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Lost $30,000 on a $1-Wide Credit Spread (Options Traders MUST Watch This)
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- เผยแพร่เมื่อ 16 ส.ค. 2024
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A trader reached out to me regarding a $30,000 loss on a $1-wide credit spread position they had with a maximum loss potential of less than $500. How could this happen? In this video, you will find out.
When options are out-of-the-money (OTM) at expiration, they are said to expire worthless, which is technically correct IF they are not exercised after the market closes.
However, options can be exercised a period of time after the market closes, even on the day of expiration.
Because of this, there are scenarios where options are OTM at the time of the market close, but end up in-the-money (ITM) after-hours with a large stock price movement. In that scenario, the option will be exercised by the owner to take advantage of the intrinsic value in the option that did not exist at the time of expiration.
In this video, you'll learn how a devastating series of unfortunate events led to a trader's very conservative TSLA credit spread strategy leading to a $30,000 loss (100% account loss) in a weekly options expiration cycle.
Please share this video with your options trading network, as this is a very important topic. It can help save thousands and thousands of unexpected losses, and potentially save lives by helping traders avoid catastrophic financial troubles.
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TO CLARIFY: This can happen with any brokerage firm. It's not about your brokerage because you can get assigned after-hours with any brokerage. But I do think it is messed up how long it took to get the assignment notice. It was impossible for this trader to exercise their long 409 put because they did not have enough buying power to short 500 shares of TSLA at $409/share. The assignment settled well after the exercise cutoff time. I got my time zones mixed up in some of the images. 2PM my time is when the market closes. 3:16PM as seen on my chart is 4:16PM CT. Either way, the information stands. I hope you learned something to watch out for in this video.
If you also lost money during this TSLA expiration date and feel Robinhood was negligent in this situation, please refer to the following video and send an email to the address included within: th-cam.com/video/WgNCzsKGBHs/w-d-xo.html
-Chris
It's all good CB👍. Thanks for taking the time to post the vid. Looking forward to the SME vids!
So best practice is to close spread before expiration.
If you haven't you need to notify broker to exercise long in case spot falls between strikes after hours ? Could this solution cause complications too.
Also how long after Friday expiration close would one be at risk for this to happen?
@@3756hans Chris said an hour and a half (4:30 Central time) you are at risk according to OIC.
Oh, meaning both long and short puts are still in the after market? it's just no one is buying the put from him, during after market? and leaving him short put in the money and gotta buy those shares. Am i right? effed this is so complicated, im new with spread
Same exact thing happened to me except I was long the 416 short the 417. My broker gave me 200 shares
Put out a video today covering this when somebody said you already made one. Nice work, thanks for being quick on the draw getting this message out, and good vid.
Love your vids man
True man, Just posted a video about my biggest losses on my channel if youre interested, id love to hear your feedback
Watched your video right before this one and realized I should watch this several times to ingrain it in my head. Sad story.
Thanks Adam! I put it together quickly after correspondence with a trader since it is an important topic. It seems many others were in a similar situation with the TSLA move.
Could this also happen with debit spreads?
This is actually an issue with the broker's risk mitigation department/guidelines. If the trader files a dispute with FINRA, they should be protected through arbitration. Any option contact that expires ITM (including the trader's 409 put protection), should be automatically exercised by the broker (just like the 410p was exercised). The broker knows OPRA's guidelines about option assignments up until 4:30pm est. The trader needs to lawyer up.
Yeah that never made sense to me. Fidelity tells you every time if the option expires in the money, it will be exercised automatically,
You are correct, on all points trader diffidently needs a lawyer. The customer agreements are written very tightly with a lot of "outs" for the broker. Unfortunately it is nearly impossible for the little guy to win in arbitration which is exactly why big companies force binding arbitration.
@@lProN00bl The option did not expire ITM. It moved ITM during the after-hours session and the option buyer exercised wihin the option cutoff time. Apparently Robinhood's policy is to notify the seller of the option as opposed to automatically exercising his long position. Brokers have different policies and you should know EXACTLY what they are.
