Interested in getting first access to my options strategy data library where I analyze the performance of popular options strategies with various trade management rules? Sign up for my newsletter and see the welcome email for more information: pfnews.substack.com/subscribe Get $200 to $250 in free stock when opening a new tastyworks brokerage account: geni.us/tastyworks TO CLARIFY: This can happen with any brokerage firm. It's not about your brokerage because you can get assigned after-hours with any brokerage. But I do think it is messed up how long it took to get the assignment notice. It was impossible for this trader to exercise their long 409 put because they did not have enough buying power to short 500 shares of TSLA at $409/share. The assignment settled well after the exercise cutoff time. I got my time zones mixed up in some of the images. 2PM my time is when the market closes. 3:16PM as seen on my chart is 4:16PM CT. Either way, the information stands. I hope you learned something to watch out for in this video. If you also lost money during this TSLA expiration date and feel Robinhood was negligent in this situation, please refer to the following video and send an email to the address included within: ruclips.net/video/WgNCzsKGBHs/видео.html -Chris
So best practice is to close spread before expiration. If you haven't you need to notify broker to exercise long in case spot falls between strikes after hours ? Could this solution cause complications too. Also how long after Friday expiration close would one be at risk for this to happen?
Oh, meaning both long and short puts are still in the after market? it's just no one is buying the put from him, during after market? and leaving him short put in the money and gotta buy those shares. Am i right? effed this is so complicated, im new with spread
Put out a video today covering this when somebody said you already made one. Nice work, thanks for being quick on the draw getting this message out, and good vid.
Thanks Adam! I put it together quickly after correspondence with a trader since it is an important topic. It seems many others were in a similar situation with the TSLA move.
Thank you! It happened to me (with TD Ameritrade, it's why I'm watching this video) as well and couldn't understand why. Luckily, I only lost $1700 and was able to recoup about 75% of my loss the following Monday by selling ALL that had been assigned afterhours :( ... I'm sure it was the same broker. This video NEEDS to be shared!
Great video. I think another solution is to place a GTC limit order with your profit target as soon as you open the position. I used 50% but 90% is also valid. This limit order would have auto closed his position for a few dollars that Friday and not exposed him to any risk with after hour market movements.
This is actually an issue with the broker's risk mitigation department/guidelines. If the trader files a dispute with FINRA, they should be protected through arbitration. Any option contact that expires ITM (including the trader's 409 put protection), should be automatically exercised by the broker (just like the 410p was exercised). The broker knows OPRA's guidelines about option assignments up until 4:30pm est. The trader needs to lawyer up.
You are correct, on all points trader diffidently needs a lawyer. The customer agreements are written very tightly with a lot of "outs" for the broker. Unfortunately it is nearly impossible for the little guy to win in arbitration which is exactly why big companies force binding arbitration.
@@lProN00bl The option did not expire ITM. It moved ITM during the after-hours session and the option buyer exercised wihin the option cutoff time. Apparently Robinhood's policy is to notify the seller of the option as opposed to automatically exercising his long position. Brokers have different policies and you should know EXACTLY what they are.
@@BJJJUDO If you do credit trades please read my post above. The circumstances in this case are very unusual. You MUST know how your broker would handle a similar situation. However, all this could have been avoided if the trader had placed an exit order ahead of time. ALWAYS BUY BACK THE POSITION FOR PENNIES. This should be an open order placed immediately after the original credit trade was in place.
Thank you for sharing this. I have a trade expiring Friday and was not planning to buy it back until I saw this. Valuable lesson learned. I hope the affected trader recovers quickly and safely.
@Sanford Winston buy an ITM Call/Put (if seller ask is 0) to avoid the worst case scenario that is being discussed here . ( you may as well buy an ITM call/put in the next expiry so that you will be completely safe in case if you are unable to exit your short position in the current expiry)
Such a great video to learn from! I feel HORRIBLE for the person who took this loss though... I've been trading options (almost entirely vertical put spreads w/.30 delta or less) for almost a year now and i have yet to let one of them expire. I ALWAYS close my positions prior to expiration because, to be honest, expiration mechanics scare the crap out of me! Despite all of my reading it still seems like so much can go against me on that day and it's just too much for me to risk. Thank you for this video and keep up the great work man!
@@synnic6051 never early no. Like I said, I always close once I've either got my profit target or I hit my loss %. Over a thousand positions and not one has been cleared by the options clearing authority
*Typically a good rule of thumb is to close the spreads at approx 50-60% of max profit. This will keep you out of trouble and tends to increase your win rate. Also, NEVER take the options all the way to expiration! FINALLY, this is WHY I ONLY trade options credit-spreads in the indexes such as SPX, RUT and NQ. They have two types of expiration types...PM and AM settlements. PM settlements are BEST because you can be assured that once the market closes, whatever value the position/trade has (a win or a loss) whatever the positions value was at market close, is what it will always be. No chance of 'after hours' fluctuations.* *AND, because these are "cash settled" products, there is NO chance of being assigned shares of stock because the indexes mentioned above, do NOT have shares. Thereby effectively eliminating the scenario in this video. NOW, if you choose a strike (in an expiration week/month) that is AM settled....you DO run the risk of price fluctuations AFTER the market close because the trade does NOT settle UNTIL the following morning! So I always MAKE SURE my credit spreads are CASH SETTLED and PM SETTLED! Keeps me out of BIG trouble!*
This almost happened to me on a Microsoft spread. Thankfully, my brokerage firm stepped in and saved me from a $100,000 loss. I was about to get another job before I found out.
So if his account has money to buy 500 shares at 409. The long 409 put should exercise as well. So we should always close all option ourselves before expiration date to be safe.
As a Derivatives Trader for several large firms over three decades. One fact I know if you blow out and go into deficit Please Do Not Do Anything Drastic!! The worst that can happen is the firm takes you to court to cover the deficit. At the end of the day, XYZ brokerage is the one that must answer to the Exchanges Clearing Corp and cover the deficit. Usually, it's written off as the cost of doing business ( Again you can be sued in Civil Court which can take years anyway. You can't get blood from a stone as the saying goes.) Please do not off yourself over money it comes and goes and you can always make it back someday. Your life is more important.
I use TOS and they will automatically exercise the protective leg of an options spread in a case like that. Call your brokerage firm and see if they have that default settings or give them permission to. But like Chris said the best option is to buy back short positions before the market closes.
Yeah tastyworks closes options that are close to being ITM at expiration as well. The brokerage in question should have exercised the trader's long 409 put for them. It's what any trader would want to happen if assigned on the short option in their spread.
I use TOS as well, they have a team that is very good when it comes closing options but they are not perfect. It requires human intelligence and attention, which has two points of failure. I had a short optioned exercised like this, when I called them they said you need to call them to make sure they exercise. Fortunately in my case it worked in my favor because the next Monday stock made me money, but from that point on I always close my positions shortly before 1pm on Friday.
TOS is NOT TastyWorks by the way, the founder of TastyWorks developed TOS years ago and sold it to Interactive Brokers (SORRY, TD Ameritrade, not IB, my apologies). TasyWorks is a very good broker IMHO, they alway send you an email if you have expiring positions that week 👍
Great info. Isn't it something that brokerage firm should take care to save their customers (credit/debit spreads are the most conservative strategies within options). Could you please name a brokerage firms, who takes care of these scenarios automatically? Do we have a chance of this scenario occurring before expiration?
This is very critical information. Thank you very much for the videos. I am usually paranoid about options getting exercised. I always cut my losses and trade it.
Thank you for the fore-warning: Correctly: the lesson learned is that it would be safer to " Buy to Close" the Bull Put Spread's OTM position very close to the expiration and not allow the option to reach expiration on its own. Could have happened to anybody.
The video covers well how an after-hour ITM put credit spread can go wrong. It also does remind people the best way to avoid catastrophe is to close the short. However, it left out a lot of the deep discussion in case the short was not closed and what choices one could have, and what their potential pros and cons are. The host said the dude could have exercised his long put position to have saved the damage. In reality, at that moment, the dude would not know his short put would for sure be assigned. I doubt his broker would even let him exercise the long put since his fund was way below what he needed to borrow. Anyway... many people made videos at the time to catch that hype and gain viewership, but nobody actually talked about the realistic nuances, which is kinda disappointing.
