Early Assignment On Calendar Spread Question

I'm new to options so please forgive me for this simple question.

I have been studying up on calendar spreads but the one thing that never seems to be mentioned is early assignment. If I am long an at the money calendar spread with the intention of holding it until the day before expiration how much of a concern is early assignment provided that the underlaying remains close to the strike price?

Thanks in advance for any replies!

 

there is good reason for concern...your short contract WILL be assigned if they are ITM..thats why you need to close or roll your shorts prior to expiration. You need to pro actively manage calendar spreads...they are NOT a "set it and forget it" type of option trade.

generally early assignment doesn't happen...however on occasion it does (esp if there is a dividend involved) so you do need to check on it if it is close to the money and if/when it is assigned you need to call your broker and find out the best way to deal with it. (if you didn't plan ahead)

 

Caveat: I don't regularly do calendars, but I have traded a few.

If the short side ever gives you 80%, take it. In other words, if you shorted a front month call at, say $1.00 and it's now worth $0.20, buy it back. Having a standing limit order to do this is helpful.

You're reducing your risk when you do this. Also, if the underlying swings back to the long strike, you're in good shape.

 

Richard and Steve, thank-you both very much for your responses this is a big help to my understanding.

 

Would it be fair to say that calendars should be avoided in the days prior to ex-dividend?

 

1) If the underlying is near the strike price, you will NOT be assigned early.

2) What are you trading? If it's a stock, being assigned early is never a problem. You have a position that is never worse than you had before being assigned.

3) If trading OEX - that's a BIG problem.

4) If you are trading a European style index, early assignment is not allowed.

Mark

 

Thanks Mark, I am looking at trading options on stock. Although I understand that the position would be no worse I am concerned about the option assignment fee ($15 per strike) and commissions of $1/contract for any adjustments that the early assignment would force me to make. Take for example my back testing results for MO in the past 12 months....

$2112 profit
-$690 losses
-$732 commissions
=$690

Slippage has been factored in to these numbers but nothing for possible assignment fees or additional adjustments that would need to be made. It wouldn't take much for the commissions to start eating away at the potential profit.

 

Daaaaaaaamn. Why are your commissions so high?

 

Those commissions are unreasonable. Unless you are a very inefficient trader, the broker is taking too much and you are keeping to little.

Speak with your broker and request a substantial cut in exercise/assignment fees. Tell them that Interactive Brokers charges ZERO.

You may also be able to negotiate lower commissions. It cannot hurt to ask.

Mark

 

What is a reasonable commission for a small trader (300-400 contracts per month)? I am embarrased to say that I already had to negotiate down from $1.50 to get the $1.00 rate.