Can you share your experience of being exercised?

M

MathAndLogic

Hello:

I have encountered short SPY options that became ITM and didn't get exercised. I use Interactive Brokers (IB) and have long and short positions on SPY. To make things simpler, let's use the following example:

Short 1 SPY 100 put
Long 1 SPY 95 put

and I have $500 to cover the margin, plus $15 from the vertical spread.

If SPY drops to 80 because World War III has begun and I get exercised, I don't have enough cash to be put 100 shares of SPY at $100/share. In this case, will IB notify me so that I can exercise my long put to cover my obligation? If so, I just lose $500 margin.

What if SPY is at 97 and I can't exercise my 95 puts? Will I just pay $300 to IB so IB can exercise someone else? What if I am the last person to be exercised? Since I covered my margin, IB can't force me to buy 100 shares of SPY at $100, right?

Thanks for sharing.
 
If SPY drops to 80 then you will get assigned on the short and the long will be automatically exercised as it is more than 0.01 ITM.

If SPY is at 97 then you would be assigned on the short put and come Monday you would find that you are long 100 shares, which you bought at 100. Assuming you don't have enough cash to cover the purchase you will get a margin call (check with your broker how much time they give to respond to a margin call). Your actual loss would depend on the price you sell your shares at on Monday, it can be more than 300 or less. This is called weekend gap risk.

To avoid this either close out the options on Friday or trade the stock in anticipation of assignment. That is, you can short 100 shares at the close on Friday, which would then be covered by the assignment of the short put.
 
There I was, hovering several inches above the bed, head rotating through 360 degrees and projectile vomiting when this priest guy comes up and start showering me with holy water, muttering weird incantations and...

Oh... I thought you meant...well you get the idea.
 
Quote from MTE:

If SPY drops to 80 then you will get assigned on the short and the long will be automatically exercised as it is more than 0.01 ITM.

If SPY is at 97 then you would be assigned on the short put and come Monday you would find that you are long 100 shares, which you bought at 100. Assuming you don't have enough cash to cover the purchase you will get a margin call (check with your broker how much time they give to respond to a margin call). Your actual loss would depend on the price you sell your shares at on Monday, it can be more than 300 or less. This is called weekend gap risk.

To avoid this either close out the options on Friday or trade the stock in anticipation of assignment. That is, you can short 100 shares at the close on Friday, which would then be covered by the assignment of the short put.
More...

Thank you, MTE.
 
Quote from MTE:

If SPY drops to 80 then you will get assigned on the short and the long will be automatically exercised as it is more than 0.01 ITM.

If SPY is at 97 then you would be assigned on the short put and come Monday you would find that you are long 100 shares, which you bought at 100. Assuming you don't have enough cash to cover the purchase you will get a margin call (check with your broker how much time they give to respond to a margin call). Your actual loss would depend on the price you sell your shares at on Monday, it can be more than 300 or less. This is called weekend gap risk.

To avoid this either close out the options on Friday or trade the stock in anticipation of assignment. That is, you can short 100 shares at the close on Friday, which would then be covered by the assignment of the short put.
More...

....if you trade this in an IRA with enough to cover spread margin but not enough to cover purchase of assigned shares, the broker would have to sell out the assigned shares, right? i will check with my broker on monday.

....i am usually out by opx and/or stay away from getting itm. but a big gap on opx fri while still holding far otm could be a bad surprise.
 
I ended up short SPY on Friday when my ITM calls were exercised.
In my cash account they let me keep the short SPY position. In my IRA the short SPY position was liquidated 10 minutes after open.
 
Interesting. In a non-margin account I always thought spreads were cash settled so you never held a short position. Does your broker still have full recourse if your position ends with a loss in a cash account?

I have heard that if you ever wind up underwater in an IRA, that can cause a real shitstorm between you and the IRS. It can nullify the IRA and trigger back taxes and penalties on top of your losses.
 
Quote from SomeYoungGuy:

Interesting. In a non-margin account I always thought spreads were cash settled so you never held a short position. Does your broker still have full recourse if your position ends with a loss in a cash account?

I have heard that if you ever wind up underwater in an IRA, that can cause a real shitstorm between you and the IRS. It can nullify the IRA and trigger back taxes and penalties on top of your losses.
More...

That's totally untrue, at least with IB. SPY doesn't cash settle so they can't just do that. If I were trading in an index like OEX it would cash settle then.

As long as you close out the short stock position in the IRA that same day, you're fine with the IRS.

BTW, I'm pretty sure I could have held that short all day except the margin used exceeded my account value. I strive to avoid this sort of thing but it happens. Ironically if my short call hadn't been assigned it would have ended OTM by EOD and I would have been fine.

That's just how it goes sometimes.
 
Quote from stevegee58:

I ended up short SPY on Friday when my ITM calls were exercised.
In my cash account they let me keep the short SPY position. In my IRA the short SPY position was liquidated 10 minutes after open.
More...

So you sold naked calls in an IRA? Who allows that?
 
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