The RUclips option gurus teach that your maximum risk on a credit spread is the value of the spread minus the credit. They never talk about the risk of assignment from large moves during after-hours trading. They never discuss the capital requirements to exercise a call or a put; instead, they naively assume that the long option in the credit spread will "automatically" be exercised, offsetting the presumed assignment on the short option. They promote credit spreads as an easy, low-risk way to generate weekly income. They never talk about the low expected value of this option strategy. One bad trade can wipe out weeks of profits. In this trader's case, one bad TSLA credit spread trade wiped out his $30,000 account. He was one of the lucky ones. Other TSLA credit spread traders report in this thread losses of $300,000 or more. Why did this trader, knowing he did not have the capital to buy 500 shares of TSLA @$410/share if assigned on his puts, fail to exit those puts prior to the close of the regular session? Why wasn't he monitoring after-hours trading? How could he not know the risk of assignment from larger moves in after-hours trading? This type of risk is identified in the mandatory risk disclosures.
I am glad you added a link to this video in your second "options for beginners" video. As soon as I saw it come up on screen I paused the one, and played this one. Made me very glad that I opted to watch more of your content before jumping in to options trading. coming from stocks and forex, I was already thinking about doing something similar to this, the only thing that keeps putting the K-bosh on getting a solid plan formed around having multiple positions open like this was that whole "could be assigned" mixed with the fact that each contract can be exercised for 100 shares of the stock it represents. I figured a good way to plan for that eventuality is to make sure you have enough money to cover an assignment, should it happen. It seems you can never know if, or when, an assignment will come your way, because you never know when the person on the other side of the trade is going to exercise or not. I haven't seen any videos of anyone doing it yet, but I would also assume that there are people who buy options specifically to exercise them at a later point in time, since options are a much less risky way of going about buying stocks. As a stock buying strategy I can see this being a great way to secure a position in a stock without having to actually own any of that stock. I think this is probably what happened to this person, unfortunately, and the person that exercised the options, more than likely does after hours trading quite often and was waiting for the stock price to drastically change in the after hours market. If the price didn't change, no big loss on their end, if it did change to a favorable position then they exercise the options the bought and now have a very favorable position in the underlying stock that they were already planning to be in. If any of that made sense. If my perception of the situation seems a little weird, I apologize. I have never traded options on a real account, and have only done a couple of trades, more than 2 years ago, on a paper trading account.
This type of thing seems WAY under-discussed on options training videos. When the confirmation window for a spread purchase pops up on the screen, it should say something like "Maximum profit $1500, Maximum loss: $500 (or 13X your net worth)." People new to trading and who may not fully understand the intricacies and protocols of expiring options put a lot of trust in the safety net of their spread. And the fact that this huge price movement occurred half an hour after market close on the date that the options expired makes the whole thing smack vaguely of collusion and predation. Thanks for posting.
@@shibity you can, just take out a personal loan for 15k when the market crashes and use margin to leverage at the money leaps options on blue chip stocks xD
Never, I repeat NEVER let options expire worthless. Close all legs at least 2-3 DTE or at 85-95% of max profit. It's not worth it holding onto expiration because we are living in unprecedented time. Learn to understand risk. After-hours and pre-market will either make you or break you during these volatile markets.
@@xxxs8309 around 0.25 leaves way too much juice in. I default to 0.05 ..hell, my opening trade some times got that 0.25 to milk on. But sure, always close before exp.
@@johto I do that sometimes but all it depends on the strike price , if it is above 60, there is no point in keeping the trade on unless you are very comfortable with the stock.Two weeks ago I sold 12 puts on OTRK with 60 price strike at 6dollar each now they are worth 0.5 and I'll close the trade at 0.25, with a realized gain of almost 7000 dollars,I'll sacrifice 300 dollars that's fine
When you setup your vertical spread, RH would tell you whether you have enough leverage. How come their leverage calculation didn't protect the individual from this unfortunate event?
This exact same scenario happened to me. Still can't believe these wrongheaded rules even exist. OCC listening? Some facts: - S&P released critical index information while the options markets were still open. That is potentially illegal and is never supposed to happen. - A seemingly very safe $1 wide spread disappears only in after-hours and assignment occurred. This rule appears to be completely asinine. Again..OCC ? I probably have not been trading options quite as long as Chris but I am far from new. I would wager that very traders even know this potentiality is even possible. It shouldn't be!
If you don’t understand this can happen, you should not be trading options! It’s very basic stuff. Nobody reads all the details you are ‘required’ to read before requesting options level in your account, then they have this shit happen and freak out. A short leg is always RISK. What’s the very first rule of trading (anything)? Always control your risk!
@@gavinliu2121 But beginners are TOLD that, repeatedly. But they get all goo-goo eyed over hearing about 500% profits in one day. And that’s entirely possible, hell I’ve had trades make over 10x in half a day, sometimes even in 15 minutes. But risk is always lurking. Nobody is preying on anyone else, it’s just a very vicious game. If you don’t understand the rules, and the possibilities, don’t play!
@@barrycw1 I’ll never be able to say ‘the exact same scenario happened to me’. I’ve had my share of bad trades, but not over simple details like letting expiring short options go into afterhours. There is so much free education available, nobody has an excuse for doing something that crazy. As soon as you say things like “ A seemingly very safe $1 wide spread disappears... ” and then try to blame the clearing house or the broker, it shows you haven’t educated yourself about options and trading rules. The trade didn’t vanish, it played out according to the rules you didn’t understand. Not trying to make you feel worse about it, but it gets old hearing people try to blame the ‘system’ that they didn’t understand.
You should also talk about scenario where the stock gives out dividend. The short leg could get exercised early (like before ex-dividend date) even though the short leg still has extrinsic value. In this case the extrinsic value is less than the dividend, so it's make sense to exercise the option.
And just so if anyone wondering about early assignments due to ex-dividend dates, you dont have to worry about it when you have a credit put spreads. That's why I like them over debit spreads. Because, you are always obligated to buy if the short leg is assigned.
I just received a notification from Robinhood (12:24 am EST) that i was assigned in the short leg of my spread.... Why it has to be at this time?....i exercised the long leg right away!!!
I think what we should consider here is, that "at expiration" should not be defined with market close. Rather you should consider 4:30 pm your "expiration" so - if you own a contract DO NOT COUNT ON THE CLOSING BELL and CLOSE your position. PERIOD. Even if it costs you 2 Dollars per contract fee, it's much better to close a position than having assignment risk. What if, on that day a company is giving news after the closing bell? then spread you owned one minute before market close, that had a 99% profit turns into an afterhour nightmare. ALWAYS close your option positions esp. spreads, when they are nearly at the full profit. If the option has CASH SETTLEMENT it's a complete different story ;)
Thats why I like Covered Calls. If for some reason I get assigned after close day of expiration it means I met maximum profit. For Spreads and Iron Condors Tasty Trade teaches taking profit @ 50% on 45 DTE positions. Around 21 days evaluate the trade and decide to take profit, roll it out, or hold on for little while longer. I will even take 25-30% profit if it happens in the first two weeks. Always assume that it best to take profits early and reset with a new trade. I really hate holding on to any trade to day of expiration (exception being Covered Calls - If there is no profit rolling out why close the Covered Call?).
Wow I lost 5050$ same day I got assigned for tesla puts 407 and 406 debit spread. 1 contract out of 5. I got an email on sept 11 after hours and after a week. I can share the screenshots with you. My options were exercised after midnight I think but I’m it’s not before 5.30. In the video u said 4.30 but in my case it’s different. I was told the cut off time was 5.30. I didn’t see the shares till the next day. I think I got assigned in the midnight.
Sorry to hear you suffered a similar situation. The time zones in the video were CT, not EST. 5:30 EST is the cutoff time. And you wouldn't see the shares until Saturday because the brokerages don't get the assignment notices until late Friday night.
This kind of thing should not be happening at all. Options regulatory council needs to prevent this kind of thing. The ability to exercise an option should depend on the stock's Closing price at 4pm on expiration Friday especially since a trader cant trade options on stocks after 4pm. What happens to the stock price after 4pm should be irrelevant. It is stupid and very costly. Something needs to be done!