@@BJJJUDO If you do credit trades please read my post above. The circumstances in this case are very unusual. You MUST know how your broker would handle a similar situation. However, all this could have been avoided if the trader had placed an exit order ahead of time. ALWAYS BUY BACK THE POSITION FOR PENNIES. This should be an open order placed immediately after the original credit trade was in place.
@@hattrick2219 Exactly, It's worth the few bucks not to worry about the extra 90 minutes.
Moral of the story - CLOSE OUT POSITIONS BEFORE EXPIRATION!
I’m new to options; does this apply to both long and short positions?
@@ngphil11 Technically this applies only to the short leg of the spread, because that's the one you risk assignment on. Obviously, you can't be assigned on the long leg because you own it. But what is more common to do is to simply close all legs of the spread as a vehicle. In a Credit/Debit spread what this does is trigger a "Buy To Close" order on the short leg and "Sell To Close" on the long leg. But, getting back to your question, if you elect to close only a single leg of the spread to avoid assignment in extended hours trading, then you should "Buy To Close" the short leg.
Philip Ng I’ve let short positions expire worthless successfully but there’s always that chance that they could end up in the money, especially with stocks that are capable of moving the way Tesla does. I had a Facebook credit spread a couple weeks ago, and it changed direction right at expiration so I bought it back. If I hadn’t I would have been in trouble. It ended up in the money at market close. Only you can make that decision. Do your homework. Pay close attention. And preserve capital. Good luck.
What about if the both legs of the spread are in the money? Do you still close them for a loss?
Kevin Stone VERY helpful answer! 1. Using the video example, but say the market is moving in MY favor, strongly, so I decide to let them both expire worthless. BUT, after the close, or very near to the close, a SIGNIFICANT news announcement hits, i.e. War with Chyna!, or whatever. And say similar or even more massive drop of TSLA, post close (eg. they lost their giga factory there due to extreme stress on international relations). I assume things could even be worse, correct? 2. What if my power and/or internet goes out an hour before close, i.e. power out due to storm, and ISP out due to whatever; ur just likely screwed right? I’ll try cell phone order submitted but dicey for sure. 3. Setting a Stop MARKET on the short strikes seems like the only and best answer, as I was intending to trade a 50 point wide SPX credit spread, or two of them, i.e. Iron Condor. My only remaining challenge, seems stupid I am sure, but I haven’t yet figured out how to put that stop in at 2X my Initial Credit, using ThinkorSwim, TOS, I just don’t know how to mechanically enter it, and so far, tech support not helpful, any screenshot example most appreciated. 4. Why would anyone trade TOS and pay those option commissions when Robinhood is free??
That happened to me too, over the long weekend, same scenario...after midnight I was informed. I had a (3) 162.50/161.50 TQQQ put spread and it expired well in the money. I should have closed the spread sooner but I’m new to options and had no clue of any loss over the max loss. I figured I’m already losing 100 I might as well wait and see if there’s a chance that the stock will rise again before expiration. On the day before expiration, Thursday night at midnight, I got a email from my broker telling me that (2) of my short legs from 2 of those spreads were exercised and my buying power read 50K loss. I recieved a margin call and some T Reg thing I’ve never heard of. I was given 200 shares of TQQQ. I told them to sell the shares and sell the 2 long positions for me right away. My losses were limited and no options should be exercised in the middle of the night. It was wrong and seemed fishy. The next day my buying power went back to normal, the shares were gone, and the long legs were gone. A scary scary situation that I don’t wish happen to anybody. I’m not doing anymore option spreads until next weeks spreads are closed. I lost a lot if money due to this last crash, and I’ve been watching all these videos for over 6 months on options and I have learned a lot. I don’t feel like I’m uneducated just need the hands in experience at this point and learn from my mistakes. But it was heart dropping. Thanks for this video. Nice to know I’m not the only one. I still don’t understand how my position was exercised so late in the night. I hate robinhood Smfh
It wasn’t exercised it the middle of the night, that’s just when they decided to tell you. Can’t believe anyone uses robinhood. Shitty brokerage.
