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.
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.
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.
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!
*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!*
I believe research shows it lowers win rate slightly but raises your avg profit per trade by reducing losers. Somewhat counterintuitive but still well worth doing.
Why didn't the brokerage auto exercise his protection leg in a spread? They automatically liquidate the shares but didn't auto exercise when he got assigned?
The brokerage has a lot of rights but if its their policy to auto-liquidate they should have done it. This was just stupid of the brokerage because it will hurt them in the long run.
@@matthewscheifer1169 The clearing house, not the broker, executes assignments. Notice of the assignment wasn't sent to the broker until after the cutoff time for exercise. Stop blaming the broker. It was the trader's fault for (1) not reading the assignment risk disclosures, (2) not knowing the broker's rules for automatic exercise and the notification deadline for exercise, (3) not closing his short puts; (4) not realizing that each day and every day that he holds a short option, he is at risk of assignment, not just during the hours when options trade, but up to 90 minutes after the close; (5) failing to realize that the notion that the maximum loss on a credit spread is the spread minus credit does not take into account the possibility that only the short leg is exercised. There's more than one way this could happen. E.g., what if the stock settles between the strikes?
@@kenneth6847 The trader was stupid for (1) not bothering to read the assignment risk disclosures, (2) not closing his short puts; (3) not realizing that each day he holds a short option, he is at risk of assignment not just during the hours when options trade, but up to 90 minutes after the close; (4) failing to realize that the notion that the maximum loss on a credit spread is the spread minus credit assumes does not take into account the possibility that only the short leg is exercised. There's more than one way this could happen. E.g., what if the stock settles between the strikes?
You're a really great guy making this video and probably avoiding big losses to who knows how many traders. The world needs people like you. My most sincere appreciation
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.
If near to expiration and the option premium is usually zero cost, it is hard to close the position as no one is going to buy to close it. Beside, it may incurred additional commission if we close it during or expiration day. Then what is your advise on this?
But the commission is a lot cheaper than the alternative. Typically, you can close for a few cents a share. And sometimes I'll put a closing order in a few days early with a Good til Canceled. After that is fingers crossed. And if it's just not closing call the broker and ask them not to assign.
Yes, you pay all those things you mentioned. But that’s still better than getting assigned. I would think to do it maybe the day before if the stock price is really cutting close.
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)
@@ngphil11 Technically this applies only to the short leg of the spread, because that's the one you risk assignment on. Obviously, you can't be assigned on the long leg because you own it. But what is more common to do is to simply close all legs of the spread as a vehicle. In a Credit/Debit spread what this does is trigger a "Buy To Close" order on the short leg and "Sell To Close" on the long leg. But, getting back to your question, if you elect to close only a single leg of the spread to avoid assignment in extended hours trading, then you should "Buy To Close" the short leg.
Philip Ng I’ve let short positions expire worthless successfully but there’s always that chance that they could end up in the money, especially with stocks that are capable of moving the way Tesla does. I had a Facebook credit spread a couple weeks ago, and it changed direction right at expiration so I bought it back. If I hadn’t I would have been in trouble. It ended up in the money at market close. Only you can make that decision. Do your homework. Pay close attention. And preserve capital. Good luck.
Kevin Stone VERY helpful answer! 1. Using the video example, but say the market is moving in MY favor, strongly, so I decide to let them both expire worthless. BUT, after the close, or very near to the close, a SIGNIFICANT news announcement hits, i.e. War with Chyna!, or whatever. And say similar or even more massive drop of TSLA, post close (eg. they lost their giga factory there due to extreme stress on international relations). I assume things could even be worse, correct? 2. What if my power and/or internet goes out an hour before close, i.e. power out due to storm, and ISP out due to whatever; ur just likely screwed right? I’ll try cell phone order submitted but dicey for sure. 3. Setting a Stop MARKET on the short strikes seems like the only and best answer, as I was intending to trade a 50 point wide SPX credit spread, or two of them, i.e. Iron Condor. My only remaining challenge, seems stupid I am sure, but I haven’t yet figured out how to put that stop in at 2X my Initial Credit, using ThinkorSwim, TOS, I just don’t know how to mechanically enter it, and so far, tech support not helpful, any screenshot example most appreciated. 4. Why would anyone trade TOS and pay those option commissions when Robinhood is free??
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?
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
I wish you expanded on this video and unexpected risk. I have 2 questions: 1) I thought in the money options are automatically exercised. If options can be exercised after the close into after hours trading, why would his other protective option not have been automatically exercised? 2) Is there no way to tie such an options trade together such that if one is exercised the other one is exercised? Because 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.