It's part of the trade, the buyer of the option can decide if they exercise the option. And they can do so basically whenever. It's pure convenience on the broker side that they default to exercising the option if you are in the money. Also funny enough what you described as the solution caused this whole accident. The 409 option wasn't exercised because the closing price wasn't in the money. As a rule of thumb one should always close option positions manually before the last day as the huge volatility works against you as the option seller. A maybe better solution would be to have no separate exercise cutoff time, however I can't comment on that as I don't have any competence to discuss that part.
@@mwfiaedev5835 The short strike wasn't ITM either at the close on Friday. However, both the long and short strikes went ITM on Friday (after hours)after it was announced that TSLA would not be included in the S&P 500. The long option should've been exercised automatically by the broker and the person would've never suffered the big loss.
I agree! Options expiring on Friday’s should have the same cut off notice for the underlying share price when normal market hours close. Seems very unfair for the options to be exercised in the after market hours and nothing can be done with the options
ricomajestic remember, the option is a contract - it gives the right of exercise to the purchaser, not to a broker, so a broker can’t exercise. They should all at least provide instant alerts to the client if an option goes in the money in after hours on the expiration date.
@@TochkaZreniya Actually that is not true. Most brokers will automatically exercise your option at expiration in a situation like this if it is in ITM unless you tell them not to. At least that's what TOS would do.
Hello, this is very usefu l information, thank you very much. What I didn't understand well is that 409 is expired for good, trader couldn't exercise tomorrow when market open? It was very last day of option right?
That's why you should always buy to close sold options before market close.. Pointless risk. What if there is a black Swan event after hours Friday and you sold puts that were worthless at 3:55pm friday but then go up massive after hours. You can destroy your account for no reason
Isn't the broker responsible for not utilizing the protective puts automatically in this case? He may have a case suing the broker. They could clearly see what was happening and should have looked out for their client
Great video! Scott Sheridan at Tastyworks has been saying this for years to Tastyworks customers! NEVER EVER leave an OTM spread on to expire worthless! This is why Tastyworks has free/zero closing commissions.
One side of a credit spread is for insurance. One more thing for insurance is to put in a limit order for a $0.00 debit spread to close. This will close the trade when the market closes and it becomes worthless.
Curious how the lawsuit will pan out assuming one was filed? .. Any exercised option should generate an _immediate_ notification. They can't claim it was the ignorance of the trader if he literally had no way of knowing until a notification was received hours later. Hope he gets his account back. Biggest lesson learned from this: Never hold to expiration
Great video man. I have a small group comprised of some newer traders and we talked about this extensively. You literally may have saved someone's life with this video.
I knew they are exercised/assigned after hours, BUT I did not know the price they use is the aftermarket/extended hours price not the price at the close of trading. Tricky!
@{Forbidden.Knowledge} That's not the point - the fact they used the aftermarket price and not the closing price at 4:00 ET to determine ITM/OTM and they did not exercise his long position which would normally hedge the short position. Not many traders realize this.
@@chrisguli2865 They still use the closing price to decide what to automatically exercise. If you own calls or puts you have the right to exercise them at the strike price. It doesn't matter the reason why which might not necessarily be related to the underlying price.
That’s crazy. I didn’t know that. Always thought options expire right at market close. I guess if he was aware of the after hours move he could have exercised his 409 put, after he was assigned...?
Thx for the video. I’ve known about options being exercised for ITM options based on after hours trading on Friday’s but wasn’t sure of the cut off time. Thx for confirming it is 430pm central time as the post market continues to trade till 7pm central time.
Let's say you are the buyer of the put options contract that was OTM market close, but becomes ITM after hours, how do you exercise the Right to Sell after hours? I have not been able to buy or sell any options after hours before, so consider your the counter party on this scenario, how would you exercise the option after hours?
Thank. I am with TD ameritrade & sometime i want to close my options before expirations day for but to close may be even 0.02, it does not work. I end up calling the trade desk to close. any suggestions? Thanks for your amazing explanations in all video.
Very good explanation. Very understandable. I didn't know about little details like options being vulnerable to 'after' market moves on expiration day until it happened to come up when I was asking my brokerage other questions.
Always close out all spread positions before expiration (debit or credit spreads). You don't want to get caught in no-man's land between the strikes, or in situations like this . Closing out the positions eliminates much headache and grief. Also, in this case, TSLA is notorious for a lot of after hours volatility, but any stock is subject to after market swings - all it takes is a bad news item or some tweet by the CEO to cause havoc, and your DOTM spread is suddenly DITM and you're in DS!
Looking at the volume of TSLA, you would think that this affected all the brokerages evenly. But it mainly hit RH and maybe a few very small option brokers. You would think it would hit Schwab or TD or fidelity big time also, but I have not seen anything much from them. My guess is that RH and these smaller brokers did not have the software or network to handle this huge volume and everything got bottleneck. So instead of accepting fault, they're trying to use this small loophole and force their clients to take the hit. I really want to know if the OCC sent the assignments to SCWAB or TD in time, but not RH? If that is the case then these guys dropped the ball
Similar, but not same for me. Had 4 GME call credit spreads $59/60 (max profit $120 / max loss $300). Figured I'd let it expire worthless. Wasn't thinking about being assigned...was assigned the day before expiration in the morning (wasn't mentally prepared w/ a plan had it happened so it was fly-by-hip). The worst part was GME was trading around $360-400. Called to get guidance...had to close my short Calls, -400 shares, prior to exiting Calls (was bearish and ideally wanted to close Calls first). So what happened after I closed my short shares, at $366, the stock plummeted in minutes under $300 and the Calls tanked, but didn't realize how large of a monetary amount it was. -$28k in a minute. Called TDA to reverse/bust the trade, but being that it took too long to reach them, they couldn't and they auto-exercised at -$62k. Other part that sucked was the first rep knew my intentions to exit the trade w/ just a max loss. In hindsight now, I know I could've exited together just as if I had a regular spread. Had they recommended that, I wouldn't be having to let my account go to collections for such an insignificant spread.
Btw, I was never risky and my account was only valued at ~$7k at the time. So essentially, I owe about 55k, which I wouldn't and don't have any money to pay. Sigh...dumbest mistake ever.
This is a great example of why most people should never do $1 wide spreads. Trader would've been 80% better off with just one spread of 410/405 puts... you probably get a better fill with a $5 wide spreads too, and lower overall fees.
What if the trade was running at a loss until expiry, but was going to expire worthless at closing bell... Why would anybody close a trade in that situation?
When you say to close selling options, is it enough to close 1 hour before the expiration day ends? Also, this true only for selling, or buying options as well?
Before expiration, with the extrinsic value, the option is rarely exercised. However, what if it does get exercised for any unknown reason, what is the solution? Can we exercise the other leg of the spread too to get out of trouble?
Even if the option was exercised after hours, why wasn't the closing price used to execute the trade instead of the after hours price? The option expires at market close and that determines weather it is in the money or not. Lots of companies announce earnings after the close and the stock drops after hours. If exercising after hours, at the after hours price was a thing, countless traders could get screwed that would otherwise be protected
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Now, would the broker have given this guy the proceeds (profits) if Tesla would have gone up 50 or 60 dollars on that Monday when he was forced liquidated? I think not, but they were fast to take his account balance...
Someone else asked this below, but no answer yet: "Could this same thing not also happen if there was a mid day flash crash, where there was a large selloff, where one side of the vertical is exercised and then a recovery before you realize your option was exercised ?" Is the broker required to handle this automatically, by exercising your long option ?
Thank you for this video. great video. same thing happened to me. whn i sold aapl iron condor. i had to buy 1000 shares but short 1000 and covered the position.
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Very good informative video, also I have a question : If it was a diagonal spread i.e. the buy option expiration date was further than the sell option expiration date could this also happen ?
A time spread only protects you in as much as the long option would gain some of the mount of the market move. You would end up with a long position in the shares and would have a long OTM put that was already paid for by the sold premium of the shorter-dated put. As you wouldn't exercise an OTM option with remaining time value you are never safe from being assigned on the short near-dated put and ending up with a position.