You're a really great guy making this video and probably avoiding big losses to who knows how many traders. The world needs people like you. My most sincere appreciation
Thank you! It happened to me (with TD Ameritrade, it's why I'm watching this video) as well and couldn't understand why. Luckily, I only lost $1700 and was able to recoup about 75% of my loss the following Monday by selling ALL that had been assigned afterhours :( ... I'm sure it was the same broker. This video NEEDS to be shared!
Which broker was it?
Which broker?
Schwab still does this shit.
So he had to close his positions before expiration, understood.
Basically lol
but also make sure that the market is open to be able to close the position.
Yes. Good moral . noted.
Its never good to wait until day of expiration anyway, shitty brokerage firm
just the short legs
Great video. I think another solution is to place a GTC limit order with your profit target as soon as you open the position. I used 50% but 90% is also valid. This limit order would have auto closed his position for a few dollars that Friday and not exposed him to any risk with after hour market movements.
I agree. I'm doing this starting today to protect myself a little bit better.
GTC limit orders execute during market hours only. Would not have saved him.
@@free322001 correct
God dam, that dude went broke from a supposedly conservative trade.That really sucks man.
he was cheap, wanted to save some coins, he could buy those puts back before closing
@@MESSY-AF Yea, probably wanted to save on commissions too.
I will say that the person who exercised those puts was smart. They took full advantage of the policies surrounding options.
General rule: Never hold options to expiration, especially spreads or other complex option strategies. You run the risk of asymmetric execution during after hours trading. This can lead to devastating losses even if you think you've hedged. ALWAYS close out your positions unless you're perfectly fine with EVERY POSSIBLE OUTCOME that can happen during after hours trading.
I dunno how individuals can feel comfortable with this. What if you go into a coma from a car wreck days before?
@@lakecityransom you can set an activation rule to trigger order/s to close your option positions on a specified date.
Moral of the story, Sell before expiration day! This is a nightmare.
Close position on expiration day at the open. That's the moral.
Or even don’t trade what you don’t understand
This is the only comment that matters.
I wish you expanded on this video and unexpected risk. I have 2 questions: 1) I thought in the money options are automatically exercised. If options can be exercised after the close into after hours trading, why would his other protective option not have been automatically exercised? 2) Is there no way to tie such an options trade together such that if one is exercised the other one is exercised? Because could this same thing not also happen if there was a mid day flash crash, where there was a large selloff, where one side of the vertical is exercised and then a recovery before you realize your option was exercised.
Thank you for sharing this. I have a trade expiring Friday and was not planning to buy it back until I saw this. Valuable lesson learned. I hope the affected trader recovers quickly and safely.
@Sanford Winston buy an ITM Call/Put (if seller ask is 0) to avoid the worst case scenario that is being discussed here . ( you may as well buy an ITM call/put in the next expiry so that you will be completely safe in case if you are unable to exit your short position in the current expiry)
Why didn't the brokerage auto exercise his protection leg in a spread? They automatically liquidate the shares but didn't auto exercise when he got assigned?
@@herrickinman9303 but once the trader got assigned the brokerage should have detected that they held shares and an option that was worth exercising.
The brokerage has a lot of rights but if its their policy to auto-liquidate they should have done it. This was just stupid of the brokerage because it will hurt them in the long run.
@@matthewscheifer1169 The clearing house, not the broker, executes assignments. Notice of the assignment wasn't sent to the broker until after the cutoff time for exercise. Stop blaming the broker. It was the trader's fault for
(1) not reading the assignment risk disclosures,
(2) not knowing the broker's rules for automatic exercise and the notification deadline for exercise,
(3) not closing his short puts;
(4) not realizing that each day and every day that he holds a short option, he is at risk of assignment, not just during the hours when options trade, but up to 90 minutes after the close;
(5) failing to realize that the notion that the maximum loss on a credit spread is the spread minus credit does not take into account the possibility that only the short leg is exercised. There's more than one way this could happen. E.g., what if the stock settles between the strikes?
