Brokerage Closed OTM Bull put spread

B

Bigwheel777

Ok - I know this is an old topic, but given the confusion I've seen on past threads, I wanted to revisit it and understand it.. cuz it just happened to me. I'm a new trader, mistakes abound, and I want to learn from the best.

I had a bull put spread on AMZN 1865 1860 - 200 Contracts last Friday - max profit about $8500. Stock started heading down towards end of day, but never crossed 1865, and closed at 1869. Note that after hours it stayed around 1869.

Broker closed the OTM spread position around 3:42... which cost me about $9400 - so my net loss was about $900 and I lost the $8500 max profit had the trade been left alone.

I've read earlier posts about assignment risk and notional values.

I called the Broker several times and they kept positing the example of "what if" AMZN crossed to 1863. The 1865 shorts would be assigned and I would be long 20,000 shares at 1865 which would create a margin call of $37,300,000. So in that scenario, why couldn't the account simply sell the 20,000 shares I now have for 1863... manifesting loss of $40,000... which my account could easily handle.
 
Bigwheel777 said:
Ok - I know this is an old topic, but given the confusion I've seen on past threads, I wanted to revisit it and understand it.. cuz it just happened to me. I'm a new trader, mistakes abound, and I want to learn from the best.

I had a bull put spread on AMZN 1865 1860 - 200 Contracts last Friday - max profit about $8500. Stock started heading down towards end of day, but never crossed 1865, and closed at 1869. Note that after hours it stayed around 1869.

Broker closed the OTM spread position around 3:42... which cost me about $9400 - so my net loss was about $900 and I lost the $8500 max profit had the trade been left alone.

I've read earlier posts about assignment risk and notional values.

I called the Broker several times and they kept positing the example of "what if" AMZN crossed to 1863. The 1865 shorts would be assigned and I would be long 20,000 shares at 1865 which would create a margin call of $37,300,000. So in that scenario, why couldn't the account simply sell the 20,000 shares I now have for 1863... manifesting loss of $40,000... which my account could easily handle.
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Bigwheel777 said:
Ok - I know this is an old topic, but given the confusion I've seen on past threads, I wanted to revisit it and understand it.. cuz it just happened to me. I'm a new trader, mistakes abound, and I want to learn from the best.

I had a bull put spread on AMZN 1865 1860 - 200 Contracts last Friday - max profit about $8500. Stock started heading down towards end of day, but never crossed 1865, and closed at 1869. Note that after hours it stayed around 1869.

Broker closed the OTM spread position around 3:42... which cost me about $9400 - so my net loss was about $900 and I lost the $8500 max profit had the trade been left alone.

I've read earlier posts about assignment risk and notional values.

I called the Broker several times and they kept positing the example of "what if" AMZN crossed to 1863. The 1865 shorts would be assigned and I would be long 20,000 shares at 1865 which would create a margin call of $37,300,000. So in that scenario, why couldn't the account simply sell the 20,000 shares I now have for 1863... manifesting loss of $40,000... which my account could easily handle.
More...
This is standard practice. Bottom line is that by definition the market is closed when those shares are delivered so they can't be sold immediately, and even if they could there's no assurance they all could be sold at the closing price. Which means you're getting $37M worth of shares more than your margin supports. To put it another way, would you expect your broker to honor an order you placed on close for $37M in shares more than you had margin for? Of course not, and this is functionally exactly the same.
You may want to research the whole concept of pin risk on spread expiration. And if you really need to hold to expiration, take a look at the cash settled index options which don't have this problem.
 
The problem is there is no way to know what you have been assigned on until the following day. So you are short the 1865 puts. What if the stock closes at 1864 but moves up after hours to 1866, or vice versa? The holder of your short puts has until 530pm et to decide whether to exercise or not. The OCC will then notify your broker some time before midnight. So when you finally find out whether and how much you have been assigned, the market is closed and you could potentially have a huge amount of stock Monday morning.
 
So the volatility increased on the 1865s and not on the 1860s? Knocking your margin requirements out of line... Why didn't your broker close just enough to get back into compliance with margin? Why close the entire position?
 
C'mon. The BD doesn't give a rat's ass about the vol-mark on the position... shares close between 1860 and 1865 and the guy's account is long (potentially) 20K deltas come Monday morning. They are absolutely within their right to blow it out. Plus, the OP was in communication with his broker so it should not have been a surprise. The broker needs time to work the order. I assume they worked it as a limit order at the posted NBBO.

You got $18.5MM to cover the assignment? No? Then F off.

The OP played roulette and wants a do-over.

Welcome home, Jimmy!
 
LanceJ said:
So the volatility increased on the 1865s and not on the 1860s? Knocking your margin requirements out of line... Why didn't your broker close just enough to get back into compliance with margin? Why close the entire position?
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This has nothing to do with vol or margin requirements for the spread. It only has to do with a potential assignment of stock that the account can not cover.
 
Bigwheel777 said:
PS - I really like and respect posts by Jimmyjazz - I would like to hear from you if you see this - Thanks !!
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Your whole attitude is wrong. You are ill prepared to do this kind of trading because you didn't learn the subject properly in the 1st place, This is not rocket science. You were dependent on luck. I bet you never read the prospectus.
 
Sig said:
This is standard practice. Bottom line is that by definition the market is closed when those shares are delivered so they can't be sold immediately, and even if they could there's no assurance they all could be sold at the closing price. Which means you're getting $37M worth of shares more than your margin supports. To put it another way, would you expect your broker to honor an order you placed on close for $37M in shares more than you had margin for? Of course not, and this is functionally exactly the same.
You may want to research the whole concept of pin risk on spread expiration. And if you really need to hold to expiration, take a look at the cash settled index options which don't have this problem.
More...
 
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