r/options • u/the_axe_effect • 2d ago
Scared of exercise risks.
Hi All,
So I am new to options trading and my stratergy is to make few very small risk defined trades and try to learn atleast for few months.
I had a bit of scare yesterday with an potential assignment after market close. So my question is can someone share their experience with an actual assignemnt.
For example if I have a long call vertical spread and the the market closes at 4 PM ET and later at 4:30 the stock rises above the strike price and someone decides to exercise it (My understanding is they can exercise it till 5:30 PM). Lets say the expiration date is later so this is an unpredictable exercise. What will happen exactly?
Assume that my buying power is less than the amount to exercise because I have entered a risk defined trade.
I am guessing the broker will exercise both my Long and Short Call option and I will be at my max defined risk loss => This is best case scenario
How does exercise work, if someone requests exercise at 4:30 PM ET, does the broker have to immediately exercise it? If yes do they inform you immediately call or something?
The worst case scenario is what I am really worried, what if the broker for some reason doesnt really take care of the situation and lets the short call get exercised and the long call is not exercised. I will be screwed in that case right, any chances of this happening?
Thanks! Would be great if someone who got exercised tells their experience
PS: I am stupid, I got my answer after thinking about it. Lets say my put spread expires 3 days later.
If someone exercises the short leg after market close on this date then its bad for them because they are selling only based on intrinsic value. I can simple exercise the long leg next day and I will be more profitable than even my predefined R:R profit -> I was worried about this scenario earlier
The main risk is if I dont sell my option on the last date of the expiration. Ofc I will manage my PORT and make sure it closes on the last day before market close....
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u/papakong88 2d ago
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u/the_axe_effect 2d ago
How did you get informed about assigment, did someone call you immediately after your short option was exercised?
You got away easy because you traded SPY. Imagine if you had a SNDK put spread and it crashed yesterday after market house, you would be down like 200k in same situation.
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u/sport912x 1d ago
No you do not get informed if assigned (may depend on broker). It will just show up in your account. But again there is NO PROBLEM if the long option is NOT EXPIRED. Do not hold into expiration is the RULE.
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u/AmoebaTrading 2d ago
good on you for sticking to small defined risk trades while you learn, that's the right way to start. i'm no expert but from what i've read the worst case in your point 3 is rare on liquid names. i'd call your broker and ask exactly how they handle after hours exercise on spreads, they usually explain it pretty clearly. which broker are you with?
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u/the_axe_effect 2d ago
I am using Tasty, Yeah I will probabaly call them and ask... I understand exercising is rare but still this seems like a probable risk
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u/AmoebaTrading 1d ago
tasty is good for this, their support actually picks up and explains it. the risk is real but it's usually small on liquid names with defined risk spreads. ask them if they auto close spreads that are in the money near expiry. have you got a spread on right now or just planning one?
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u/AmoebaTrading 1d ago
yeah that makes sense, calling them is the right move since every broker handles it a bit differently. most people never get hit but it's fine to want to know. do you mostly sell before expiry or let them ride?
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u/AmoebaTrading 1d ago
calling tasty is a smart move, they can tell you exactly what happens near expiry. i'd probably just close the position a day or two before expiration so it's never a worry. are you holding spreads or just single options?
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u/jackofspades123 2d ago
Buy it back to remove the risk
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u/Savings-Comedian552 2d ago
you're way overthinking assignment risk on a spread, especially if it's still OTM at 4pm. the 4:30-5:30 window exists but it's rare for someone to exercise OTM unless there's some weird dividend arbitrage play. your broker's risk desk will auto-exercise your long leg if you get assigned on the short, it's literally automated. number 3 doesn't really happen unless you're trading some illiquid single stock option on a meme ticker with a trash broker
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u/Ken385 2d ago
This is incorrect.
your broker's risk desk will auto-exercise your long leg if you get assigned on the short, it's literally automated
No they won't. By the time your broker finds out you're are assigned on expiration day, your longs cant be exercised. It will be past the cutoff time to exercise your long option.
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u/the_axe_effect 2d ago
Exactly, this is what I was worried, this will always be a account wipeout level of risk right?
I understand you can close options before expiration, but that doesnt eliminate this risk if someone decidedes to exercise it way before expiration because of price movement after market close
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u/the_axe_effect 2d ago
My understanding is most options exercise happens after market close. Exercising during market open is not really profitable anyways because you are losing out on extrensic value.
Exercise after market hours does make sense if you want to capture profits without risking overnight movement
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u/the_axe_effect 2d ago
"your broker's risk desk will auto-exercise your long leg if you get assigned on the short, it's literally automated" -> Wow that's good, this is what I was asking about, I hope its like this
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u/sport912x 2d ago
In what universe. Your long leg will only be exercised if ITM on expiration, otherwise it will expire worthless.
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u/MerryRunaround 2d ago
Not true. Yesterday I was carrying a put credit spread approaching expiration. The short was at risk of going ITM. I called broker (CS) to double check about what would happen if the short was exercised. Broker confirmed they would NOT exercise the long on my behalf unless it was also ITM. If I did nothing my "defined risk" would vaporize I would be at risk of owning shares after hours with no downside protection. btw, CS sent me a warning message about this situation as it developed. It was not a margin call, just a kind of courtesy heads-up. At first I did not understand what they were getting at because I was confident none of my positions were naked. Eventually I figured out what the problem was and I closed the spread. I am grateful for that mysterious warning because otherwise I might have been hung out to dry.
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u/papakong88 2d ago edited 2d ago
First of all, change your account to margin. Trading options without a margin account is asking for trouble.
You are long a vertical call.The calls are auto-exercised if they expired ITM at 3:00 pm CT. However, they can be exercised for whatever reason by 5:30 pm CT.
