Assigned on RDFN short vertical call spread

[niko79542]

I was assigned on the short leg of a vertical call spread for RDFN that I put on yesterday.

* Here is the trade.
Sold 75 Feb 15 Calls @ 11.1
Bought 75 Feb 25 Calls @ 2.1

* The underlying at the time of the trade was 26.4. The Feb 15 calls are almost entirely intrinsic value.
* I was assigned on the Short leg overnight. TD Ameritrade put me in a short position for 7500 RDFN at 15 and asked me to close out the position by 2PM today.
* I lose out on commissions, and paying the spread on this thinly traded options.

So I have three questions
1) I am assuming the Feb 15 calls are trading at intrinsic value because of the dividend risk.
2) Is this a dumb position to take because of risk of assignment, dividend risk?
3) Is there another way to synthesize a short?

 

[niko79542]

Oh yea. And I called TD. They had no clue about any of this and told me I probably made some money on the assignment. (Hint: I did not).

 

[beerntrading]

If you're in a short spread (you actually have a diagonal), assignment is awesome...usually. Because you're losing all the short extrinsic value that was where your income would come from. Given your setup, you're doing a directional play, for which credit spreads are not ideal.

Typically you can do a synthetic short by selling an ATM call (and perhaps buying an OTM call to CYA), and buying an ATM put. On this one though, it's got a pretty big hard to borrow (40%-ish, I think?) and you'd pay quite dearly for this on the put side. In fact, the May $25 puts were still trading above the calls even on Tuesday's highs. I know all this because I have that exact spread as a bullish position and tried to short the shares against the obvious peak to neutralize yesterday's retreat...in hindsight, 40% hard to borrow looks cheap.

The calls on this one are deeply discounted and very skewed (and I'm kicking myself for not having more calls instead of a credit when I opened). This thing is as close to 0-risk of dividend as you'll find because they're years from profitability; but there's a substantial risk of assignment...especially when the liquidity is you.

The market maker on the other side of this trade probably knew exactly what situation you were in, and knew you're over a barrel because now you either have to carry the short, pay his spreads to close your long, or pay his spreads to open the short again (wash, rinse, repeat...translation: DON'T DO THIS!!!). You're not the only one who thinks this is a good short opportunity, so you'll pay to get into the short position on it--and those of us who are doing a synthetic long will pick up most of that cost.

 

[beerntrading]

Ouch, I just looked back at this trade. It looks like the market maker exercised before your screen even refreshed to show you your position. A dick move on his part, but chalk this one up to a (relatively) cheap lesson--and one you won't forget.

His side of the trade was this:
You payed the spread on both sides. He had to hedge, and with nearly 1.00 delta, that meant picking up the short around 1-for-1. He was going to have to pay 40% on it (or forgo that on his net long position). So, instead of this, he just exercised and pocketed your spread.

Now you're long the calls, unlikely to get out for less than you purchased, and when you pay the spread to close, the odds are actually in your favor to hold and hope. I think you just became accidentally bullish on this stock. This should chop around some, so if you're ambitious, you could probably rest a sell order and wait until you get hit to offset your loss. Or you could play it speculatively.

One thing I would say, they do not have earnings scheduled, but they are priced into the February contracts (11/9 was Q3, but 9/7 was Q2). That means there's a substantial risk they'll move earnings past your expiry and leave you holding the bag on that lost volatility.

 

[niko79542]

40% sounds cheap indeed. Im opening an account with IB

 

[spindr0]

Yeh, I'm a bit lost here. I don't see a dividend history. Are you assuming that there's a dividend? If there is one, what is it and when is it?

A $15 call that is over $11 ITM trades at intrinsic because that's the nature of option pricing. If there is a pending dividend, it would trade for less than parity. Which leads me to my next question. The stock was $26.40 when you sold the Feb $15 call for only $11.10? If no dividend and no typo, bad execution. You should have received at least $11.40 and if your numbers are correct, that's why you were assigned. You created an arb opportunity for someone else (buy call for $11.10, short stock @ $26.40 and exercise to buy shares @$15, netting a quick 30 cents).

 

[FSU]

You were assigned because this is a very hard to borrow stock, currently listed as short sale restricted. It is very risky to sell in the money calls in these situations as it is very likely you will be assigned. You may even be forced to buy your stock back on the cash market for immediate settlement.

 

[niko79542]

That means there's a substantial risk they'll move earnings past your expiry and leave you holding the bag on that lost volatility.

Yea I'm not banking on them reporting before Februrary. I expect volatility to dry out fairly soon as well. Will get out ASAP.

 

[niko79542]

You were assigned because this is a very hard to borrow stock, currently listed as short sale restricted. It is very risky to sell in the money calls in these situations as it is very likely you will be assigned. You may even be forced to buy your stock back on the cash market for immediate settlement.

They politely asked me to close it by 2PM today.

 

[niko79542]

Yeh, I'm a bit lost here. I don't see a dividend history. Are you assuming that there's a dividend? If there is one, what is it and when is it?

A $15 call that is over $11 ITM trades at intrinsic because that's the nature of option pricing. If there is a pending dividend, it would trade for less than parity. Which leads me to my next question. The stock was $26.40 when you sold the Feb $15 call for only $11.10? If no dividend and no typo, bad execution. You should have received at least $11.40 and if your numbers are correct, that's why you were assigned. You created an arb opportunity for someone else (buy call for $11.10, short stock @ $26.40 and exercise to buy shares @$15, netting a quick 30 cents).

No typo. No divy expected. It is bad execution. And as others have said, this is impossible to borrow. 30c was a cheap price to pay for yesterdays action anyway.