Hi, I am new to spreads, I have got one successful vertical where every leg remained OTM. But whenever I lock in a spread for analysis, the thinkorswim platform has a comment, "Max Loss: $xxx.xx (not including possible dividend risk)". I do not understand this. 1) Can a stock get assigned to you if you sold a vertical spread and the final stock price ended up in between your sell/buy brackets? 2) If it's possible for a stock to be assigned to you in the scenario above, what happens if you don't have money to cover underlying contracts? THANKS
1-Yes 2-Margin call-exit the position the next day-(Hope you don't have a broker that will do it for you)
Because it is not required. Regulation only requires that you meet your call. Risk is a concern of the clearing firm and your broker. If there is little risk, why would I need to liquidate an account if the client is compliant . What if you were to wire in money the next morning to meet the call? Why should I liquidate you?
No. Each Broker has Written Supervisory Procedures (WSP) that determine what they must do. Institutional brokers tend to give more leeway in their WSP. Large Retail brokers find it easier to manage with automation.
Okay so it doesn't necessarily mean there's an issue with the broker. I guess my question more directly is why you had written: "Hope you don't have a broker that will do it for you"
If I have a margin call but have not lost money, why would I prefer my broker to liquidate my positions with a cost to my money if I can do it myself?
I don't understand your comment. When an asset is on the move against a client position, once all margin is depleted the risk now starts to be carried by the broker/clearer. That also means other clients start to be affected. A prudent broker should always get a client out of a position immediately as soon as the client cannot right away meet his margin requirement anymore. A day later the broker and possibly other clients may be saddled with a huge loss that the losing client may not be able to cover even through legal avenues. I want my broker to immediately close positions of other clients that cannot meet their margin obligations anymore. Not wait and take on risk but cut right away. A client knows and can see at any time what the margin cushion in his or her account is like. It's entirely fair of a broker to cut positions right away when the margin cushion is entirely depleted. After all a client can reduce his exposure at any time during trading hours.
In his example, that is not what he asked. He asked what happens from early assignment from a vertical call spread. That means you end up being long call and short stock, which is a hedge position with a limit to losses, but in a reg-T account, an increase in margin, that cause a call. Your example is not the same.