So this is like how much juice do I want to squeeze out of the lemon? If I try and max juice my diamond hands get too slippery and the lemon slips out of my hands and knocks over the juice bowl. No juice for my lemonade. But if I close before 1p Fridays, these citrus hands will have a sweet glass of lemonade?
Man, Idk who this happened to, but God Bless them, that's absolutely sickening. Thanks for sharing this though man. I trade weeklys with few days to expiry with low touch probs over and over and let expire. I didn't even know this was possible to get assigned after hours!
Reminds me of an age old elderly advice. 'In life it's important to know what to do. Even more important is to know what NOT TO DO". --- Thanks for sharing this info. Projectoption you are good you lay it out as it is. Thanks for the warning. -- Some times I think 30,000 subscribers should chip in a dollar each for this account holder.
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Thank you. As a basic rule, trader shouldn't wait for the last minute on expiration day when one side is tested, especially with such volatile stock as Tesla. It's simple risk/ reward calculation. Credit spread gives only defined reward and undefined risk.
This type of thing can happen with Tesla, but there are some companies that it's quite unlikely to ever happen, depending on how deep OTM the option is. But good video.
Hi don't understand just recently had to iron Condors going on Google and Adobe.8/28 expirations 1 contract on goog and 3 on adbe, was assigned . received $5 credit for 1560/1550 1420/1410 and 452.5/450 420/417.5 $1.68 credit. Never close the positions and was assigned. The stocks closed at roughly 1650 and 530 . Sweating bullets that Weeknd. Waited until Monday and check my account. But in the end lost $500 on Google and $ 270 Adobe. This was expected. Don't understand how the brokerage firm could have done what they've done to that person.
More Questions:........I know there has to be two sides of an Option, The Buyer and the Seller.......... In this situation, only concerned with the 210 Puts:........The 210 Short Puts expired OTM at closing, and then dropped down ITM after closing.......... The Seller( Our Trader Here ) was responsible for the 210 Short Puts for an extra 1-1/2 hours after closing, and he lost, and it is Terrible........ I thought the Buyer in this case, owned these 210 Puts, and they were Long 210 Puts to him since he bought the 210 Puts, and his 210 Long Puts were supposed auto-exercise to him at closing(or when the broker decides to take action)........But is the Buyer who actually bought the 210 Puts actually receiving the benefit here?......Or is the Broker not even telling(by waiting to Exercise, or Not to Exercise) the original Buyer of the 210 Puts anything because the Buyer's Long Puts were supposed to Auto-exercise here,,,,,, and now, The Broker, acting upon themselves to profit from this rule?.... If this is true, then are Brokers really making the bulk of their money after the Market Closes, when there are big gaps down or up?......and waiting to see which way the stock price moves…….. Question 2: Could the Broker who is constantly monitoring have done THIS in this Scenario as presented by ProjectOption:……. Concerning the Buyer of the 210 Short Puts:….. 1 Wait within their prescribed time to Exercise the Buyer’s 210 ITM Put Options that Closed ITM…… 2 Decide not to Exercise the Long ITM 210 Puts the Buyer owns, who also could be unaware of anything, and is just happy not to be assigned by the Broker…. 3 Don’t Exercise the ITM 210 Puts to the Original Buyer that were long at the Close….. 4 Take the place of the Buyer and force the Seller(Our Trader) of the 210 Short Puts to Into this terrible situation, because they know the size of his account?..... Or maybe am not really understanding!!!!! Thank you for any explanations!!!!!!
I didn't follow everything you said/asked. It's not the brokerage going against the trader. It's another trader who owns the 410 put that exercises it, and they could be with any brokerage/institution. It doesn't have to be the same brokerage. The brokerage simply facilitates the transactions of trades and exercise/assignments.
Wow this story definitely worth some time to digest. I want to ask about the automatically exercise rule. I thought any long option that is ITM by at least $0.01 will be exercised automatically without the buyer to submit the request explicitly. So if my understanding is correct (please correct me if I am wrong), whether a long option will be exercised automatically is determined by the Friday regular hour closing price. What happens after that time will not change the status of an option in the OCC system. The buyer has 90 minute more to choose to act against the automatic rule. Is my understanding correct?
Great video. Would there need to be enough liquidity in the after hours to find someone to sell 500 shares? Probably not a problem with Tesla in the after hours but how about a lower volume stock like XOM or a bank with less AH trading.
I lost 3000 USD when my maximum lost should be 20 USD. I open call credit spread ITM for NKLA (my first call credit spread ever). Literally first day I was assigned -100 shares of NKLA. I had that trade open for 2 weeks. Surprise surprise one month later fee for shorting those 100 shares cost me 3k. Brokerage firm intrest for a few days was 1000 percent. The most expensive trade in my traiding history.
I had that happen to me before the expiration date and the stock did not have dividends or splits so why would the brokerage excercise in the money a day before expiring. The ticker was NET and this happen just about 31st of march for a callender call spread in the money long call. The next day the short call also got assigned at the end of the day.
Just looked at some porportional out of the money puts on TSLA expiring this Friday and the bid/ask spread was 1$. TSLA itself may have been part of the problem as trying to close out a profitable trade looks to be a painful operation.
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TO CLARIFY: This can happen with any brokerage firm. It's not about your brokerage because you can get assigned after-hours with any brokerage. But I do think it is messed up how long it took to get the assignment notice. It was impossible for this trader to exercise their long 409 put because they did not have enough buying power to short 500 shares of TSLA at $409/share. The assignment settled well after the exercise cutoff time. I got my time zones mixed up in some of the images. 2PM my time is when the market closes. 3:16PM as seen on my chart is 4:16PM CT. Either way, the information stands. I hope you learned something to watch out for in this video.
If you also lost money during this TSLA expiration date and feel Robinhood was negligent in this situation, please refer to the following video and send an email to the address included within: ruclips.net/video/WgNCzsKGBHs/видео.html
-Chris
It's all good CB👍. Thanks for taking the time to post the vid. Looking forward to the SME vids!
So best practice is to close spread before expiration.
If you haven't you need to notify broker to exercise long in case spot falls between strikes after hours ? Could this solution cause complications too.
Also how long after Friday expiration close would one be at risk for this to happen?
@@3756hans Chris said an hour and a half (4:30 Central time) you are at risk according to OIC.
Oh, meaning both long and short puts are still in the after market? it's just no one is buying the put from him, during after market? and leaving him short put in the money and gotta buy those shares. Am i right? effed this is so complicated, im new with spread
Same exact thing happened to me except I was long the 416 short the 417. My broker gave me 200 shares
Put out a video today covering this when somebody said you already made one. Nice work, thanks for being quick on the draw getting this message out, and good vid.
Love your vids man
True man, Just posted a video about my biggest losses on my channel if youre interested, id love to hear your feedback
Watched your video right before this one and realized I should watch this several times to ingrain it in my head. Sad story.
Thanks Adam! I put it together quickly after correspondence with a trader since it is an important topic. It seems many others were in a similar situation with the TSLA move.
Could this also happen with debit spreads?
Thank you! It happened to me (with TD Ameritrade, it's why I'm watching this video) as well and couldn't understand why. Luckily, I only lost $1700 and was able to recoup about 75% of my loss the following Monday by selling ALL that had been assigned afterhours :( ... I'm sure it was the same broker. This video NEEDS to be shared!
Which broker was it?
Which broker?
Schwab still does this shit.
God dam, that dude went broke from a supposedly conservative trade.That really sucks man.
he was cheap, wanted to save some coins, he could buy those puts back before closing
@@MESSY-AF Yea, probably wanted to save on commissions too.
Great video. I think another solution is to place a GTC limit order with your profit target as soon as you open the position. I used 50% but 90% is also valid. This limit order would have auto closed his position for a few dollars that Friday and not exposed him to any risk with after hour market movements.
I agree. I'm doing this starting today to protect myself a little bit better.
GTC limit orders execute during market hours only. Would not have saved him.
@@free322001 correct
This is actually an issue with the broker's risk mitigation department/guidelines. If the trader files a dispute with FINRA, they should be protected through arbitration. Any option contact that expires ITM (including the trader's 409 put protection), should be automatically exercised by the broker (just like the 410p was exercised). The broker knows OPRA's guidelines about option assignments up until 4:30pm est. The trader needs to lawyer up.