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.
Thanks for the content, but I am confused, the 409 long put should be automatically exercised before 4:30pm. Why does it require the trader to confirm this exercise? Thanks in advance.
General rule: Never hold options to expiration, especially spreads or other complex option strategies. You run the risk of asymmetric execution during after hours trading. This can lead to devastating losses even if you think you've hedged. ALWAYS close out your positions unless you're perfectly fine with EVERY POSSIBLE OUTCOME that can happen during after hours trading.
Wow, what a horrible scenario! THANK YOU for this video! I also noticed you have replied to literally dozens of commenters...even duplicate questions, very honorable! THANK YOU! Just subbed 👍
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 👍
@@vking4535 With my brokerage at least, the strike price does not need to reach the strike of your long leg. If the short leg gets assigned, the brokerage automatically exercises your long leg, regardless if the stock price reached it or not.
Wow this is terrible that this can happen, two things should be changed: 1. Options should not not be able to be exercised after hours on the expiration date. 2. As long as they made this trade as a combined credit spread and didn't make each trade individually, one option shouldn't get assigned without the other one also getting assigned.
This is good to know. Can't trade option BH or AH, I would have assumed too that the contract ends at 4pm est that day. How could they let it exercise even AH, and after one thought option already it is expired. Am just glad it was not me :(
Options can be exercised every trading day, not just expiration day, from 9:30AM ET to 5:30PM ET, Each and every day that you hold a short option, that option is at risk of early assignment. Don't let anyone tell you option are only exercised on expiration day. The risk of assignment was disclosed to you when you opened your account. You need to read those disclosures. As for your notion that "one option shouldn't get assigned without the other one also getting assigned.," what if only the short option is ITM? Hmm? Did you ever stop to consider that possibility? Once the short option is exercised, the spread ceases to exist. If you don't bother to monitor price action during after-hours trading, how will you know whether you should exercise or whether you are at risk of assignment?
@@cpfamily6431 Options trade from 9AM ET-4PM ET, but the underlying stock trades before, during and after those hours, each and every trading day, not just expiration day. Options can be exercised every trading day, not just expiration day, from 9:30AM ET to 5:30PM ET. Each and every day that you hold a short option, that option is at risk of assignment. Don't let anyone tell you that options can only be exercised on expiration day. You also have to consider the possibility that only the short option of the credit spread becomes ITM and gets exercised,. Once that happens, the spread ceases to exist and you are left with an OTM long option. If this was a put credit spread, you might wake up the next day to discover that you have been assigned 100 shares of stock and are now required to pay for them. Do you have the capital to buy 100 shares of the stock? The RUclips option gurus promote option credit spreads as a safe, easy strategy to generate weekly income. These people are only interested in generating ad revenue from their clickbait videos.
Had similar situation occur when I first started selling options. Assignment is late notice and you are paying interest the whole time. Pen risk end of day close on TSLA is a few % so I’m confused why the broker didn’t call to close out the position. I switched to selling on the SPX primarily bc it’s cash settled which is advantageous in so many ways. Sorry to hear what happened to this fellow. Few people know the finer workings of the risk in selling options, thanks for getting great info out there.
Some brokers will warn you to close out your short option (or close it for you) if it gets close to being ITM, especially on expiration day. But your broker is not under any obligation to babysit the your position for you. Why didn't the trader exercise his 409 put himself?
It has happened to me as well, even though stock was out of the money. But I had owned the shares of the stock that I had call spread for, so, my stock got sold. Luckily i was 50% up in my stock position also, the stock changed its direction and was able to buy it back cheap. So no loss for me.
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?
I thought max loss was the difference between the strikes (the spread) - Net Credit Received? How does the fact that he got assigned after hours change this?
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.
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.
You have no idea how much I appreciate this video. I'm very new to options, I've been writing covered calls and selling naked puts recently to kind of experiment, but spreads have my full attention and interest. I have 20 pages of notes on them and the crazy thing is that I still dont even halfway understand them, and I'm not gonna hop into a trade like this without fully understand it. Great video, I subbed.
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.
Nope! Index options like SPX options are European-style which do not have exercise abilities. Since there's no exercising there's also no assignment. The position would be marked to the final cash value of all the options based on the index settlement number that comes out at the time of expiration ("SET" for SPX options).
So, to summarize: 1) Don't use margin or at least be responsible with how much margin you do use, and 2) Close all options positions before close Thanks for the info!
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.