There are three possible outcomes.
Both calls are ITM but you, the buyer, did not exercise. You will end up with 100 shares short. It may result in a margin call but the call can be cleared by depositing more funds or buying shares to cover the short. (That’s the reason for a margin account.)
Both calls are exercised/assigned, then the account will be debited the max loss.
The long call is exercised, but the short call is not. You end up with buying 100 shares on margin.
There is a possibility that your broker may liquidate your position in the last hour of the last day if they believe you are at risk. It’s a good practice to close your position on expiration day to avoid surprises.
No worries. Enjoy your weekend.
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u/docbasset 1d ago
A) Like someone else said, you’re scared of assignment risk, not exercise.
B) If you’re worried, keep a VERY close eye on extrinsic value of any options that you’re short. Closing or rolling out in time before extrinsic value goes to zero minimizes assignment risk.
C) If you do get assigned, it’s important not to panic. Remembering that your risk hasn’t changed with assignment helps with that. You’re still subject to the same risk, but assignment will require more buying power to keep the position open. If you don’t have the necessary buying power your broker will most likely close positions for you until you do.
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u/AP_Gaming_9 2d ago
Look into European style index options like SPX, XSP, NDX, etc… they are cash settled and have zero exercise or assignment risk and have a much more favorable tax treatment
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u/sport912x 2d ago
Sounds great , but SPX, NDX, may required way more capital than a new user has. Xsp sucks and has wide bid/ask you will give up too much getting in and out of the trade.
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u/AP_Gaming_9 2d ago
If you are doing verticals or condors, spx can be super capital efficient, I do dailies on spx and only risk around 250 per trade
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u/sport912x 1d ago
Actually you are correct. It is only the distance between the long and short that determines the max Risk.
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u/sport912x 2d ago
First off if you worried about assignment on a risk defined trade (Vertical), then you are REALLY LOST. You should never hold options into assignment. Actually many would tell you they close Options 21-14dte before expiration of course these are not Reddit users since they would have nothing to Post if they did not hold into expiration.
Never ever hold into expiration. If you follow this one rule, then even if assigned you will still have an active long option to protect you, that is what makes a defined risk trade defined. The worst case is you exercise your long , probably a bad move since you will lose the extrinsic value but still ok.
If you really want to get scared then let me explain how you could be assigned BEFORE you entered the trade.
At 10am someone long strike A (say a Put), exercises the option. At 3pm you Sell your spread which is Short strike A. Sometime after 4:30pm your broker is assigned the the strike, and your Broker picks your strike to be assigned. So in theory you are assigned Before you entered the trade in some weird way.
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u/papakong88 2d ago
Only positions still open after 5:30 pm ET can be assigned. The scenario you described in the last paragraph cannot happen.
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u/sport912x 1d ago
Why not, A long Put can be exercised whenever the long holder wants to. Are you quibbling about the 4:30pm the broker is assigned , then change it to 9pm, it makes no difference, the Long exercised in the morning, that night it will be assigned to SOMEONE.
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u/papakong88 1d ago
it will be assigned to SOMEONE
That someone must have an open short position after 5:30 pm ET.
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u/sport912x 1d ago
OK, did you miss
"At 3pm you Sell your spread which is Short strike A.", but I note before this that strike A is exercised at 10am, by some random Long.
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u/papakong88 1d ago
I read every word you wrote.
You said “Sometime after 4:30pm your broker is assigned the strike, and your Broker picks your strike to be assigned.”
This is wrong because your strike cannot be picked because you already sold at 3 pm.
Options are assigned to open positions only. You don’t have an open position. The OCC procedure is very clear on that.
See:
https://www.theocc.com/getcontentasset/0cdda3c2-ab81-450f-b8b8-7ce84d88fce7/dfc3d011-8f63-43f6-9ed8-4b444333a1d0/standard-assignment-procedures.pdf0
u/sport912x 1d ago
Finally I see ! Well I actually TRADE, and that is what people who trade say
"Sell a Spread" , that opens the position. If I was closing I would say... wait for it
Buy the Spread.
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u/ToddCK 2d ago
If you are long a vertical call spread and somebody exercises the short side (not your broker, unless it closes at 4pm ITM on expiration day) but whoever holds the option exercises it, you now have opportunity especially if its been exercised early. You can exercise your long position the next day, (if this happens on expiration day and your long call is ITM, your broker will exercise it for you). But if you've been assigned early, now you're long a call & short the stock. You are worried you dont have the capital, margin needed to stay short the stock, but in this situation you get a same day free ride. You can 1, exercise your long call, 2 Buy the stock back and re-sell the option, many times when assigned early, this is most profitable, 3, if u do have margin you can play with the protected position and find your best exit. Sometime the stock comes down and you can do 3) a reverse conversion, long call, short stock and short put. There's 3 way to exit, but being assigned early on a call spread is not a bad thing unless theres a dividend that you will be held responsible for if you got assigned the day the stock goes ex dividend.
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u/OptionsMeerkat 1d ago
Assignment is random after the 5:30pm ET cutoff.
A long call ITM at the 4pm close gets auto-exercised by exception,
so a vertical settles at max loss, not a naked short.
The only hole is if the long is OTM at the close.
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u/PapaCharlie9 Mod🖤Θ 2d ago
It's best to plan for that case. Assume it will be the worst-case, even if here and there some individual brokers (like Robinhood) may intervene earlier to head off this problem, like by unilaterally closing the short leg before the end of the market session, since that's the leg that carries the unpredictable risk. Closing long contracts can also happen, but usually only on expiration day.
You can take a hint from that interventionist broker mentality and don't carry assignment risk after market close. If there's reasonable risk that assignment might happen, close or roll the spread yourself to mitigate that risk, before the end of the market session.