Question about vertical call spread

Discussion in 'Options' started by etrades, Jan 6, 2019.

  1. etrades

    etrades

    Hi guys,

    When trading vertical call spread, what happens when the the call you sold goes ITM ? If these are American options, this could get assigned correct ? Does that happen ? and what is the impact of that action on the trade ?

    Thank you
     
  2. Assuming that you're long the vertical, generally the call you're short won't be assigned (if it is assigned) until the option has little to zero extrinsic value left. If assigned, you're then positioned with a riskless Long Call vs Short Underlying.

    If you can't margin the underlying security then your broker may exercise your long call, in which case you'll become flat. Usually that means that you captured the full range (or, thereabouts) of the vertical.
     
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  3. Robert Morse

    Robert Morse Sponsor

    Yes it can and does happen. The result might be a margin issue for you for one day until you can unwind the stock position. It is more likely to happen in stocks that are very hard to borrow or threshold stocks or with a Dividend that the long call wants to capture, as they find more value in the Dividend then holding the call vs Stock.
     
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  4. jonahern

    jonahern

    you exit your winning position?
     
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  5. Robert Morse

    Robert Morse Sponsor

    I agree. If I were to buy a 5 point vertical for 2.00, and it was trading around $4.90 - $5.00, it might often makes sense to close and move on.
     
  6. tommcginnis

    tommcginnis

    Wow. Some crazy answers here. People need to finish their coffee.

    When the call you sold (of your short vertical American spread) goes ITM, your short strike is certainly subject to exercise.

    If exercised, your account is debited for the cost of purchasing the underlying contract(s) at prevailing market price, and then credited for the forwarding of that underlying to (an) option owner at the strike price.

    1) The net effect on the account (Net Liq.) will be (Mkt - Strike)*Multiplier,

    2) with 0 net position change in the underlying, and

    3) +1 net change in options for that strike.
     
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  7. jonahern

    jonahern

    you're right-I was being jokey...but was due to over caffeination
     
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  8. etrades

    etrades


    Thank you guys for the replies.


    @tommcginnis ,

    "3) +1 net change in options for that strike."

    So, it means that instead of being short the underlying stock, I am long one call option at the strike price is that correct ?

    Also guys,

    What if the underlying is Futs contract rather than a stock. Such as ES or CL ? Is it the same as stocks? (i.e. I would never be holding (or short) the underlying ? )
     
    Last edited: Jan 6, 2019
  9. Here's an example.

    On a 2450 ES board you bought 1 2500c and sold 1 2520c. Let's say you paid 7.00 ($350) for the spread with a max payout of 20.00 ($1000).

    A week later, with only a few days to opex, ES is now 2600. As such, the 2520c has virtually no extrinsic value beyond its 80pts of intrinsic. In other words, the call is moving tick for tick with futures. So, an existing long in that strike decides to assign you.

    Now, your position is this. Long 1 ES 2400c vs short 1 ES future at 2420. In turn, you can now exercise your long 2400 call and that will create the p/l of b1 ES 2400 (your exercise) vs s1 ES 2420 (your assignment) for a profit of 20pts which was your vertical's max p/o.
     
  10. Robert Morse

    Robert Morse Sponsor

    For options on futures where it is an american option, the only difference is there is little incentive for an early assignment and if you do get assigned, the margin difference between a DITM option and a future is nominal.
     
    #10     Jan 7, 2019
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