Hi guys. I do some backtesting in Thinkorswim paper money account, usually writing out of the money vertical spreads with target to keep them OTM till the expiration and so get all the premium in my pocket. TOS papermoney account have some 'nice' features like keeping expired positions in opened positions until you adjust them manually to quit. So I mean paper money and live money account have some differences. I've had a position in NGF4: 25.11.2013 SOLD -6 VERTICAL /NGF4 4.5/4.8 CALL @.007 It's expired yesterday 26.12.2013, while underlying was exactly below the 4.5 strike. I guess it should be expired worthless as it was not in the money on the expiring moment. Nevertheless, I've got huge loss now due to upside run in volatility of NG. So I admit that price of the spread (or spread legs) was totally higher than the open prices, but I guess the spread should be expired worthless while it's not in the money. So is TOS right and I've got hit, or is there some platform issues and I would keep the premium?
Got a reply from TOS support. ----- First, please note that if you are trading Options in a Paper Money account you should close out of them before expiration or they will make the account so it is not tradable until you manually adjust the positions. In a Live Account, these Call Options would have most likely expired worthless and you would have retained your premium. Futures Options do not get exercised or assigned in Paper Money â thus it is always best to close out of the positions before your days left go negative. ----- So I've hit on some drawbacks of TOS demo system.
Sure, I've done it already. The questions was about live money accounts - will this credit spread, which prices were skyrocketed due to volatility, expire wortless as it was out of the money still? I've got the answer from TOS suport, that most likely yes. Will it?
That's a more complicated question. You need to know the details of expiration and assignment, not just "last trade". Some markets allow contrary instructions, which means that the long can exercise an option that expired OTM, or abandon an option that expired ITM. I seem to recall that NYMEX allows contrary instructions (for two hours), whereas GLOBEX currency futures options does not. I had a case where I was short a CL put that expired OTM, but dipped below the strike briefly by a little over $100 during the period when contrary instructions were allowed. I expected get assigned on the put, but I did not. The option-holder left money on the table that time. Be sure to read the fine print!
Thanks for your input, rwk, it really helps. Yeah, I've been shorting naked options and spreads for a period of time, and there were no problems like this with NG. So I'm sure in rule that no matter what, if you short side was definitely out of the money on the moment of expire (+ additional period you've mentioned), you'll definitely book all the premium. That's it?
I used to short options exclusively, and I most of the time I didn't worry about getting assigned. But you should be aware of when it can happen, and that people sometimes do things that don't make sense. You also need to be aware of pin risk whereby an option you're short trades near the strike at expiration. Most option sellers will close the trade to avoid pin risk. Option premia have been low lately, and I am now looking mostly at long strategies. Good luck! The answers are out there... [rwk]
Speaking of pin risk I just watched today's video in swim lessons on the TOS platform and toward the end of the video they talked a guy who thought he was out but he was still assigned on TWTR and than the next day TWTR gaped down The bottom line is to buy back the short if it's near expiration and there is a likelihood of assignment even if it's paper trading Better to learn now than later on when there is real money on the line
some times. I dont care if there is PIN risk and I am ITM i sell AMZN puts. and some time back . 290 got all of a sudden ITM and assigned.. on Monday.. as usual.. (scare tactic) weak hands fold. it opened even lower and i bet u . many weak hands folded. then it rose 3$ and I made more than my original trade. .ha ha. yeah. there is no rhyme or reason .but if u see a stock suddenly move close to expiration. watch the next session - it will continue to behave strangely.. back to AMZN.. wish I was long -real long. rather than selling a few puts OTM each week...