Vertical Option Spreads at Expiration

[abc12345]

I have an account with Interactive Brokers (IB) and I want to trade complex options strategies composed by vertical spreads. I want to hold options until their expiration.

Unfortunately I don’t have control over the short legs. What will happens if I am forced to exercise just one leg and I don’t have enough fund because I rely both legs to cover each other?

I think there are 3 cases in the vertical spread at expiration:

1. Both legs are ITM – both legs should be exercised.
   
   
2. Both legs are OTM – both legs should expired.
   
   
3. One leg is ITM and the other is OTM – how to manage this case? I probably will fall under a margin call.
   

Since I can’t control over my short legs, the other party can decide to exercise my short legs (or not) in contrary to the logic especially if the options are near to the money. So the case 1 and 2 are also not secured and I could stay with one exercised leg and a margin call.

My question is how to manage the vertical spreads in order both legs to cover each other at expiration? Is it possible to tell IB to exercise at expiration my vertical spreads like separate units and not to split the legs (since I have bought the spreads like a unit)?

Another risk of one leg exercise is: the symbol could gap up or down overnight and I can have big losses.

There is more – I am citizen of an EU country. We have been forbidden to trade with American ETF, but not with options of these ETF.

What will happens if I have SPY vertical spread? How I can manage it at expiration in order both legs to cover each other? If I am forced to exercise just one leg, how I can close the position since I am forbidden to trade it? Will the both legs cover each other or each leg will be closed separately automatically?

 

[spindr0]

Put and call vertical spreads are interchangeable due to synthetic equivalence. IOW. a $100/110 debit call spread is the same as a 110/100 credit put spread.

If you just buy debit spreads, there will be no issue with your 3rd scenario (one leg is ITM and the other is OTM and the short ITM leg is assigned, creating your margin issue).This eliminates early assignment of an ITM short option that can't be covered by exercise of an OTM long option.

A problem for us in the U.S. is Exercise By Exception where all ITM options are exercised unless for long options, you designate that they not be exercised. How this is handled in your locality should be determined.

 

[FSU]

There is no reason to hold these spreads to expiration. Close them out before the end of expiration day and you will not have any assignment risk.

If you hold through expiration, you have the risk of being assigned on your short leg even if it is out of the money or not assigned on your short leg even if its in the money.

 

[stepandfetchit]

...
What will happens if I have SPY vertical spread? ...

Consider side-stepping the issue by trading cash settled products, such as SPX and XSP (if/when it's liquidity is adequate) {Instead of SPY}

 

[abc12345]

Thanks for your replies.

It obviously doesn’t work as I thought. I should change my strategy.

 

[Sig]

One more thing to think about, some brokers (Interactive Brokers specifically) will require that you have enough funds in your account to purchase the stock when exercised for the entire amount of your spread if the price were to fall in the middle of the spread and the two legs didn't cancel. They may require this as far away as the day before expiration, and even if the current price is far outside the spread. If you don't have that amount of money in your account, they'll auto-liquidate whatever pieces of the spread they feel like, using market orders that get you horrible fills, and if their random autoliquidation makes your spread unbalance and adds extra risk, they'll auto-liquidate even more to eliminate that risk that they just created, all mindlessly and often at great pain to you financially.
I'm all with @stepandfetchit on this one, I only hold cash settled spreads to expiration.

 

[abc12345]

Sounds very danger what https://www.elitetrader.com/et/members/sig.446656/ says.

Let me tell you why I have opened this thread. I have developed a BOX scanner that scans in real time for options BOX spreads and can sends limit BOX orders to IB. Even now I can see a SPY marketable short BOX between 306 and 316 at weekly 25 November where bid/ask of the BOX are 10.15/10.38. So I can sell immediately the BOX for 10.15 and after the expiration it should return 15$ profit (without IB commissions) – that means 15/1000=0.015 or 1.5% guaranteed profit per 30 days.

Unfortunately in the reality this theoretical profit could turn to big losses.

Ok - if I use only options with European style (cash settle) – is it possible my short leg to be assigned even its OTM or not to be assigned if it’s ITM? Is it possible the european style BOX to be broken in some way?

There is another problem in IB – I think the combo orders for index options are not guaranteed.

 

[Sig]

Sounds very danger what https://www.elitetrader.com/et/members/sig.446656/ says.

Let me tell you why I have opened this thread. I have developed a BOX scanner that scans in real time for options BOX spreads and can sends limit BOX orders to IB. Even now I can see a SPY marketable short BOX between 306 and 316 at weekly 25 November where bid/ask of the BOX are 10.15/10.38. So I can sell immediately the BOX for 10.15 and after the expiration it should return 15$ profit (without IB commissions) – that means 15/1000=0.015 or 1.5% guaranteed profit per 30 days.

Unfortunately in the reality this theoretical profit could turn to big losses.

Ok - if I use only options with European style (cash settle) – is it possible my short leg to be assigned even its OTM or not to be assigned if it’s ITM? Is it possible the european style BOX to be broken in some way?

There is another problem in IB – I think the combo orders for index options are not guaranteed.

A European option can't be exercised early, that's what makes it a European option (confusing name really). And it's a native order type on the CBOE cob. This is a common thing done all the time, so no, there isn't really any way to "break" it if you use European style options. The only exception to that is that IB's autoliquidation algorithm used to use bid/ask spreads to determine individual leg values and doesn't grasp the risk free nature of a box, so if bid/ask gets out of whack after you buy it and IBs autoliquidation routine may screw you...easy solution is to simply avoid them as they've got several other serious issues as well.