Thanks for the video. Usually I never let a position expire, one time I came close. I was in a losing FB Iron Condor(IC) and I was riding it on Friday expiration. The short call was ITM and I was hoping that the stock would lower to allow the challenge call side to become OTM. In the middle of the day the stock never went OTM and I closed the position for a small loss. Luckily that position stayed ITM especially after watching this vid. Now I will never let anything go to expiration - you are no longer in control of the position after the close/after expiration.
I think you can let the long option expire if it's worthless so you can save on the commission and if it by chance moves in the money you can exercise it before 4:30pm as in this case. Is this correct?
@@rupulstilskin I have no idea. I don't know how to exercise a position after hours. I've been assigned and have exercised a protective option, but never after hours
Because selling a put a little bit over the put that you bought decreases the price essentially. He wasn’t buying a 409 put outright, he was reducing the cost with the short 410 put
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
Great video and good looking out.... Very little discussion about this issue... Another issue/challenge is the inability to close out positions, hence leaving you stuck & exposed!
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.
Could the individual have rolled the spread strategy a few weeks? That's assuming he was informed in time to do so. I'm also learning and just wondering if that could have also helped/worked.
As someone who doesn't trade opinions I have some questions. 1. Is it guaranteed that you can close any option you have sold. Does buying back your option always work? 2. If the answer to 1. Is yes than does that mean that if you buy an option you don't have the guarantee that you can excerise your option? 3. If the answer to 2. Is yes than that means the only way to be 100% safe on option trading. Is buy having the money to be assigned on put options and having 100 stocks of the underlying when selling call options. Is it guaranteed that you sell your stocks when you get assigned on a call option. Or can it happen that you keep your stocks and get a short position instead?
@@williamandreozzi I don't know if that is how it works. I sold a sep 18 5/6 itm put spread on cbrp on sep 4. $1 spread, options prices were such that i had a 5 cent ($5.00 total) risk. Stock price was around $2.00. Short leg was exercised early on sep 11 a week before expiration I got a margin call Fri at midnight. I called my broker, TOS, and had to tell them to exercise my long option. Shares were sold Monday morning. Fortunately the stock price did not move over the weekend. I learned a lesson very cheaply.
In this case they should have, but without knowing the purpose of the puts the broker should not exercise. I sell puts to buy stocks at times and sometimes sell just for the easy money, so it's not really always black and white.
Philip Rollins I would think exercising an ITM put for you client would be a no brainer. very sad scenario, especially if they opened the trade as a spread.
That was a hard lesson to learn there, I feel for the guy or girl but he or she should of just took the 500 and called it a wrap. This is a classic case of doing to much.
@@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
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.
Option are complicated derivatives. Don’t trade option before fully understanding how it works or be the reason you lose more money for beginners watching this video. There’re other ways to simplify the process with the help of an optimum advisory.
It is better to entrust the creation and managing of your trading portfolio to professional, or to create your portfolio exactly like professionals, to follow a large whale like a small fish.
Victoria Kokka Olsen depending on whom you’re asking, Trading successfully can either take up one’s lifetime to master or one big push of luck at an extremely opportune occasion, I’m investing in a fruitful partnership to ensure lucrative tradings on my account.
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.
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.
Always close out credit spreads on equity and ETF options. SPX weekly options are cash settled at close on expiration day at 3 PM CT so you don't have to worry about after hours price moves.
Yeah...thanks for the reminder on this.However, while you don't have to worry about assignment risk, the SPX is SO VOLATILE that it can really hurt you. Especially if you are doing 0 DTE (same day expiration trades). Still it is good to know that it is GOOD PRACTICE to just sell short positions before expiration as a RULE of THUMB
The market isn’t technically closed, it’s just past the “regular session”. You can still buy and trade stocks and technically trade options if your brokerage allows that.
Hi Chris what should you do if you have a long vertical call spread and both calls are in the money? Do you suggest closing out the position before the close? Example long 410, short 420 and the stock closes at 450?
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.
This is why I no longer keep options trades open after the day before expiration regardless of position, too much risk involved that close to expiration. I buy contracts with 2-3 weeks minimum left before expiration and always close my positions 1-2 days before expiration
jabberwocky1969 not necessarily, I’ve had brokers close open calls early on expiration day when the underlying shares are on a run up, screwing me out of profits. I just don’t like dealing with all the negative potential variables on expiration day, so I usually close my weekly Friday expirations on the Wednesday or Thursday before in most cases. Or at the very latest before noon on expiration day, wether it’s a long or short position
Boyer Industries You said the BROKER closed your long call position. Did they, legally, can do it? Why the broker would do it? Are they the counterpart?