Yeah that never made sense to me. Fidelity tells you every time if the option expires in the money, it will be exercised automatically,
You are correct, on all points trader diffidently needs a lawyer. The customer agreements are written very tightly with a lot of "outs" for the broker. Unfortunately it is nearly impossible for the little guy to win in arbitration which is exactly why big companies force binding arbitration.
@@lProN00bl The option did not expire ITM. It moved ITM during the after-hours session and the option buyer exercised wihin the option cutoff time. Apparently Robinhood's policy is to notify the seller of the option as opposed to automatically exercising his long position. Brokers have different policies and you should know EXACTLY what they are.
@@BJJJUDO If you do credit trades please read my post above. The circumstances in this case are very unusual. You MUST know how your broker would handle a similar situation. However, all this could have been avoided if the trader had placed an exit order ahead of time. ALWAYS BUY BACK THE POSITION FOR PENNIES. This should be an open order placed immediately after the original credit trade was in place.
@@hattrick2219 Exactly, It's worth the few bucks not to worry about the extra 90 minutes.
Thank you for sharing this. I have a trade expiring Friday and was not planning to buy it back until I saw this. Valuable lesson learned. I hope the affected trader recovers quickly and safely.
@Sanford Winston buy an ITM Call/Put (if seller ask is 0) to avoid the worst case scenario that is being discussed here . ( you may as well buy an ITM call/put in the next expiry so that you will be completely safe in case if you are unable to exit your short position in the current expiry)
Such a great video to learn from! I feel HORRIBLE for the person who took this loss though... I've been trading options (almost entirely vertical put spreads w/.30 delta or less) for almost a year now and i have yet to let one of them expire. I ALWAYS close my positions prior to expiration because, to be honest, expiration mechanics scare the crap out of me! Despite all of my reading it still seems like so much can go against me on that day and it's just too much for me to risk. Thank you for this video and keep up the great work man!
Have you ever had an early assigned on your spreads? What day was it? Was the long option automatically exercised to cover the short option?
@@synnic6051 never early no. Like I said, I always close once I've either got my profit target or I hit my loss %. Over a thousand positions and not one has been cleared by the options clearing authority
@@jesser8502 Just curious, for over a thousand positions in a year, how do you track them to make sure they are closed before expiration?
*Typically a good rule of thumb is to close the spreads at approx 50-60% of max profit. This will keep you out of trouble and tends to increase your win rate. Also, NEVER take the options all the way to expiration! FINALLY, this is WHY I ONLY trade options credit-spreads in the indexes such as SPX, RUT and NQ. They have two types of expiration types...PM and AM settlements. PM settlements are BEST because you can be assured that once the market closes, whatever value the position/trade has (a win or a loss) whatever the positions value was at market close, is what it will always be. No chance of 'after hours' fluctuations.*
*AND, because these are "cash settled" products, there is NO chance of being assigned shares of stock because the indexes mentioned above, do NOT have shares. Thereby effectively eliminating the scenario in this video. NOW, if you choose a strike (in an expiration week/month) that is AM settled....you DO run the risk of price fluctuations AFTER the market close because the trade does NOT settle UNTIL the following morning! So I always MAKE SURE my credit spreads are CASH SETTLED and PM SETTLED! Keeps me out of BIG trouble!*
thanks for the tip Lorenzo
how do we know, AM/PM settle and also Cash settled?
@@rhoptionsclaim5518 You can go to the CBOE website and use their search function, you can Google it or call your broker and they will tell you.
This almost happened to me on a Microsoft spread. Thankfully, my brokerage firm stepped in and saved me from a $100,000 loss. I was about to get another job before I found out.
Care to share what did your broker done?
How did they save you?
@@MrDavid949 they hedged my trade for me.
So if his account has money to buy 500 shares at 409. The long 409 put should exercise as well. So we should always close all option ourselves before expiration date to be safe.
As a Derivatives Trader for several large firms over three decades. One fact I know if you blow out and go into deficit Please Do Not Do Anything Drastic!! The worst that can happen is the firm takes you to court to cover the deficit. At the end of the day, XYZ brokerage is the one that must answer to the Exchanges Clearing Corp and cover the deficit. Usually, it's written off as the cost of doing business ( Again you can be sued in Civil Court which can take years anyway. You can't get blood from a stone as the saying goes.) Please do not off yourself over money it comes and goes and you can always make it back someday. Your life is more important.
I use TOS and they will automatically exercise the protective leg of an options spread in a case like that. Call your brokerage firm and see if they have that default settings or give them permission to. But like Chris said the best option is to buy back short positions before the market closes.
Yeah tastyworks closes options that are close to being ITM at expiration as well. The brokerage in question should have exercised the trader's long 409 put for them. It's what any trader would want to happen if assigned on the short option in their spread.
I use TOS as well, they have a team that is very good when it comes closing options but they are not perfect. It requires human intelligence and attention, which has two points of failure. I had a short optioned exercised like this, when I called them they said you need to call them to make sure they exercise. Fortunately in my case it worked in my favor because the next Monday stock made me money, but from that point on I always close my positions shortly before 1pm on Friday.
They didn't in my case. I use TOS as well.
TOS is NOT TastyWorks by the way, the founder of TastyWorks developed TOS years ago and sold it to Interactive Brokers (SORRY, TD Ameritrade, not IB, my apologies).
TasyWorks is a very good broker IMHO, they alway send you an email if you have expiring positions that week 👍
@@pogster56 who said tastyworks and TOS were the same?
This is some of the most important info I've heard in a long time... very glad I watched this. It's so easy to forget about the after hour activities.
Close them spreads before expiration, not worth the risk!! 👍
Great info. Isn't it something that brokerage firm should take care to save their customers (credit/debit spreads are the most conservative strategies within options). Could you please name a brokerage firms, who takes care of these scenarios automatically? Do we have a chance of this scenario occurring before expiration?
This is very critical information. Thank you very much for the videos. I am usually paranoid about options getting exercised. I always cut my losses and trade it.
Thanks so much for the warning! Too bad so many "experts" don't seem to know about this
Thank you for the fore-warning: Correctly: the lesson learned is that it would be safer to " Buy to Close" the Bull Put Spread's OTM position very close to the expiration and not allow the option to reach expiration on its own. Could have happened to anybody.
The video covers well how an after-hour ITM put credit spread can go wrong. It also does remind people the best way to avoid catastrophe is to close the short. However, it left out a lot of the deep discussion in case the short was not closed and what choices one could have, and what their potential pros and cons are. The host said the dude could have exercised his long put position to have saved the damage. In reality, at that moment, the dude would not know his short put would for sure be assigned. I doubt his broker would even let him exercise the long put since his fund was way below what he needed to borrow. Anyway... many people made videos at the time to catch that hype and gain viewership, but nobody actually talked about the realistic nuances, which is kinda disappointing.
The RUclips option gurus teach that your maximum risk on a credit spread is the value of the spread minus the credit. They never talk about the risk of assignment from large moves during after-hours trading. They never discuss the capital requirements to exercise a call or a put; instead, they naively assume that the long option in the credit spread will "automatically" be exercised, offsetting the presumed assignment on the short option.
They promote credit spreads as an easy, low-risk way to generate weekly income. They never talk about the low expected value of this option strategy. One bad trade can wipe out weeks of profits. In this trader's case, one bad TSLA credit spread trade wiped out his $30,000 account. He was one of the lucky ones. Other TSLA credit spread traders report in this thread losses of $300,000 or more.
Why did this trader, knowing he did not have the capital to buy 500 shares of TSLA @$410/share if assigned on his puts, fail to exit those puts prior to the close of the regular session? Why wasn't he monitoring after-hours trading? How could he not know the risk of assignment from larger moves in after-hours trading? This type of risk is identified in the mandatory risk disclosures.
