I do lots of option trades, over 1500 contracts per year, not to boast but to give you an context of me going through this scenario.
Recently I have sold a SPY spread in IRA, and my close order didn’t go through and the options were in money, so fidelity exercised both legs. But basically they lend money to buy (first) and then sell and get money back. However, this triggers free ride rule. See below Fidelity message.
Because the market were very volatile, the bid-ask spread on both legs of the spread were so wide, I could not close the spread without significant leakage. So my tight order didn’t go through and got exercised on both legs.
Not preference, but they are required from risk controls to hedge. The entire gamma trade is based on that. In simple words, when GME meme holders bought out of money cheap calls, the market maker had to buy the stock, which in turn drove the prices up…
The market makers own options and hedge it with long/ short of the stock. And there are market makers like citadel or even prime brokers like GS/ ML/ MS/ Citi/ JPM also own options and hedge them with long/ short of the stock.
Sometime back I saw a report market makers own generally anywhere between 50% ~ 80%, depending on the stock, earnings, and few other events.
Just for accuracy, he didn’t “[sell] an option for $10”, he sold an option with a strike price of $10.
And at the close on Friday, the stock price was $8.98. That is QUITE A LOT under the strike price meaning that it was in the money, and deep in the money by about 10%. In almost ALL cases, such options would all be exercised because it makes economic sense to do so.
I don’t know what you mean by “recall” here. But that option can be sold anytime up to 3:00pm CST on the day it expires, because that options market closes at 3:00pm CST. And the holder of that option can exercise it at anytime up to expiration. And official expiration is a bit later than when that options market closes. I think expiration is 5:30pm EST. So you have one and a half hours after market close to exercise any options that are in the money. And in fact, this is what most brokers do by default, they exercise any option you hold if it is in the money by at least $0.01. Settlement happens over the weekend, usually you get notified sometime early on Saturday about assignments, but the actual money and shares trade hands on Monday (if the market is open). In my example above, when the Disney 90 strike puts were assigned to me, the option expired on April 17th (because the 18th was Good Friday, a market holiday) and the shares were delivered into my account on Monday April 21st, and I made payment for those shares on Monday April 21st.
Hmmm, I trade spreads periodically (and Fidelity is one of the brokers I use for options trading). And I’ve had many cases in which both options (the one I bought and the one I sold) end up in the money. And I have sometimes let them get to expiry in that situation. But what I always observed is that they both are assigned at the same time, and both settle at the same time, on the Monday after expiry. For example, if I had an Apple 180/200 BCS that expires, the long 180 leg would automatically be exercised by my broker (on behalf of me), and the short 200 leg would be exercised by whoever owns that option. Come Monday morning, there are four entires in my account - 100 shares of Apple (per contract) are deposited into my account, and $18000 (per contract) is debited from my account. And for the other option (the short 200 strike one), $20,000 is credited to my account, and 100 shares (per contract) are debited from my account to deliver. It all happens at the same time. I’ve haven’t seen the “free ride” message for quite a long time, including LOTS of trading in spreads. In fact, I can’t even remember the last time I saw it. I wonder if it’s because most of my spread trading is in a margin account? But I know I’ve traded spreads in IRA accounts which are always cash accounts. Maybe it only happens if the cash balance results in less than zero after the trades all settle on Monday?
It is possible that someone closed their Buy and when it was done, the OP’s contract was matched to it. Possibly, the MM wanted the shares to use and was willing to pay the contract price.
Not really, So the market closes, then someone (On Friday) has till 3:00PM CST to close the buy? Then the OP has to match it by what time? That is what we are discussing. Because as I understand it, Dlbuffy did not find out till Monday. I have never seen it take that long to settle an option.
Ok I talked to Schwab and they said this is what happens.
When someone sells a put ( a contract) they have till the end of the Market on Friday to buy it back. After that the Buyer or the Market Maker have an hour and a half to Buy it or settle the contract. Depending on how they want to handle it. So after 3:00pm CST it has been settled. There isn’t a 5:30 EST expiration. So after that, at least with Schwab, on Saturday or Sunday you should get a notification. Then on Monday, if the sold Put was in the money, The money will leave your account and the shares will show up.
So Dlbuffy, Either sometime on Friday after close the Buyer or the market Maker had to Buy the Contract before 3:00pm CST. On Saturday or Sunday something should have been posted to your account.
When you trade in non-IRA margin account generally this is not an issue. This is an issue only in IRA accounts. Technically, your account is in negative cash for nano-second, as you first buy and then you sell…
In a margin account when it can become an issue? Let us say I own 100 contracts of SPY spread of $540~$550, that I purchased for $5, i.e., I have purchased with $50K cash. I am not closing because to close I will have to pay 200*.75 $150+bid-spread leakage, so I decided to let both legs to be exercised. This will require $5.4 Million in margin capacity and My available margin is only $2 M (not the account value or cash, but total margin capacity). Then you will hit the free ride in margin account too.