**** It's well worth noting that during most of the first 3 hours of the TSLA regular trading session on the 9/4/20 option expiration day, the trader's credit-spread options were all ITM; during that time, TSLA traded down to 372, placing all the trader's options 37 to 38 points DEEP IN THE MONEY! Despite the writing on the wall, the trader did not exit his credit spreads. I suppose he was determined to keep every penny of the chump change he got for selling those spreads.
thank you very much for this video. can it works at the opposite direction? let say he buy an option and the expiration date it was OTM and after hours it get ITM, and the next day it opens ITM. will he benefit from it?
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.
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?).
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.
It depends on if you can take assignment. If you short a put and you have no problem being assigned to take stock, then you don't need to close. If you have a covered call, getting assigned on the short call just means selling your shares. You can't lose huge sums of money in either scenario (assuming we are talking about a cash-secured put). In this spread example, the assignment led to a massively leveraged position and that's why it was a huge problem.
Thanks. Very good cautionary video. But narration could be much less repetitive, and be concise and to the point. For newer traders who may never have experienced this, the excessive repetition of the almost same point, may serve to confuse rather than clarify. Well done, this video needs to be made.
I tried to find this info everywhere. I was never quite sure if 4pm market close was the cut off or not. I never see the assignment on TD until the next day at least. Awesome video on closing out the trade early.
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.
Does this half rule apply to all options or just some of them? As in like buying back your sold options if they become in the money. I watch my puts all the time for this purpose but i only sell SPY puts and always thought its only for index options.
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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?
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.
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.
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.
*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.
I believe research shows it lowers win rate slightly but raises your avg profit per trade by reducing losers. Somewhat counterintuitive but still well worth doing.
Why didn't the brokerage auto exercise his protection leg in a spread? They automatically liquidate the shares but didn't auto exercise when he got assigned?
@@herrickinman9303 but once the trader got assigned the brokerage should have detected that they held shares and an option that was worth exercising.
The brokerage has a lot of rights but if its their policy to auto-liquidate they should have done it. This was just stupid of the brokerage because it will hurt them in the long run.
@@matthewscheifer1169 The clearing house, not the broker, executes assignments. Notice of the assignment wasn't sent to the broker until after the cutoff time for exercise. Stop blaming the broker. It was the trader's fault for
(1) not reading the assignment risk disclosures,
(2) not knowing the broker's rules for automatic exercise and the notification deadline for exercise,
(3) not closing his short puts;
(4) not realizing that each day and every day that he holds a short option, he is at risk of assignment, not just during the hours when options trade, but up to 90 minutes after the close;
(5) failing to realize that the notion that the maximum loss on a credit spread is the spread minus credit does not take into account the possibility that only the short leg is exercised. There's more than one way this could happen. E.g., what if the stock settles between the strikes?
@@kenneth6847 The trader was stupid for
(1) not bothering to read the assignment risk disclosures,
(2) not closing his short puts;
(3) not realizing that each day he holds a short option, he is at risk of assignment not just during the hours when options trade, but up to 90 minutes after the close;
(4) failing to realize that the notion that the maximum loss on a credit spread is the spread minus credit assumes does not take into account the possibility that only the short leg is exercised. There's more than one way this could happen. E.g., what if the stock settles between the strikes?
Because you can't always win, and the brokerage can always control risks on their end.
You're a really great guy making this video and probably avoiding big losses to who knows how many traders. The world needs people like you. My most sincere appreciation
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
@@free322001 If there was a gtc order to close with a reasonable 50% profit then it would have obviously filled well before expiration Friday.
Thank you for sharing the great information. I will remember always always sell my options before the expiration date. Excellent information.
If near to expiration and the option premium is usually zero cost, it is hard to close the position as no one is going to buy to close it. Beside, it may incurred additional commission if we close it during or expiration day. Then what is your advise on this?
So true. Amen
But the commission is a lot cheaper than the alternative. Typically, you can close for a few cents a share. And sometimes I'll put a closing order in a few days early with a Good til Canceled. After that is fingers crossed. And if it's just not closing call the broker and ask them not to assign.
That happened to me. Luckily all were out of the money.
This person needed to BUY back his put, not sell it.
Yes, you pay all those things you mentioned. But that’s still better than getting assigned. I would think to do it maybe the day before if the stock price is really cutting close.
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)
Moral of the story - CLOSE OUT POSITIONS BEFORE EXPIRATION!
I’m new to options; does this apply to both long and short positions?
@@ngphil11 Technically this applies only to the short leg of the spread, because that's the one you risk assignment on. Obviously, you can't be assigned on the long leg because you own it. But what is more common to do is to simply close all legs of the spread as a vehicle. In a Credit/Debit spread what this does is trigger a "Buy To Close" order on the short leg and "Sell To Close" on the long leg. But, getting back to your question, if you elect to close only a single leg of the spread to avoid assignment in extended hours trading, then you should "Buy To Close" the short leg.