I am glad you added a link to this video in your second "options for beginners" video. As soon as I saw it come up on screen I paused the one, and played this one. Made me very glad that I opted to watch more of your content before jumping in to options trading. coming from stocks and forex, I was already thinking about doing something similar to this, the only thing that keeps putting the K-bosh on getting a solid plan formed around having multiple positions open like this was that whole "could be assigned" mixed with the fact that each contract can be exercised for 100 shares of the stock it represents. I figured a good way to plan for that eventuality is to make sure you have enough money to cover an assignment, should it happen. It seems you can never know if, or when, an assignment will come your way, because you never know when the person on the other side of the trade is going to exercise or not. I haven't seen any videos of anyone doing it yet, but I would also assume that there are people who buy options specifically to exercise them at a later point in time, since options are a much less risky way of going about buying stocks. As a stock buying strategy I can see this being a great way to secure a position in a stock without having to actually own any of that stock. I think this is probably what happened to this person, unfortunately, and the person that exercised the options, more than likely does after hours trading quite often and was waiting for the stock price to drastically change in the after hours market. If the price didn't change, no big loss on their end, if it did change to a favorable position then they exercise the options the bought and now have a very favorable position in the underlying stock that they were already planning to be in. If any of that made sense. If my perception of the situation seems a little weird, I apologize. I have never traded options on a real account, and have only done a couple of trades, more than 2 years ago, on a paper trading account.
This type of thing seems WAY under-discussed on options training videos. When the confirmation window for a spread purchase pops up on the screen, it should say something like "Maximum profit $1500, Maximum loss: $500 (or 13X your net worth)." People new to trading and who may not fully understand the intricacies and protocols of expiring options put a lot of trust in the safety net of their spread. And the fact that this huge price movement occurred half an hour after market close on the date that the options expired makes the whole thing smack vaguely of collusion and predation. Thanks for posting.
The ironic thing is, if he was allowed to keep his Tesla shares to this day he would have doubled his money!
If he had 205k in his account when he was assigned.
Well that's the risk you take when you trade options as opposed to owning shares :L
If only we could all buy stock with money we don't have.
@@shibity you can, just take out a personal loan for 15k when the market crashes and use margin to leverage at the money leaps options on blue chip stocks xD
@@swordsdboss options are not stocks
This past Labor Day, I learned to close out all positions before a holiday weekend😂
Had I done that, would of locked in 1900. Instead I'm down to 300 😭
This is now the adult homework so to speak haha. Nice
Why over a holiday weekend?
@@johnwaas4864 more days for shit to hit the fan
Do tell!
This is KEY!!! I need to look at this 1 more time. Rarely to people explain this side.
Do you think you can make a video about moving averages and how you can use them to help manage your positions?
Never, I repeat NEVER let options expire worthless. Close all legs at least 2-3 DTE or at 85-95% of max profit. It's not worth it holding onto expiration because we are living in unprecedented time. Learn to understand risk. After-hours and pre-market will either make you or break you during these volatile markets.
I agree I always close when a put is around 0.25, not worth keeping it on Friday till the end
@@xxxs8309 around 0.25 leaves way too much juice in. I default to 0.05 ..hell, my opening trade some times got that 0.25 to milk on. But sure, always close before exp.
@@johto I do that sometimes but all it depends on the strike price , if it is above 60, there is no point in keeping the trade on unless you are very comfortable with the stock.Two weeks ago I sold 12 puts on OTRK with 60 price strike at 6dollar each now they are worth 0.5 and I'll close the trade at 0.25, with a realized gain of almost 7000 dollars,I'll sacrifice 300 dollars that's fine
@@xxxs8309 Sure, its about the % 👍
Yes!
When you setup your vertical spread, RH would tell you whether you have enough leverage. How come their leverage calculation didn't protect the individual from this unfortunate event?
Good lesson about always closing options before expiration. Not sure why anyone would buy 5 x $1 wide spread rather than 1x $5 wide spread.
This exact same scenario happened to me. Still can't believe these wrongheaded rules even exist. OCC listening?
Some facts:
- S&P released critical index information while the options markets were still open. That is potentially illegal and is never supposed to happen.
- A seemingly very safe $1 wide spread disappears only in after-hours and assignment occurred. This rule appears to be completely asinine. Again..OCC ?
I probably have not been trading options quite as long as Chris but I am far from new. I would wager that very traders even know this potentiality is even possible. It shouldn't be!
a game that is designed to cultivate on beginners.
If you don’t understand this can happen, you should not be trading options! It’s very basic stuff. Nobody reads all the details you are ‘required’ to read before requesting options level in your account, then they have this shit happen and freak out. A short leg is always RISK. What’s the very first rule of trading (anything)? Always control your risk!
@@gavinliu2121 But beginners are TOLD that, repeatedly. But they get all goo-goo eyed over hearing about 500% profits in one day. And that’s entirely possible, hell I’ve had trades make over 10x in half a day, sometimes even in 15 minutes. But risk is always lurking. Nobody is preying on anyone else, it’s just a very vicious game. If you don’t understand the rules, and the possibilities, don’t play!
@@brucea550 Okay Einstein LOL
@@barrycw1 I’ll never be able to say ‘the exact same scenario happened to me’. I’ve had my share of bad trades, but not over simple details like letting expiring short options go into afterhours. There is so much free education available, nobody has an excuse for doing something that crazy.
As soon as you say things like “ A seemingly very safe $1 wide spread disappears... ” and then try to blame the clearing house or the broker, it shows you haven’t educated yourself about options and trading rules. The trade didn’t vanish, it played out according to the rules you didn’t understand. Not trying to make you feel worse about it, but it gets old hearing people try to blame the ‘system’ that they didn’t understand.
You should also talk about scenario where the stock gives out dividend. The short leg could get exercised early (like before ex-dividend date) even though the short leg still has extrinsic value. In this case the extrinsic value is less than the dividend, so it's make sense to exercise the option.
Right, that's an assignment scenario, but that's a different discussion than what is going on and explained in this video.
@@projectfinance Yes, let's not make this confusing.
And just so if anyone wondering about early assignments due to ex-dividend dates, you dont have to worry about it when you have a credit put spreads. That's why I like them over debit spreads. Because, you are always obligated to buy if the short leg is assigned.
I just received a notification from Robinhood (12:24 am EST) that i was assigned in the short leg of my spread.... Why it has to be at this time?....i exercised the long leg right away!!!
It sounds like robinhood sucks
How could you. RH told me they could not!! Or are they lying to me?
I think what we should consider here is, that "at expiration" should not be defined with market close. Rather you should consider 4:30 pm your "expiration" so - if you own a contract DO NOT COUNT ON THE CLOSING BELL and CLOSE your position. PERIOD. Even if it costs you 2 Dollars per contract fee, it's much better to close a position than having assignment risk.
What if, on that day a company is giving news after the closing bell? then spread you owned one minute before market close, that had a 99% profit turns into an afterhour nightmare.
ALWAYS close your option positions esp. spreads, when they are nearly at the full profit.
If the option has CASH SETTLEMENT it's a complete different story ;)
Exactly why you always close it out at end. Even if you have to spend a little extra to not achieve max profit never want this unnecessary risk.
True man, Just posted a video about my biggest losses on my channel if youre interested, id love to hear your feedback
Thats why I like Covered Calls. If for some reason I get assigned after close day of expiration it means I met maximum profit. For Spreads and Iron Condors Tasty Trade teaches taking profit @ 50% on 45 DTE positions. Around 21 days evaluate the trade and decide to take profit, roll it out, or hold on for little while longer. I will even take 25-30% profit if it happens in the first two weeks.
Always assume that it best to take profits early and reset with a new trade. I really hate holding on to any trade to day of expiration (exception being Covered Calls - If there is no profit rolling out why close the Covered Call?).
Good video. Found it a bit weird you used CT when the exchange is in EST.
Wow I lost 5050$ same day I got assigned for tesla puts 407 and 406 debit spread. 1 contract out of 5. I got an email on sept 11 after hours and after a week. I can share the screenshots with you. My options were exercised after midnight I think but I’m it’s not before 5.30. In the video u said 4.30 but in my case it’s different. I was told the cut off time was 5.30. I didn’t see the shares till the next day. I think I got assigned in the midnight.
Sorry to hear you suffered a similar situation. The time zones in the video were CT, not EST. 5:30 EST is the cutoff time. And you wouldn't see the shares until Saturday because the brokerages don't get the assignment notices until late Friday night.