@@kenneth6847 The trader was stupid for
(1) not bothering to read the assignment risk disclosures,
(2) not closing his short puts;
(3) not realizing that each day he holds a short option, he is at risk of assignment not just during the hours when options trade, but up to 90 minutes after the close;
(4) failing to realize that the notion that the maximum loss on a credit spread is the spread minus credit assumes does not take into account the possibility that only the short leg is exercised. There's more than one way this could happen. E.g., what if the stock settles between the strikes?
Because you can't always win, and the brokerage can always control risks on their end.
As a Derivatives Trader for several large firms over three decades. One fact I know if you blow out and go into deficit Please Do Not Do Anything Drastic!! The worst that can happen is the firm takes you to court to cover the deficit. At the end of the day, XYZ brokerage is the one that must answer to the Exchanges Clearing Corp and cover the deficit. Usually, it's written off as the cost of doing business ( Again you can be sued in Civil Court which can take years anyway. You can't get blood from a stone as the saying goes.) Please do not off yourself over money it comes and goes and you can always make it back someday. Your life is more important.
It seems irresponsible and negligent that his broker didn't exercise the other leg automatically.
Yap totally the brokers fault
Alejandro Rosario I'm kinda new to options trading..when did your contract expire? On that Friday?
@@beyondfinance7755 The terminologies sound a bit confusing to me. In your case, did TD Ameritrade automatically do the right thing for you?
the broker is not supposed to make decisions for you.
@@beyondfinance7755 just dont fuck with credit spreads like a gay bear and you wont ever have this problem
As an options writer I generally closeout the position before op ex date. It's too risky to let it expire. I've been called in the past.
This almost happened to me on a Microsoft spread. Thankfully, my brokerage firm stepped in and saved me from a $100,000 loss. I was about to get another job before I found out.
Care to share what did your broker done?
How did they save you?
@@MrDavid949 they hedged my trade for me.
So if his account has money to buy 500 shares at 409. The long 409 put should exercise as well. So we should always close all option ourselves before expiration date to be safe.
Newer trader here and you answered many of my questions. Thank you for sharing this well needed info!
This is some of the most important info I've heard in a long time... very glad I watched this. It's so easy to forget about the after hour activities.
Such a great video to learn from! I feel HORRIBLE for the person who took this loss though... I've been trading options (almost entirely vertical put spreads w/.30 delta or less) for almost a year now and i have yet to let one of them expire. I ALWAYS close my positions prior to expiration because, to be honest, expiration mechanics scare the crap out of me! Despite all of my reading it still seems like so much can go against me on that day and it's just too much for me to risk. Thank you for this video and keep up the great work man!
Have you ever had an early assigned on your spreads? What day was it? Was the long option automatically exercised to cover the short option?
@@synnic6051 never early no. Like I said, I always close once I've either got my profit target or I hit my loss %. Over a thousand positions and not one has been cleared by the options clearing authority
@@jesser8502 Just curious, for over a thousand positions in a year, how do you track them to make sure they are closed before expiration?
If near to expiration and the option premium is usually zero cost, it is hard to close the position as no one is going to buy to close it. Beside, it may incurred additional commission if we close it during or expiration day. Then what is your advise on this?
So true. Amen
But the commission is a lot cheaper than the alternative. Typically, you can close for a few cents a share. And sometimes I'll put a closing order in a few days early with a Good til Canceled. After that is fingers crossed. And if it's just not closing call the broker and ask them not to assign.
That happened to me. Luckily all were out of the money.
This person needed to BUY back his put, not sell it.
So, to summarize:
1) Don't use margin or at least be responsible with how much margin you do use, and
2) Close all options positions before close
Thanks for the info!
Thanks for the summary
This problem is well known among experienced options traders but you never see it discussed in public on TH-cam or anywhere else for that matter. Kudos to Projectoption for making the subject of this video. The basic problem is that while stocks trade after the retail markets close, options don't. So your options do not expire at 4:00PM Eastern Time (day of expiration), but you cannot trade them after 4:00. If the aftermarket changes the status of your options, there is not much you can do about it to avoid a loss. Normally, when it happens, it is a sustainable loss and that is how most of us come to understand this issue. However, in a worst case scenario, as in the occurrence described in this video, the result can be catastrophic. The CBOE could fix this if they wanted to, but they don't want to. It is not the retail traders making money from this, so it will never end.