Philip Ng I’ve let short positions expire worthless successfully but there’s always that chance that they could end up in the money, especially with stocks that are capable of moving the way Tesla does. I had a Facebook credit spread a couple weeks ago, and it changed direction right at expiration so I bought it back. If I hadn’t I would have been in trouble. It ended up in the money at market close. Only you can make that decision. Do your homework. Pay close attention. And preserve capital. Good luck.
What about if the both legs of the spread are in the money? Do you still close them for a loss?
Kevin Stone VERY helpful answer! 1. Using the video example, but say the market is moving in MY favor, strongly, so I decide to let them both expire worthless. BUT, after the close, or very near to the close, a SIGNIFICANT news announcement hits, i.e. War with Chyna!, or whatever. And say similar or even more massive drop of TSLA, post close (eg. they lost their giga factory there due to extreme stress on international relations). I assume things could even be worse, correct? 2. What if my power and/or internet goes out an hour before close, i.e. power out due to storm, and ISP out due to whatever; ur just likely screwed right? I’ll try cell phone order submitted but dicey for sure. 3. Setting a Stop MARKET on the short strikes seems like the only and best answer, as I was intending to trade a 50 point wide SPX credit spread, or two of them, i.e. Iron Condor. My only remaining challenge, seems stupid I am sure, but I haven’t yet figured out how to put that stop in at 2X my Initial Credit, using ThinkorSwim, TOS, I just don’t know how to mechanically enter it, and so far, tech support not helpful, any screenshot example most appreciated. 4. Why would anyone trade TOS and pay those option commissions when Robinhood is free??
So he had to close his positions before expiration, understood.
Basically lol
but also make sure that the market is open to be able to close the position.
Yes. Good moral . noted.
Its never good to wait until day of expiration anyway, shitty brokerage firm
just the short legs
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?
Seems like a case study warning about risks of trading on margin...thanks for sharing
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?
I wish you expanded on this video and unexpected risk. I have 2 questions: 1) I thought in the money options are automatically exercised. If options can be exercised after the close into after hours trading, why would his other protective option not have been automatically exercised? 2) Is there no way to tie such an options trade together such that if one is exercised the other one is exercised? Because 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.
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.
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.
Thanks for the content, but I am confused, the 409 long put should be automatically exercised before 4:30pm. Why does it require the trader to confirm this exercise? Thanks in advance.
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.
General rule: Never hold options to expiration, especially spreads or other complex option strategies. You run the risk of asymmetric execution during after hours trading. This can lead to devastating losses even if you think you've hedged. ALWAYS close out your positions unless you're perfectly fine with EVERY POSSIBLE OUTCOME that can happen during after hours trading.
I dunno how individuals can feel comfortable with this. What if you go into a coma from a car wreck days before?
@@lakecityransom you can set an activation rule to trigger order/s to close your option positions on a specified date.
Equity options makes sense to closed it out prior to expiration. Index options you will never run into this scenario.
Wow, what a horrible scenario! THANK YOU for this video! I also noticed you have replied to literally dozens of commenters...even duplicate questions, very honorable! THANK YOU! Just subbed 👍
Best video for all who trade credit spreads. Thank you so much.
Newer trader here and you answered many of my questions. Thank you for sharing this well needed info!
It seems irresponsible and negligent that his broker didn't exercise the other leg automatically.
Yap totally the brokers fault
Alejandro Rosario I'm kinda new to options trading..when did your contract expire? On that Friday?
@@beyondfinance7755 The terminologies sound a bit confusing to me. In your case, did TD Ameritrade automatically do the right thing for you?
the broker is not supposed to make decisions for you.
@@beyondfinance7755 just dont fuck with credit spreads like a gay bear and you wont ever have this problem
I will say that the person who exercised those puts was smart. They took full advantage of the policies surrounding options.
Probably the Brokers Algo programmed to take the exact amount available in the traders account..
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?
Can you explain more how you close the position please? Thank you
WOW! Thank you! I was interested in doing complex option trades.... not anymore!
How come the 409 put didn't get automatically exercised?
I have the same question.
Because the strike price never reached 409 that day (Friday) and it went worthless, 409 PUT buy order was invalid on Monday.
I belive that excercise on after hours trading is only manual, you have to do this yourself.
@@vking4535 With my brokerage at least, the strike price does not need to reach the strike of your long leg. If the short leg gets assigned, the brokerage automatically exercises your long leg, regardless if the stock price reached it or not.
