Quote from cactiman:
<<< As far as I know it works something like this:
If I don't close the AAPL 600/595 Spread before the bell on Expiration Friday and AAPL closes at 599, the AAPL 600 Put I sold has closed ITM and my account is assigned 100 shares of AAPL at the strike price of $600.
I don't need to have $60,000 in my account to buy the stock. It is immediately sold by my broker in the After Hours Market for 599 (or close to it) and the $100 loss (+ commissions) is deducted from my account.
The broker also has the prerogative to Buy To Close my Spread before the bell, if they can't contact me.
I'm assuming they do this if the stock isn't available to be sold in the After Hours Market. >>>
The above is correct. But if you are not in contact with the company, you won't know which of the above they will do. Nor do you know what your specific selling price will be after hours.
BTW, options only trade for one hour after option expiration day.
If they close the trade for you before expiration day, it will be because they feel the account can not handle the risk of owning the stock over the weekend and into monday morning.
But, if they allow you to wait until monday morning, that will be a VERY stressful weekend for you. Because if the stock opens down $100, you will be responsible for the loss.
To put it another way, if you only have $20,000 in your account, and your loss is $30,000, you will owe your brokerage firm $10,000.
If you don't pay them they will sue you. They will sue you for what ever the amount is you owe them, as it was your decision to over leverage your account via the spread trade.
And it was your decision not to close it prior to expiration day.
<<< The 595 AAPL Put I bought as part of the Spread expires worthless if the closing price is 595 or higher.
If the closing price is 594 my Long Put is automatically exercised and I'm then short 100 shares of AAPL, sold at 595, IF I have enough money in the account for the margin involved. >>>
If the stock closes a penny or more under $595, your loss is $500.
The trade is over, and you are at max loss.
<<< If there isn't enough money to margin 100 short shares of AAPL, the broker liquidates the position instead, and gives me the profits for the 595 Put trade ($100).
I assume the Options Clearing Corporation (OCC) gives the broker the $100 to give to me. >>>
If you waited for expiration day to close the position, there will be no profits for the long put.
<<< But there's no way an account could get wiped out because of the value of the underlying stock in a credit spread.
No one would trade them if that were true. >>>
It's unlikely that any strategy has wiped out more accounts than credit spreads, or spread like strategies.
To put it another way, if you put all your account money into a single spread or multiple spreads, and they all closed a penny under your long strike, your account is now 100% wiped out.
On the other hand, suppose you instead closed the trade(s) with the stock(s) trading in the equvilent range of $596 - $597 of your AAPL spread. I would estimate the loss of value to your account to be in the area of 60 - 80%.
That $20,000 account may now only be worth $4,000 - 5, 000.
Hence the reason it's best to close a spread BEFORE it gets inside your strikes.... unless you are willing to own the stocks and are capable of buying them.
But because of the MASSIVE margin leverage most spread traders are on, (and don't even realize it), you will not be able to buy most of your stocks.