Thank you for the comment this is really insightful. Basically, don't hold options past expiration PERIOD would seem to be the takeaway
Yeah, this practice is messed up, I'm still new to options and this is the first time I've heard of this problem, glad I have haven't tried messing around with Put spreads yet, and definitely will be paying to close out any OTM option before expiration now.....
Is this intended by CBOE? Or they just didn’t bother to fix it
@Humble Grumble I know the rule but don't know about its INTENTION? could you please elaborate?
Yuling Li They can profit from it. Trading arms of hedge firms and banks have their own algo’s to pick off arbitrage opportunities this creates. CBOE makes money off this. They also make money from all the people having to close positions early to avoid this. They won’t change it unless masses of people stop trading options in protest.
The ironic thing is, if he was allowed to keep his Tesla shares to this day he would have doubled his money!
If he had 205k in his account when he was assigned.
Well that's the risk you take when you trade options as opposed to owning shares :L
If only we could all buy stock with money we don't have.
@@shibity you can, just take out a personal loan for 15k when the market crashes and use margin to leverage at the money leaps options on blue chip stocks xD
@@swordsdboss options are not stocks
*Typically a good rule of thumb is to close the spreads at approx 50-60% of max profit. This will keep you out of trouble and tends to increase your win rate. Also, NEVER take the options all the way to expiration! FINALLY, this is WHY I ONLY trade options credit-spreads in the indexes such as SPX, RUT and NQ. They have two types of expiration types...PM and AM settlements. PM settlements are BEST because you can be assured that once the market closes, whatever value the position/trade has (a win or a loss) whatever the positions value was at market close, is what it will always be. No chance of 'after hours' fluctuations.*
*AND, because these are "cash settled" products, there is NO chance of being assigned shares of stock because the indexes mentioned above, do NOT have shares. Thereby effectively eliminating the scenario in this video. NOW, if you choose a strike (in an expiration week/month) that is AM settled....you DO run the risk of price fluctuations AFTER the market close because the trade does NOT settle UNTIL the following morning! So I always MAKE SURE my credit spreads are CASH SETTLED and PM SETTLED! Keeps me out of BIG trouble!*
thanks for the tip Lorenzo
how do we know, AM/PM settle and also Cash settled?
@@rhoptionsclaim5518 You can go to the CBOE website and use their search function, you can Google it or call your broker and they will tell you.
Never, I repeat NEVER let options expire worthless. Close all legs at least 2-3 DTE or at 85-95% of max profit. It's not worth it holding onto expiration because we are living in unprecedented time. Learn to understand risk. After-hours and pre-market will either make you or break you during these volatile markets.
I agree I always close when a put is around 0.25, not worth keeping it on Friday till the end
@@xxxs8309 around 0.25 leaves way too much juice in. I default to 0.05 ..hell, my opening trade some times got that 0.25 to milk on. But sure, always close before exp.
@@johto I do that sometimes but all it depends on the strike price , if it is above 60, there is no point in keeping the trade on unless you are very comfortable with the stock.Two weeks ago I sold 12 puts on OTRK with 60 price strike at 6dollar each now they are worth 0.5 and I'll close the trade at 0.25, with a realized gain of almost 7000 dollars,I'll sacrifice 300 dollars that's fine
@@xxxs8309 Sure, its about the % 👍
Yes!
Close them spreads before expiration, not worth the risk!! 👍
Thank you for the fore-warning: Correctly: the lesson learned is that it would be safer to " Buy to Close" the Bull Put Spread's OTM position very close to the expiration and not allow the option to reach expiration on its own. Could have happened to anybody.
Good lesson about always closing options before expiration. Not sure why anyone would buy 5 x $1 wide spread rather than 1x $5 wide spread.
