Call credit spread assignment procedure

W

wxytrader

ABC short 100 contracts @ 4.60 strike
ABC long 100 contracts @ 4.70 strike

So my maximum risk is 0.10 * 100 * 100 = 1000

How would the assignment procedure be carried out by the broker if:

Scenario 1
Price hits 4.80
Short call ITM
Long call ITM

The broker agent I talked to seemed to think that in scenario 1 the brokerage would exercise the long call ITM, and then sell those shares at the short call strike to cover that contract...and I pay the difference (1000 loss as mentioned)


Scenario 2
Price hits 4.70
Short call ITM
Long call OTM

In Scenario 2 the broker agent said they purchase at the market price and then sell those shares at the short strike to cover that contract, and then again I cover the difference (1000 loss as mentioned)

The reason I'm asking is without the broker facilitating the process I could not deliver the shares as I do not have $50k in my account. :)
 
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wxytrader said:
The reason I'm asking is without the broker facilitating the process I could not deliver the shares as I do not have $50k in my account. :)
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This topic was discussed to dead, it will not offset like that, your broker won't allow you to enter 100 contracts.

Each leg is a seperated trade, and post whatever the required margin for settlement.
 
mervyn said:
This topic was discussed to dead, it will not offset like that, your broker won't allow you to enter 100 contracts.

Each leg is a seperated trade, and post whatever the required margin for settlement.
More...


Well then what's the point of entering into a spread at all? If I had the shares, or the money to buy the shares then I would just enter into a covered call and save myself the long call debit...so the only point for the long call then would be to put a cap on your short call losses if the stock price rockets past the strike, and you want to close the position and keep your shares?
 
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wxytrader said:
Well then what's the point of entering into a spread at all? If I had the shares, or the money to buy the shares then I would just enter into a covered call and save myself the long call debit. If this is true then all option strategies make no sense.
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that's correct, if you have no money to buy shares (minimun 25% of total value), spread is not an easy way to play. none of the literatures tell you about the account size and poistioning.

Scenario 3, price is 4.50
 
mervyn said:
that's correct, if you have no money to buy shares (minimun 25% of total value), spread is not an easy way to play. none of the literatures tell you about the account size and poistioning.

Scenario 3, price is 4.50
More...


Apparently they do facilitate the trade:

(Short call option)

1. You do not own the underlying stock
If you do not own the underlying stock, meaning you wrote a naked call write, then you will end up with short stocks sold at the strike price of the call options. Now, if you do not have enough margin to take on the short stock position, your broker would usually just close the whole position and post the resultant profit or loss to your account. Again, such assignments WILL happen during expiration if those short call options are in the money and it MIGHT (random chance) happen anytime before expiration if they are in the money.
https://www.optiontradingpedia.com/options_assignment.htm

At my broker, you cannot open a naked call position. This is because if you get into trouble then they will have to close the position at an unknown loss, whereas if you have a long call for protection then atleast the broker knows the maximum loss that can occur, and will base your margin requirement on that...when they clean up your mess so to speak.

Short 10 calls @ $100
Long 10 calls @ $105
Price goes to $115

So the broker will exercise the $105 call and buy 1000 shares at a cost of $105,000, then will turn around and sell 1000 shares at $100 to satisfy the short call, taking a loss of $5000 which would have been part of the margin requirement for the client based on the max risk of the spread entered in to.


(Short put option)

1. You do not own short stocks
If you are not already short the underlying stock, meaning you wrote a naked put write, then you will end up buying the stocks sold at the strike price of the put options (because you gave the holder of the put options the right to sell to you the options at the strike price). Now, if you do not have enough cash to buy the stock position, your broker would usually just close the whole position and post the resultant profit or loss to your account. Again, such options assignments WILL happen during expiration if those short put options are in the money and it MIGHT (random chance) also happen anytime before expiration if they are in the money.
https://www.optiontradingpedia.com/options_assignment.htm

With a naked put, you basically need to have the money in the account to cover the short contract or would get a margin call. However, if you have a long put for protection, then the margin requirement should now just be maximum loss for the spread, since the broker now knows he can buy (assigned) the stock at the short price, and turn around and sell it at the protective put price.

Short 10 puts @ $100
Long 10 puts @ $95
Price goes to $85

So the broker will buy the 1000 shares for $100,000 taking a $15,000 paper loss, then will turn around and exercise the $95 long put and sell the shares back for $95,000 ending up with a loss of $5,000 which again would have been part of the margin requirement for the client based on the max risk of the spread entered in to.

So it all makes sense that they do it in this way.
 
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wxytrader said:
Apparently they do facilitate the trade:

So it all makes sense that they do it in this way.
More...

What you wrote for a half page doesn't work in the real world. Have you ever tried yo trade with a broker? You can write do naked trades with Level III.

I suggest you open an account with IBKR, which I believe is the most prudent broker that can give you access to most of the markets and products.

The broker doesn't front money to make arb trades against its own clients, they make commissions.
 
mervyn said:
What you wrote for a half page doesn't work in the real world. Have you ever tried yo trade with a broker? You can write do naked trades with Level III.

I suggest you open an account with IBKR, which I believe is the most prudent broker that can give you access to most of the markets and products.

The broker doesn't front money to make arb trades against its own clients, they make commissions.
More...

I am their client. I take the loss, the broker gets the fees, and the call buyer gets the profits.

I have level 3 or whatever because I have a margin account and can short stock and write contracts. My broker doesn't allow naked shorts for the obvious reasons described above. I am only going by what the broker agent told me on the phone. They were looking at my account and were going to put the spread through (I don't use thinkorswim and have to actually call in spreads...not sure what happens if I make two seperate trades)...anyway they saw my margin and clearly could see that I could cover the maximum spread risk, but not the short call.

btw my broker is a major institution. Either way they get their fees and take on no additional risk for facilitating the trade assignment...that is kind of their job as brokers.
 
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wxytrader said:
ABC short 100 contracts @ 4.60 strike
ABC long 100 contracts @ 4.70 strike

So my maximum risk is 0.10 * 100 * 100 = 1000

How would the assignment procedure be carried out by the broker if:

Scenario 1
Price hits 4.80
Short call ITM
Long call ITM

The broker agent I talked to seemed to think that in scenario 1 the brokerage would exercise the long call ITM, and then sell those shares at the short call strike to cover that contract...and I pay the difference (1000 loss as mentioned)


Scenario 2
Price hits 4.70
Short call ITM
Long call OTM

In Scenario 2 the broker agent said they purchase at the market price and then sell those shares at the short strike to cover that contract, and then again I cover the difference (1000 loss as mentioned)

The reason I'm asking is without the broker facilitating the process I could not deliver the shares as I do not have $50k in my account. :)
More...

It will depend on the broker. With brokers like IB, if they see that you don't have enough funds to cover the auto-exercise will force liquidate your option position to close them before they get exercised unless you put in more money. Some are able to assign the options first to come up with the money to buy the shares from the auto-exercise and you pay the losses.
 
mervyn said:
This topic was discussed to dead, it will not offset like that, your broker won't allow you to enter 100 contracts.

Each leg is a seperated trade, and post whatever the required margin for settlement.
More...

Yes but if you do a spread, they look at the margin on the entire spread as a whole and the margin requirement gets significantly reduced.
 
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