@@PoopLoop202 I didn't know that long options that are OTM can also be exercised. How is that possible???
Wow this is terrible that this can happen, two things should be changed:
1. Options should not not be able to be exercised after hours on the expiration date.
2. As long as they made this trade as a combined credit spread and didn't make each trade individually, one option shouldn't get assigned without the other one also getting assigned.
Exactly!
This is good to know. Can't trade option BH or AH, I would have assumed too that the contract ends at 4pm est that day. How could they let it exercise even AH, and after one thought option already it is expired. Am just glad it was not me :(
Agreed something not right about this
Options can be exercised every trading day, not just expiration day, from 9:30AM ET to 5:30PM ET, Each and every day that you hold a short option, that option is at risk of early assignment. Don't let anyone tell you option are only exercised on expiration day. The risk of assignment was disclosed to you when you opened your account. You need to read those disclosures.
As for your notion that "one option shouldn't get assigned without the other one also getting assigned.," what if only the short option is ITM? Hmm? Did you ever stop to consider that possibility? Once the short option is exercised, the spread ceases to exist.
If you don't bother to monitor price action during after-hours trading, how will you know whether you should exercise or whether you are at risk of assignment?
@@cpfamily6431 Options trade from 9AM ET-4PM ET, but the underlying stock trades before, during and after those hours, each and every trading day, not just expiration day.
Options can be exercised every trading day, not just expiration day, from 9:30AM ET to 5:30PM ET. Each and every day that you hold a short option, that option is at risk of assignment. Don't let anyone tell you that options can only be exercised on expiration day.
You also have to consider the possibility that only the short option of the credit spread becomes ITM and gets exercised,. Once that happens, the spread ceases to exist and you are left with an OTM long option. If this was a put credit spread, you might wake up the next day to discover that you have been assigned 100 shares of stock and are now required to pay for them.
Do you have the capital to buy 100 shares of the stock?
The RUclips option gurus promote option credit spreads as a safe, easy strategy to generate weekly income. These people are only interested in generating ad revenue from their clickbait videos.
Had similar situation occur when I first started selling options. Assignment is late notice and you are paying interest the whole time. Pen risk end of
day close on TSLA is a few % so I’m confused why the broker didn’t call to close out the position.
I switched to selling on the SPX primarily bc it’s cash settled which is advantageous in so many ways. Sorry to hear what happened to this fellow. Few people know the finer workings of the risk in selling options, thanks for getting great info out there.
Some brokers will warn you to close out your short option (or close it for you) if it gets close to being ITM, especially on expiration day. But your broker is not under any obligation to babysit the your position for you. Why didn't the trader exercise his 409 put himself?
this same scenario happen to me on the NDX, with a 30k loss. also several times on stocks like bestbuy, tesla etc. i always close short options now.
It has happened to me as well, even though stock was out of the money. But I had owned the shares of the stock that I had call spread for, so, my stock got sold. Luckily i was 50% up in my stock position also, the stock changed its direction and was able to buy it back cheap. So no loss for me.
As an options writer I generally closeout the position before op ex date. It's too risky to let it expire. I've been called in the past.
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?
Thanks so much for the warning! Too bad so many "experts" don't seem to know about this
So you recommend only choosing the short put leg on put credit spreads? But keep the Long Put Leg open at expiration???
I thought max loss was the difference between the strikes (the spread) - Net Credit Received? How does the fact that he got assigned after hours change this?
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.
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.
Moral of the story, Sell before expiration day! This is a nightmare.
Close position on expiration day at the open. That's the moral.
Or even don’t trade what you don’t understand
This is the only comment that matters.
Trade diagonal or calendar spreads instead of vertical spreads
So, should we close all short positions before expiration to avoid this, or only in the 15 min after close if they are ITM?
I greatly appreciate this very rare but possible scenario. Great explanation thanks a lot!
This is why I close spreads the morning of expiration win lose or draw
Close them spreads before expiration, not worth the risk!! 👍
Thanks for being a greay teacher!!!!!
You have no idea how much I appreciate this video. I'm very new to options, I've been writing covered calls and selling naked puts recently to kind of experiment, but spreads have my full attention and interest. I have 20 pages of notes on them and the crazy thing is that I still dont even halfway understand them, and I'm not gonna hop into a trade like this without fully understand it. Great video, I subbed.
"Naked Puts"? Or do you mean cash secured puts.
Trade SPX spreads, cash settled to avoid being assigned
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.
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!
Wow! Very interesting! Perhaps we should manually close ALL option trades before 4.00 pm (EST) on the day of expiration. Does it sound right?