This kind of thing should not be happening at all. Options regulatory council needs to prevent this kind of thing. The ability to exercise an option should depend on the stock's Closing price at 4pm on expiration Friday especially since a trader cant trade options on stocks after 4pm. What happens to the stock price after 4pm should be irrelevant. It is stupid and very costly. Something needs to be done!
It's part of the trade, the buyer of the option can decide if they exercise the option. And they can do so basically whenever.
It's pure convenience on the broker side that they default to exercising the option if you are in the money.
Also funny enough what you described as the solution caused this whole accident. The 409 option wasn't exercised because the closing price wasn't in the money.
As a rule of thumb one should always close option positions manually before the last day as the huge volatility works against you as the option seller.
A maybe better solution would be to have no separate exercise cutoff time, however I can't comment on that as I don't have any competence to discuss that part.
@@mwfiaedev5835 The short strike wasn't ITM either at the close on Friday. However, both the long and short strikes went ITM on Friday (after hours)after it was announced that TSLA would not be included in the S&P 500. The long option should've been exercised automatically by the broker and the person would've never suffered the big loss.
I agree! Options expiring on Friday’s should have the same cut off notice for the underlying share price when normal market hours close. Seems very unfair for the options to be exercised in the after market hours and nothing can be done with the options
ricomajestic remember, the option is a contract - it gives the right of exercise to the purchaser, not to a broker, so a broker can’t exercise. They should all at least provide instant alerts to the client if an option goes in the money in after hours on the expiration date.
@@TochkaZreniya Actually that is not true. Most brokers will automatically exercise your option at expiration in a situation like this if it is in ITM unless you tell them not to. At least that's what TOS would do.
Hello, this is very usefu l information, thank you very much. What I didn't understand well is that 409 is expired for good, trader couldn't exercise tomorrow when market open? It was very last day of option right?
That's why you should always buy to close sold options before market close.. Pointless risk. What if there is a black Swan event after hours Friday and you sold puts that were worthless at 3:55pm friday but then go up massive after hours. You can destroy your account for no reason
Isn't the broker responsible for not utilizing the protective puts automatically in this case? He may have a case suing the broker. They could clearly see what was happening and should have looked out for their client
Trade SPX spreads, cash settled to avoid being assigned
Great video!
Scott Sheridan at Tastyworks has been saying this for years to Tastyworks customers!
NEVER EVER leave an OTM spread on to expire worthless!
This is why Tastyworks has free/zero closing commissions.
Even still .. Scott would take care of this.
One side of a credit spread is for insurance. One more thing for insurance is to put in a limit order for a
$0.00 debit spread to close. This will close the trade when the market closes and it becomes worthless.
Curious how the lawsuit will pan out assuming one was filed? .. Any exercised option should generate an _immediate_ notification. They can't claim it was the ignorance of the trader if he literally had no way of knowing until a notification was received hours later. Hope he gets his account back.
Biggest lesson learned from this: Never hold to expiration
Great video man. I have a small group comprised of some newer traders and we talked about this extensively. You literally may have saved someone's life with this video.
Wow I never knew they can exercise after market close
Yes market closes at 400 pm but you can still trade up to 415 pm
@@charlierobles316 but you can't trade options after market close
I knew they are exercised/assigned after hours, BUT I did not know the price they use is the aftermarket/extended hours price not the price at the close of trading. Tricky!
@{Forbidden.Knowledge} That's not the point - the fact they used the aftermarket price and not the closing price at 4:00 ET to determine ITM/OTM and they did not exercise his long position which would normally hedge the short position. Not many traders realize this.
@@chrisguli2865 They still use the closing price to decide what to automatically exercise. If you own calls or puts you have the right to exercise them at the strike price. It doesn't matter the reason why which might not necessarily be related to the underlying price.
I had no idea about this thank you so much for this video. You are the only one I’ve seen talk about this.
Glad it was helpful!
I always close the risk side of the spread now, before market close on expiration day.
That’s crazy. I didn’t know that. Always thought options expire right at market close. I guess if he was aware of the after hours move he could have exercised his 409 put, after he was assigned...?
Daniel Salvaggio he should have in advance...
@Dam Winchester Not having 100 shares should not be problem, you are just short 100 shares. And you could always buy 100 shares anyway.
Thx for the video. I’ve known about options being exercised for ITM options based on after hours trading on Friday’s but wasn’t sure of the cut off time. Thx for confirming it is 430pm central time as the post market continues to trade till 7pm central time.
THIS IS ONE OF THE BEST DISCUSSION ON OPTIONS TREADING RISKS! I HAD NO IDEA ABOUT THIS RISK,
SPX - can’t get assigned.
Let's say you are the buyer of the put options contract that was OTM market close, but becomes ITM after hours, how do you exercise the Right to Sell after hours? I have not been able to buy or sell any options after hours before, so consider your the counter party on this scenario, how would you exercise the option after hours?
My guess is they wont allow you to excercise, citing some other rule
Thank.
I am with TD ameritrade & sometime i want to close my options before expirations day for but to close may be even 0.02, it does not work. I end up calling the trade desk to close.
any suggestions?
Thanks for your amazing explanations in all video.
Very good explanation. Very understandable. I didn't know about little details like options being vulnerable to 'after' market moves on expiration day until it happened to come up when I was asking my brokerage other questions.
Always close out all spread positions before expiration (debit or credit spreads). You don't want to get caught in no-man's land between the strikes, or in situations like this . Closing out the positions eliminates much headache and grief. Also, in this case, TSLA is notorious for a lot of after hours volatility, but any stock is subject to after market swings - all it takes is a bad news item or some tweet by the CEO to cause havoc, and your DOTM spread is suddenly DITM and you're in DS!
Looking at the volume of TSLA, you would think that this affected all the brokerages evenly. But it mainly hit RH and maybe a few very small option brokers. You would think it would hit Schwab or TD or fidelity big time also, but I have not seen anything much from them. My guess is that RH and these smaller brokers did not have the software or network to handle this huge volume and everything got bottleneck. So instead of accepting fault, they're trying to use this small loophole and force their clients to take the hit. I really want to know if the OCC sent the assignments to SCWAB or TD in time, but not RH? If that is the case then these guys dropped the ball
Similar, but not same for me. Had 4 GME call credit spreads $59/60 (max profit $120 / max loss $300). Figured I'd let it expire worthless. Wasn't thinking about being assigned...was assigned the day before expiration in the morning (wasn't mentally prepared w/ a plan had it happened so it was fly-by-hip). The worst part was GME was trading around $360-400. Called to get guidance...had to close my short Calls, -400 shares, prior to exiting Calls (was bearish and ideally wanted to close Calls first).
So what happened after I closed my short shares, at $366, the stock plummeted in minutes under $300 and the Calls tanked, but didn't realize how large of a monetary amount it was. -$28k in a minute.
Called TDA to reverse/bust the trade, but being that it took too long to reach them, they couldn't and they auto-exercised at -$62k.
Other part that sucked was the first rep knew my intentions to exit the trade w/ just a max loss. In hindsight now, I know I could've exited together just as if I had a regular spread.
Had they recommended that, I wouldn't be having to let my account go to collections for such an insignificant spread.
Btw, I was never risky and my account was only valued at ~$7k at the time. So essentially, I owe about 55k, which I wouldn't and don't have any money to pay. Sigh...dumbest mistake ever.
@@ajtam05 How can you be assigned before expiration? Stop lying please.
This is a great example of why most people should never do $1 wide spreads. Trader would've been 80% better off with just one spread of 410/405 puts... you probably get a better fill with a $5 wide spreads too, and lower overall fees.
What if the trade was running at a loss until expiry, but was going to expire worthless at closing bell... Why would anybody close a trade in that situation?
When you say to close selling options, is it enough to close 1 hour before the expiration day ends? Also, this true only for selling, or buying options as well?
This is so sad 😞, I try to close all positions before they expire. But I am always stressed about spreads...thanks for this video 👍
Same issue here. Sometimes spread can be quite high. As no one trading that option pairs.
Before expiration, with the extrinsic value, the option is rarely exercised. However, what if it does get exercised for any unknown reason, what is the solution? Can we exercise the other leg of the spread too to get out of trouble?
