How do American style option spreads work in IRAs

Discussion in 'Options' started by vanv0029, Mar 16, 2019 at 9:06 PM.

  1. vanv0029

    vanv0029

    This may be a stupid question. I could not find an answer. What ifthe ATM short put part of say a 5 point bull put spread is exercised in Schwab IRA. I am approved for level 2 option trading and have plenty of liquidating value in my IRA, but not enough cash to buy the stock. if American style puts such as BA are exercised, I can always just exercise the long puts, but how does the timing work. Say the buyer of the put exercises the short put at market close. Will I be able to exercise the long put still the same day? I assume Schwab would not randomly sell my IRA long stock positions in the after hours market, right? I can avoid the problem by trading only cash settled European style SPX spreads obviously.
     
  2. smallfil

    smallfil

    The last day to exercise stock options is on the option expiration date. If you do not have the cash to buy an in the money option, you should simply close out your options trade. In this case, closing out your option spread (both options will be closed), extinguishes your liability. However, if you let your option spread expire in the money even 1 penny by options expiration day, the broker usually, will exercise it for you. Not sure how they would handle it if you do not have enough monies to buy the option.
     
  3. smallfil

    smallfil

    Erratum....Not sure how they would handle it if you do not have enough monies to buy the stock.
     
  4. Jgills

    Jgills

    Call your broker (Schwab here) and ask how they handle early excercise if you’re assigned (go through the iterations you’re conscerned about). If this is expiration you’re asking about, make sure you understand their expiration process. Most places will default to exercise long options in they are in the money, but better be safe and understand from your broker.
     
  5. vanv0029

    vanv0029

    Thanks. I thought there might be some standarized rules for voluntary exercise of the at the money short half of an option spread in IRAs. I think it does not make economic sense for options without dividends, but I have seen it happen. I will ask Schwab. It seems rules are broker specific.