I think you are looking at it with recency bias. Scott Bessent already arrived in Switzerland and If you looked at Friday, the stock finished at the very low of its range on heavy volume you would have expected it to be lower on monday. Trump was saying tariffs might go to 80%, it was all a circus and everyone logically would have known that.
It’s a little confusing, but from what I can figure out, you did not have a put on Soundhound for $10. It sounds like you sold a put option to someone.
Not at all. One of the common occurrence is Index re-balancing. The stock may close at $50 and if it added after the Friday close, the stock could rally after hours and your put will not get assigned. I had this with $CRWD. That’s when I learned about other news items like mergers, etc can also cause the same.
If you recollect, in one of our earlier conversations I talked about closing the options…
This is interesting. Fidelity in their description of “free riding” (by the way, it’s not Fidelity’s rule, it’s a Federal Reserve rule), they say multiple times, “the same security”. If you use the proceeds from the “same security” to pay for the purchase of that security, that is free riding. But strictly speaking, the $540 option is a different security than the $550 option, and you are using the proceeds from the $540 option to pay for the liability of the $550 option. BUT, I suspect that the Federal Reserve rule (regulation T) probably considers all options on an underlying security (SPY in this case), and the security itself to all be considered the same security for this regulation. And if you think about it, it has to be that way, otherwise people could use combinations of the underlying security and options on the underlying security to purposely accomplish any sort of actual free riding they wish. However, I do think that in this particular case, for a simple vertical spread, the regulation should be more relaxed because the maximum loss is not greater than the total invested (therefore $10 x number of options in cash is sufficient, rather than $5.4M) and the total maximum value of the trade at the end is $10 x number of options.
You are missing the point. I gave index rebalancing as an example of a stock price can change after the market close and that will determine whether to exercise or not. The close price means nothing. Remember, if you sell, you are basically at the mercy of the option owner.
Right King but I was missing a small piece of information that was crucial. The buyer of the option has 1.5 hours after close to make up his mind and so does the market maker. I do not remember anyone saying anything about that in any of the classes. But I could have missed it too. That is what makes this such a great lesson. I learned something new.
The whole thing is fascinating. We learn something and accept it as true, and practically speaking it is almost always true. But it still may be incorrect! The whole expiration time is one of those things. With a little research, it appears that different kinds of options have different expiration times. It took a while to find the actual text of the options contracts that we sell/buy, and that text is contained in the OCC by-laws. Here are some examples of expiration times:
General definition:
(23) Except as otherwise specified in the By-Laws and Rules for particular classes of options, the term “expiration time” in respect of an option contract, means 10:59 P.M. Central Time (11:59 P.M. Eastern Time).
Index options that are settled in cash (like SPX for example, NOT SPY because SPY is settled in ETF shares):
(4) The term “expiration time” in respect of an OTC index option contract means 7:00 P.M. Central Time (8:00 P.M. Eastern Time).
Futures options and commodity options:
(b) The expiration time for futures options and commodity options shall be 10:59 P.M. Central Time (11:59 P.M. Eastern Time), except that the expiration time for futures options and commodity options traded on NYSE Liffe, LLC shall be 7:00 P.M. Central Time (8:00 P.M. Eastern Time).
Foreign currency options:
(3) The term “expiration time” means:
(i) in respect of a foreign currency option contract, 10:59 P.M. Central Time (11:59 P.M. Eastern Time);
and
(ii) in respect of a flexibly structured foreign currency option contract, 9:15 A.M. Central Time (10:15 A.M. Eastern Time).
Notwithstanding the above:
(iii) in respect of a flexibly structured foreign currency option contract expiring on a standard “mid-month” or “end-of-month” date, as defined in Section 1.E.(2)(i) and (ii) of Article XV, 10:59 P.M. Central Time (11:59 P.M. Eastern Time), except, however, all flexibly structured foreign currency options listed for trading after January 14, 1997 with an expiration date on or after April 1, 1997 shall expire at 9:15 A.M. Central Time (10:15 A.M. Eastern Time).
Submitting Exercise or Do-Not-Exercise Instructions:
All Instructions must be called in and are only applicable to long positions
Do-Not-Exercise instructions can only be submitted the day of expiration up through market close
Exercise instructions can be submitted at any time until expiration
Merrill may take action at any time to close out positions that may not be able to be supported if exercised/assigned. It is extremely important to monitor your open options positions and be aware of your risk exposure.
I am not sure you can issue exercise or do not exercise instruction after the close. What you can do is however, once the market closes based on your option position you can buy or short-sell the shares in the after hours market. If it is IRA then you may not be able to sell short.
