Hi, I've been dabbling in options for the past 6 months or so, mostly in a paper account with interactive brokers. I want to clarify, if I purchase a vertical spread (multi leg order) am I only ever liable for the difference between the two orders or are there situations where I am liable for the full selling & buying of the 100 contracts? I am mostly trading US and HK stock options (I get index/future options are cash settled already). Thanks
If your short leg gets exercised, you will be assigned and your long leg stays as it is. Assignment risk gets bigger deeper ITM your short leg is, also I wouldn't sell deep ITM calls on stocks that are hard to borrow.
Early Assignments and/or one option leg expiring in the money. 1) Say you have a short call spread. Sold 50 call and bought 60 call. Underlying rises to $55 and gets exercised early . You are now short 100 shares at $50 with a 5 dollar loss and can go up to $10 going to expiration. 2) Say you have a bull put spread. Bought 50 put and sold 40 put. Underlying goes to $45 at options expiration. You are Auto-exercised. What do you have?
So basically if I get caught out on both sides of the underlying through expiration or early exercise I can get stuck with the 100 contracts correct?
Yes. But, don't over simplify it. Practice the calculations. This will pay off. Think about margin requirements, too.
Both. I just wanted to remind you that there may be additional margin requirements upon assignment that could put you into forced liquidation of other positions, if you don't have enough cash on hand. You don't have to be precise for margins, just back of the napkin calculations and a lot of leeway.
What about the same with E mini future options? They're cash settled even if I land on both sides of the underlying correct?
Assuming, your options and the underlying future have the same day expiration. How often will that happen? Futures expire monthly. The listing cycle is even more confusing. Options expire more than bi-weekly, if you count AM and PM expiry options. The CME has gone crazy on contract listings.