Hi everybody, I am working with an Options Vertical Spread strategy that requires holding positions until expiry. There is a risk that at Fixing/Close time the price of the underlying falls between the two strikes, example: BearCALL 3400 SHORT 3405 LONG Fixing at expiry = 3402 In this scenario the SHORT option is assigned and you get SHORT Futures @3400 and if the market suddenly makes a move to 3450 you'll take a heavy loss. Usually brokers may liquidate positions before we even reach this scenario, but that is the problem: I want to find a solution that covers the positions at risk of being assigned, so that if they are assigned and the other leg in the Vertical does not offset the assignmed ones, they are anyway covered, and this way the broker will not liquidate positions before expiry (I repeat that I need to keep Verticals until expiry, i.e. let them expire). I have thought about some solutions but I wanted to see if someone may have other/better ideas: - trade only cash-settled options (this resolves entirely the problem but limits the trading to cash-settled options and they aren't as numerous as the "physically" delivered ones) - cover the leg at risk of assignment with a longer-term expiry option, right before expiry, but that has a premium cost and it may produce a loss on that separated trade - trade diagonals instead than verticals: too many scenarios to deal with at expiry, the verticals are simpler: you win or lose a fixed x amount at expiry, and you know that from the start of the trade. If anyone has been dealing with this issue and has some ideas or solutions to propose, I'd love to hear about it. Thanks.
If you are trading the ES, then this is the best solution. Just trade options on the SPX - enormous liquidity, expiries 3 days a week, and they can only be settled on expiry day.
thanks ffs1001, when you say "enormous liquidity" do you mean through Bid/Ask refills? because units posted ATM or around there are usually 20 to 100...
Yes, you can, but if the market moves against you you will be fully protected minus the cost of the ATM PUT for each contract. Example: ES PUT ATM may cost 30 points and that translates into a -1500 USD loss per contract if the market goes against you. If you trade 10 contracts it's a -15k loss risk, just to avoid assignment risk, it seems a bit a steep price to pay....