Even if the option was exercised after hours, why wasn't the closing price used to execute the trade instead of the after hours price? The option expires at market close and that determines weather it is in the money or not. Lots of companies announce earnings after the close and the stock drops after hours. If exercising after hours, at the after hours price was a thing, countless traders could get screwed that would otherwise be protected
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Now, would the broker have given this guy the proceeds (profits) if Tesla would have gone up 50 or 60 dollars on that Monday when he was forced liquidated? I think not, but they were fast to take his account balance...
Someone else asked this below, but no answer yet: "Could this same thing not also happen if there was a mid day flash crash, where there was a large selloff, where one side of the vertical is exercised and then a recovery before you realize your option was exercised ?" Is the broker required to handle this automatically, by exercising your long option ?
What a nightmare.
Great lesson and video. Good job for posting this!
Thank you for this video. great video. same thing happened to me. whn i sold aapl iron condor. i had to buy 1000 shares but short 1000 and covered the position.
This guy came into the trading fraternity’s live stream the day of and brought this up. He got shafted.
That was him? Lmaoo
I was just wondering if it was that guy 😂
oooooh, it all makes sense now. Everybody was confused lol. Ouch
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Very good informative video, also I have a question : If it was a diagonal spread i.e. the buy option expiration date was further than the sell option expiration date could this also happen ?
A time spread only protects you in as much as the long option would gain some of the mount of the market move. You would end up with a long position in the shares and would have a long OTM put that was already paid for by the sold premium of the shorter-dated put. As you wouldn't exercise an OTM option with remaining time value you are never safe from being assigned on the short near-dated put and ending up with a position.
So this is like how much juice do I want to squeeze out of the lemon? If I try and max juice my diamond hands get too slippery and the lemon slips out of my hands and knocks over the juice bowl. No juice for my lemonade. But if I close before 1p Fridays, these citrus hands will have a sweet glass of lemonade?
Either close before expiration or make sure the long option has a later expiration date which is well worth the extra cost.
Good Video. I have been greedy lately and not closing OTM options to get the extra $5. This is a good reason follow the best practices.
Same shit happened to me... I usually won’t close out worthless options to save on commissions. But after hours I was assigned. Really sucks.
Man, Idk who this happened to, but God Bless them, that's absolutely sickening. Thanks for sharing this though man. I trade weeklys with few days to expiry with low touch probs over and over and let expire. I didn't even know this was possible to get assigned after hours!
Reminds me of an age old elderly advice.
'In life it's important to know what to do.
Even more important is to know what NOT TO DO".
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Thanks for sharing this info. Projectoption you are good you lay it out as it is.
Thanks for the warning.
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Some times I think 30,000 subscribers should chip in a dollar each for this account holder.
I would
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Thank you. As a basic rule, trader shouldn't wait for the last minute on expiration day when one side is tested, especially with such volatile stock as Tesla. It's simple risk/ reward calculation. Credit spread gives only defined reward and undefined risk.
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This type of thing can happen with Tesla, but there are some companies that it's quite unlikely to ever happen, depending on how deep OTM the option is. But good video.
Thank you for making and sharing this invaluable video. Now I know what NOT TO DO. I will certainly CLOSE OUT POSITIONS BEFORE EXPIRATION!
Very good info , thank you 🙏🏻
Hi don't understand just recently had to iron Condors going on Google and Adobe.8/28 expirations 1 contract on goog and 3 on adbe, was assigned . received $5 credit for 1560/1550 1420/1410 and 452.5/450 420/417.5 $1.68 credit. Never close the positions and was assigned.
The stocks closed at roughly 1650 and 530 . Sweating bullets that Weeknd. Waited until Monday and check my account. But in the end lost $500 on Google and $ 270 Adobe. This was expected. Don't understand how the brokerage firm could have done what they've done to that person.
Lawsuit for sure. All itm long options are exercised by .01
I am so grateful watching this video. Thank you so much for making this video...
Thanks for watching. It was the necessary thing to do. This is an important video.
So you should close all spreads before expiration?
Yes, I'd recommend that.
Thank you 🙏 I never knew about the possible assignment post trading hours, you possibly saved me a big chunk of change
More Questions:........I know there has to be two sides of an Option, The Buyer and the Seller.......... In this situation, only concerned with the 210 Puts:........The 210 Short Puts expired OTM at closing, and then dropped down ITM after closing.......... The Seller( Our Trader Here ) was responsible for the 210 Short Puts for an extra 1-1/2 hours after closing, and he lost, and it is Terrible........ I thought the Buyer in this case, owned these 210 Puts, and they were Long 210 Puts to him since he bought the 210 Puts, and his 210 Long Puts were supposed auto-exercise to him at closing(or when the broker decides to take action)........But is the Buyer who actually bought the 210 Puts actually receiving the benefit here?......Or is the Broker not even telling(by waiting to Exercise, or Not to Exercise) the original Buyer of the 210 Puts anything because the Buyer's Long Puts were supposed to Auto-exercise here,,,,,, and now, The Broker, acting upon themselves to profit from this rule?....
If this is true, then are Brokers really making the bulk of their money after the Market Closes, when there are big gaps down or up?......and waiting to see which way the stock price moves……..
Question 2: Could the Broker who is constantly monitoring have done THIS in this
Scenario as presented by ProjectOption:…….
Concerning the Buyer of the 210 Short Puts:…..
1 Wait within their prescribed time to Exercise the Buyer’s 210 ITM Put Options that
Closed ITM……
2 Decide not to Exercise the Long ITM 210 Puts the Buyer owns, who also could be
unaware of anything, and is just happy not to be assigned by the Broker….
3 Don’t Exercise the ITM 210 Puts to the Original Buyer that were long at the Close…..
4 Take the place of the Buyer and force the Seller(Our Trader) of the 210 Short Puts to
Into this terrible situation, because they know the size of his account?.....
Or maybe am not really understanding!!!!! Thank you for any explanations!!!!!!
I didn't follow everything you said/asked. It's not the brokerage going against the trader. It's another trader who owns the 410 put that exercises it, and they could be with any brokerage/institution. It doesn't have to be the same brokerage. The brokerage simply facilitates the transactions of trades and exercise/assignments.
Great tip Thanks !
Wow this story definitely worth some time to digest. I want to ask about the automatically exercise rule. I thought any long option that is ITM by at least $0.01 will be exercised automatically without the buyer to submit the request explicitly. So if my understanding is correct (please correct me if I am wrong), whether a long option will be exercised automatically is determined by the Friday regular hour closing price. What happens after that time will not change the status of an option in the OCC system. The buyer has 90 minute more to choose to act against the automatic rule. Is my understanding correct?
You are right, valid point. Strage is that brokarage did not automatically assign his/her long PUT which became ITM after hours..
@@luckeblack9139 I guess you meant did not automatically exercise his/her long PUT?
Shouldn't the 409 put excersised automatically and simultaneously by the brokerage when the short 410 put was excersised
Great video. Would there need to be enough liquidity in the after hours to find someone to sell 500 shares? Probably not a problem with Tesla in the after hours but how about a lower volume stock like XOM or a bank with less AH trading.
I lost 3000 USD when my maximum lost should be 20 USD. I open call credit spread ITM for NKLA (my first call credit spread ever). Literally first day I was assigned -100 shares of NKLA. I had that trade open for 2 weeks. Surprise surprise one month later fee for shorting those 100 shares cost me 3k. Brokerage firm intrest for a few days was 1000 percent. The most expensive trade in my traiding history.
Why would you place an ITM call credit spread?? You’re already playing with fire. Second, did this all happen on a Friday after the close?
Excellent video. Thanks for the heads up.
if this person did not exercise the long put, the short put will still be protected even though he got assigned, correct? Thanks
I did the same thing with Tesla Put credit spreads. I ended up losing about $8000 when the put went in the money on the last day of expiration
I had that happen to me before the expiration date and the stock did not have dividends or splits so why would the brokerage excercise in the money a day before expiring. The ticker was NET and this happen just about 31st of march for a callender call spread in the money long call. The next day the short call also got assigned at the end of the day.
Just looked at some porportional out of the money puts on TSLA expiring this Friday and the bid/ask spread was 1$. TSLA itself may have been part of the problem as trying to close out a profitable trade looks to be a painful operation.
It wasn't in this instance since the options were held through expiration and the trader did not attempt to close them.