SPY VS SPX vertical and being excercised

[xtksystems]

Hi,

I've been researching Vertical Spreads and im curious how being excercised pre-expiration affects it. For example, if a stock is trading at 100 and im bearish and sell the 110 Call, then buy the 113 Call for protection and net the difference, what exactly would take place if the stock reached say 112 or considerably higher for that matter?

Granted my 113 should be effectively acting as my stop loss if it keeps going past 113, but what if I am excercised well short of options expiration?

In other words, if I get excercised on 1 contract at say 112 price, am I then at that point putting up 11,200 margin to satisfy the excercise price if someone excercises or does my broker just automatically transact me buying at market and selling for 110 and just deduct my account the difference by also closing out the 113 call?

Or, does my vertical not sell off my 113 Call automatically and I have to manually take care of that position and GTF outa there? I'd hate to think that I could be excercised on, at say 120 market, losing $1000, and then before I close out my 113 call protection, stock drops like a rock and becomes worthless giving me less risk protection than originally thought.

Also, If i'm correct, I dont believe this would be an issue with the SPX as I would not hold the vertical until expiration, and already would have my vertical giving me auto protection during the contract even if its deep ITM. But the SPY just seems more reasonable to work with given the bid/ask gaps and volume..

Thoughts?

Thanks

-Tom

 

[traderlux]

tom,

i cant give you direct answers on "exorcism," but as i have been trading spy verticals for about a year i can give you some feedback.
i dont know if you have a broker yet but that would be one of your first and most important steps, even if you dont fund your account and start real trading.
in selecting a broker, the way they handle exercise and the cost is important as you point out in your post and they can tell you how they do it. ib does it with a bot and from prior posts on et some real probs can happen that way.
it is not always best to go for the lowest commish, being able to deal with real people helps sometimes.
i went with spy over spx, b/a spread being one of the reasons.
commish % of trade is higher but it works for me. others look down on spy and only trade spx. what ever works for you is what you should do.

most of my tades were bull puts when the market was going up and i was far enough out of the money that any question of exercise never came up.
i have posted some of my trades and rules in a journal on et if you are interested. there are also other threads about credit spreads on et.

Quote from xtksystems:

Hi,

I've been researching Vertical Spreads and im curious how being excercised pre-expiration affects it. For example, if a stock is trading at 100 and im bearish and sell the 110 Call, then buy the 113 Call for protection and net the difference, what exactly would take place if the stock reached say 112 or considerably higher for that matter?

Granted my 113 should be effectively acting as my stop loss if it keeps going past 113, but what if I am excercised well short of options expiration?

In other words, if I get excercised on 1 contract at say 112 price, am I then at that point putting up 11,200 margin to satisfy the excercise price if someone excercises or does my broker just automatically transact me buying at market and selling for 110 and just deduct my account the difference by also closing out the 113 call?

Or, does my vertical not sell off my 113 Call automatically and I have to manually take care of that position and GTF outa there? I'd hate to think that I could be excercised on, at say 120 market, losing $1000, and then before I close out my 113 call protection, stock drops like a rock and becomes worthless giving me less risk protection than originally thought.

Also, If i'm correct, I dont believe this would be an issue with the SPX as I would not hold the vertical until expiration, and already would have my vertical giving me auto protection during the contract even if its deep ITM. But the SPY just seems more reasonable to work with given the bid/ask gaps and volume..

Thoughts?

Thanks

-Tom