Hi all, Let's say you're trading a long butterfly for SPY with calls (long 415 strike /short 437 strike/long 460 strike). The expiration date is August 20. You have $30,000 in your account. You get assigned because the short calls go ITM sometime before expiration. Let's say SPY is at 445 when this happens. That means you have to buy $89,000 of SPY. But you only have $30,000 in your account. What happens to your money? Can your brokerage firm take your money? or will they just shut your account down and return it? Thanks
Your 2 shorts are covered by you 2 long positions. So you'd be buying 87500$ of stocks/etf to sell them at 89000$.
No, you will not have to buy $89K of SPY. Assuming you got in for $11, your max loss at expiration is about ~$12 (that's at 460; since your fly is unbalanced, your max loss on the downside is a buck less than that) - and at 445, you'd be up ~3.10. Yes, your shorts would be ITM - but your longs would have moved up accordingly. Even if your broker didn't auto-exercise your longs, imagine getting an exercise notice - i.e., you're short two lots. $87.4k has been credited to your account as payment for those calls at 437, and now you have to satisfy them by delivering two lots. You exercise your 415 long for one of the lots and buy 100 shares at 445 (average of 430), then deliver them for a net credit of $1.4k ((437-430) * 2 * 100). Then, you close your long 460 for whatever credit remains in it. Given that you paid $11, you're still up money. Note that it rarely makes sense to exercise before expiration, so it's quite rare for that to happen. The owner of that option would be losing all of the remaining extrinsic value.
Ignoring all the option bits, it would be the other way around: since they were 437s called at 445, he would be buying at 445 to sell at 437. I.e., paying $89k and selling at $87.4k, for a loss of $1.6k on shares.
This happens often enough that brokerages don’t need to worry about liquidating you and you don’t need to worry about being liquidated. They’d give you some time to get back to positive account, though this can look scary, so there are articles about the guy who killed himself when his Robinhood balance was showing negative $750K. Don’t do that You can simply get out by closing or adjusting your positions in the morning. You may lose some money if you get assigned due to dividend, so watch our for dividends or make equivalent trades using puts instead of calls when the expiration comes after a dividend. The profitability will show differently for puts vs calls if there is an upcoming dividend as its already included in put prices, while calls need to be exercised to collect a dividend.
Simple answer is you would show a negative cash balance of $89k but have 200 shares of SPY which is worth $89k You simply sell the 200 shares then to cover the $89k negative cash balance. Unless you have a glitchy broker, your account balance will still be at $30k while all this is happening.
NO, no money will be taken from your account, for the assignment on the short calls per se. When the short call is ITM, you are going to SELL SPY not buy SPY. So if you do not have SPY already in your account, you will be SHORT SPY when and if the short calls remain ITM upon expiration AND you still have not closed the positions. You can still close the short calls if you want to avoid assignment. So instead of spending money, you will actually have more money in your account due to the selling/shorting of SPY that is IF your broker allows you to carry a short position in SPY. Some brokers do not allow the shorting of SPY then in this case, you will have to buy back the SPY to close the short. That's when you are going to have cash outlay which is equal to the (strike price of the short call - market price of SPY ) X number of shares. And if you don't have enough money in your account, then you will get a margin call. But in your case, you don't have to worry. You also have the long calls that will be deep ITM upon expiration so if you auto-exercise them (make sure you exercise the long calls or sell the long calls that are ITM upon expiration) then the proceeds should cover for the short IF the broker does allow shorting on SPY unless your broker is IB. I know IB, in this situation if it doesn't allow the shorting of SPY and if it sees you won't have enough money in the account to close the short, it may liquidate your option positions, i.e. close your short calls. And if it sees that you also don't have enough money to buy the shares for the exercising of the long positions, then it will close your long calls too. So check with your broker. Check with your broker to see if they allow the shorting of SPY and what if you don't have enough money to close the short as a result of the assignment if they don't allow shorting. You need to study options more before you dab into option trading.