Is it possible for this to happen with index options that cash settle? Thanks
Nope! Index options like SPX options are European-style which do not have exercise abilities. Since there's no exercising there's also no assignment. The position would be marked to the final cash value of all the options based on the index settlement number that comes out at the time of expiration ("SET" for SPX options).
So, to summarize:
1) Don't use margin or at least be responsible with how much margin you do use, and
2) Close all options positions before close
Thanks for the info!
Thanks for the summary
I've always advocated my family and friends to always close before expiration, feels bad for those who let their options expire and this happens
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.
This is very educational, thank you! It makes no sense to me how this can even happen, but it did and that is why the video is so helpful!
Thanks for the video. Usually I never let a position expire, one time I came close. I was in a losing FB Iron Condor(IC) and I was riding it on Friday expiration. The short call was ITM and I was hoping that the stock would lower to allow the challenge call side to become OTM. In the middle of the day the stock never went OTM and I closed the position for a small loss. Luckily that position stayed ITM especially after watching this vid. Now I will never let anything go to expiration - you are no longer in control of the position after the close/after expiration.
I think you can let the long option expire if it's worthless so you can save on the commission and if it by chance moves in the money you can exercise it before 4:30pm as in this case. Is this correct?
@@rupulstilskin I have no idea. I don't know how to exercise a position after hours. I've been assigned and have exercised a protective option, but never after hours
With $TSLA ask and bid how was he able to sell a $1 spread with $1 premium.
Because selling a put a little bit over the put that you bought decreases the price essentially. He wasn’t buying a 409 put outright, he was reducing the cost with the short 410 put
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!
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!
Great video and good looking out.... Very little discussion about this issue... Another issue/challenge is the inability to close out positions, hence leaving you stuck & exposed!
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
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.
Could the individual have rolled the spread strategy a few weeks? That's assuming he was informed in time to do so. I'm also learning and just wondering if that could have also helped/worked.
As someone who doesn't trade opinions I have some questions.
1. Is it guaranteed that you can close any option you have sold. Does buying back your option always work?
2. If the answer to 1. Is yes than does that mean that if you buy an option you don't have the guarantee that you can excerise your option?
3. If the answer to 2. Is yes than that means the only way to be 100% safe on option trading. Is buy having the money to be assigned on put options and having 100 stocks of the underlying when selling call options.
Is it guaranteed that you sell your stocks when you get assigned on a call option. Or can it happen that you keep your stocks and get a short position instead?
@Projectoptions Nice try on copying his profile picture.
Why wouldn’t the broker exercise the leg of the debit spread that the traded bought?
Theyre not obligated to which is BS
@{Forbidden.Knowledge} TDA would have exercised the long; do you know which brokerage he was using; because not ALL brokerages would do this.
{Forbidden.Knowledge} great thing to post here lol
Most likely Robinhood
@@williamandreozzi I don't know if that is how it works. I sold a sep 18 5/6 itm put spread on cbrp on sep 4. $1 spread, options prices were such that i had a 5 cent ($5.00 total) risk. Stock price was around $2.00. Short leg was exercised early on sep 11 a week before expiration I got a margin call Fri at midnight. I called my broker, TOS, and had to tell them to exercise my long option. Shares were sold Monday morning. Fortunately the stock price did not move over the weekend. I learned a lesson very cheaply.
Why wouldn’t their broker exercise the 409’s for them???
In this case they should have, but without knowing the purpose of the puts the broker should not exercise. I sell puts to buy stocks at times and sometimes sell just for the easy money, so it's not really always black and white.
Philip Rollins I would think exercising an ITM put for you client would be a no brainer. very sad scenario, especially if they opened the trade as a spread.
That was a hard lesson to learn there, I feel for the guy or girl but he or she should of just took the 500 and called it a wrap. This is a classic case of doing to much.
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 is KEY!!! I need to look at this 1 more time. Rarely to people explain this side.
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.
Option are complicated derivatives. Don’t trade option before fully understanding how it works or be the reason you lose more money for beginners watching this video. There’re other ways to simplify the process with the help of an optimum advisory.
It is better to entrust the creation and managing of your trading portfolio to professional, or to create your portfolio exactly like professionals, to follow a large whale like a small fish.
Well said Dave, not everyone understands the commitment involved while trading and not everyone is ready to lose
Even now I still welcome all help, literally, any help is good, it can only make me better.
Kimothy Olsen yeah I’m doing alright trading on a managerial position
Victoria Kokka Olsen depending on whom you’re asking, Trading successfully can either take up one’s lifetime to master or one big push of luck at an extremely opportune occasion, I’m investing in a fruitful partnership to ensure lucrative tradings on my account.
