted]

If at option close, the underlying is 'close' to the strike price, then the counterparty - in your case the buyer of the 204 put - has the option to either let the position expire or to exercise.

So you are long 100 shares going into Monday open.


A lot of folks in this position
would simply turn around and sell the weekly 204 call to capture premium.



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[atfourty]

Thank you for all the replies, i understand now.

LESSON LEARNED : The only way to guarantee NO-Assignment is to close out the position before expiration.

 

[FIRE'd@51]

This is one of the reasons I prefer to trade SPX credit spreads since they are European and cash-settled. What happened to you with SPY options couldn't happen with SPX's.

 

[utrecht]

Same thing happened to me. I was short 10 weekly SPY 204 puts and got assigned. Its not a bad thing though. It just adds more risk. My trade had a $1400 profit as of Fridays close. Now it will have more or less.

 

[atfourty]

Same thing happened to me. I was short 10 weekly SPY 204 puts and got assigned. Its not a bad thing though. It just adds more risk. My trade had a $1400 profit as of Fridays close. Now it will have more or less.

But, wouldn't you worry about monday open?

 

[wingfooted]

The worst that can happen is that the S&P 500 will go to zero and the OP loses $20K.




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[atfourty]

The worst that can happen is that the S&P 500 will go to zero and the OP loses $20K.




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Man!, if the s&P 500 opens at zero, we have way more issues than my losing 20K.

 

[Fermion]

The worst that can happen is that the S&P 500 will go to zero and the OP loses $20K.




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If the S&P500 goes to zero I am going all in. I can find $1 in coins somewhere. Imagine getting 500,000 shares of Apple, 2,000,000 shares of Google....

 

[ERD50]

... but, i got assigned on my short put (204 SPY), $20,400 (yikes). How is that possible?, when SPY closed at 204.25 ?

Thanks

I've seen that happen, called my broker about it. I was told that the option buyer can still sell that option for some time (20 minutes at my brokerage, IIRC) after the market closes.

Did SPY drop further after the close? OK, this link shows it dipped below 204...

SPDR S&P 500 ETF (SPY) After Hours Trading - NASDAQ.com

So I guess he could buy some slightly below 204, and deliver them to you at 204. Someone with low transaction costs could pull this off I think. It is guaranteed for them.

So yes, if it is close, the only sure thing is to pay the transaction costs and spread to close it out before the market closes.


-ERD50

 

[utrecht]

But, wouldn't you worry about monday open?

Yes, like I said I have added risk, but the market can open up just as easy as it can open down. If you sell naked options long enough this will happen enough times that it work out even in the long run.

 

[utrecht]

I sold my 1000 shares of SPY for 204.50. An additional $500 profit on my option trade.

 

[ERD50]

I sold my 1000 shares of SPY for 204.50. An additional $500 profit on my option trade.

I hope the OP was quick on the draw, SPY went south shortly after the open.

-ERD50