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.
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.
Thank you so much for this! I have watched nearly 100 videos about options trading and no one has mentioned this at all
God bless you Chris for this video ! But why CBOE has not adjusted those Loop holes disadvantages to investors ?
Always close out credit spreads on equity and ETF options. SPX weekly options are cash settled at close on expiration day at 3 PM CT so you don't have to worry about after hours price moves.
Very good remark on SPX cash settled, thank you.
Thanks for this informative massage !
Yeah...thanks for the reminder on this.However, while you don't have to worry about assignment risk, the SPX is SO VOLATILE that it can really hurt you. Especially if you are doing 0 DTE (same day expiration trades).
Still it is good to know that it is GOOD PRACTICE to just sell short positions before expiration as a RULE of THUMB
Looks like it is called "pin risk"
That should be illegal. When the mkt closes it should close for everyone.
indeed, my frend
Exactly
it had extended hour , as same as pre-market hour
The market isn’t technically closed, it’s just past the “regular session”. You can still buy and trade stocks and technically trade options if your brokerage allows that.
It does! YOU, Java, call call your broker (3:00 - 4:30 C) and exercise your ITM put just like anyone else.
Hi Chris what should you do if you have a long vertical call spread and both calls are in the money? Do you suggest closing out the position before the close? Example long 410, short 420 and the stock closes at 450?
Hey Thanks for this...Love the content on this channel. I'm guessing the after hours rules apply to index options as well??
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.
This is why I no longer keep options trades open after the day before expiration regardless of position, too much risk involved that close to expiration. I buy contracts with 2-3 weeks minimum left before expiration and always close my positions 1-2 days before expiration
The threat is with short options.
jabberwocky1969 not necessarily, I’ve had brokers close open calls early on expiration day when the underlying shares are on a run up, screwing me out of profits. I just don’t like dealing with all the negative potential variables on expiration day, so I usually close my weekly Friday expirations on the Wednesday or Thursday before in most cases. Or at the very latest before noon on expiration day, wether it’s a long or short position
Yep. Thats a common sense. I thought everybody knew this shit. I guess not, huh.
Boyer Industries You said the BROKER closed your long call position. Did they, legally, can do it? Why the broker would do it? Are they the counterpart?
**** It's well worth noting that during most of the first 3 hours of the TSLA regular trading session on the 9/4/20 option expiration day, the trader's credit-spread options were all ITM; during that time, TSLA traded down to 372, placing all the trader's options 37 to 38 points DEEP IN THE MONEY! Despite the writing on the wall, the trader did not exit his credit spreads. I suppose he was determined to keep every penny of the chump change he got for selling those spreads.
Correct. But either way he should not have owed more than the max loss which was $500 dollars.
thank you very much for this video. can it works at the opposite direction? let say he buy an option and the expiration date it was OTM and after hours it get ITM, and the next day it opens ITM. will he benefit from it?
Yes, if you own an option that is OTM when the bell rings, then the stock moves so the option becomes ITM after hours, you should exercise the option.
@@projectfinance thank you, you have a great channel
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.
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?).
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.
Always need to close positions before closing on expiration
Great reminder!
Even with selling puts and covered calls?
@@TheSupermannbatman yeah for selling puts bit for covered calls would depend of your willing to take the risk of assignment
@@TheSupermannbatman With selling puts especially!
It depends on if you can take assignment. If you short a put and you have no problem being assigned to take stock, then you don't need to close. If you have a covered call, getting assigned on the short call just means selling your shares. You can't lose huge sums of money in either scenario (assuming we are talking about a cash-secured put). In this spread example, the assignment led to a massively leveraged position and that's why it was a huge problem.
Thanks. Very good cautionary video. But narration could be much less repetitive, and be concise and to the point. For newer traders who may never have experienced this, the excessive repetition of the almost same point, may serve to confuse rather than clarify. Well done, this video needs to be made.
I tried to find this info everywhere. I was never quite sure if 4pm market close was the cut off or not. I never see the assignment on TD until the next day at least. Awesome video on closing out the trade early.
simple
close your option trades before expiration. that should be options 101
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.
Thank you for sharing this very heavy lesson Chris! This a great video that all new options traders need to watch and take to heart.
Excellent video. Thanks for the heads up.
Does this half rule apply to all options or just some of them? As in like buying back your sold options if they become in the money. I watch my puts all the time for this purpose but i only sell SPY puts and always thought its only for index options.
Thought my video was glitching in the beginning