I had a crazy loss like that. I bought a put to sell Lehman for $4 a share when they were going down. Citi agreed to compensate the Lehman $2 upon the completion of the deal so I figured it was easy money. However, Lehman stock stubbornly kept holding between 3.70 and 4 and I kept waiting for some profits. The market was closed for Good Friday and my put automatically exercised Thursday when it was in the money by a small amount so I was left with the stock shorted. It would have been fine if it settled down to $2 where it should have settled, however that Sunday Citi announced they agreed to a more generous competition amount of $10 a share. Needless to say when the market opened Monday my short was no longer in the money and I had to pay to exit my short. I forget what the total loss was but it was a lot less than 30k. Still painful though!
I use TOS and they will automatically exercise the protective leg of an options spread in a case like that. Call your brokerage firm and see if they have that default settings or give them permission to. But like Chris said the best option is to buy back short positions before the market closes.
Yeah tastyworks closes options that are close to being ITM at expiration as well. The brokerage in question should have exercised the trader's long 409 put for them. It's what any trader would want to happen if assigned on the short option in their spread.
I use TOS as well, they have a team that is very good when it comes closing options but they are not perfect. It requires human intelligence and attention, which has two points of failure. I had a short optioned exercised like this, when I called them they said you need to call them to make sure they exercise. Fortunately in my case it worked in my favor because the next Monday stock made me money, but from that point on I always close my positions shortly before 1pm on Friday.
They didn't in my case. I use TOS as well.
TOS is NOT TastyWorks by the way, the founder of TastyWorks developed TOS years ago and sold it to Interactive Brokers (SORRY, TD Ameritrade, not IB, my apologies).
TasyWorks is a very good broker IMHO, they alway send you an email if you have expiring positions that week 👍
@@pogster56 who said tastyworks and TOS were the same?
Had similar situation occur when I first started selling options. Assignment is late notice and you are paying interest the whole time. Pen risk end of
day close on TSLA is a few % so I’m confused why the broker didn’t call to close out the position.
I switched to selling on the SPX primarily bc it’s cash settled which is advantageous in so many ways. Sorry to hear what happened to this fellow. Few people know the finer workings of the risk in selling options, thanks for getting great info out there.
Some brokers will warn you to close out your short option (or close it for you) if it gets close to being ITM, especially on expiration day. But your broker is not under any obligation to babysit the your position for you. Why didn't the trader exercise his 409 put himself?
Wow, what a horrible scenario! THANK YOU for this video! I also noticed you have replied to literally dozens of commenters...even duplicate questions, very honorable! THANK YOU! Just subbed 👍
Wow this is terrible that this can happen, two things should be changed:
1. Options should not not be able to be exercised after hours on the expiration date.
2. As long as they made this trade as a combined credit spread and didn't make each trade individually, one option shouldn't get assigned without the other one also getting assigned.
Exactly!
This is good to know. Can't trade option BH or AH, I would have assumed too that the contract ends at 4pm est that day. How could they let it exercise even AH, and after one thought option already it is expired. Am just glad it was not me :(
Agreed something not right about this
Options can be exercised every trading day, not just expiration day, from 9:30AM ET to 5:30PM ET, Each and every day that you hold a short option, that option is at risk of early assignment. Don't let anyone tell you option are only exercised on expiration day. The risk of assignment was disclosed to you when you opened your account. You need to read those disclosures.
As for your notion that "one option shouldn't get assigned without the other one also getting assigned.," what if only the short option is ITM? Hmm? Did you ever stop to consider that possibility? Once the short option is exercised, the spread ceases to exist.
If you don't bother to monitor price action during after-hours trading, how will you know whether you should exercise or whether you are at risk of assignment?
@@cpfamily6431 Options trade from 9AM ET-4PM ET, but the underlying stock trades before, during and after those hours, each and every trading day, not just expiration day.
Options can be exercised every trading day, not just expiration day, from 9:30AM ET to 5:30PM ET. Each and every day that you hold a short option, that option is at risk of assignment. Don't let anyone tell you that options can only be exercised on expiration day.
You also have to consider the possibility that only the short option of the credit spread becomes ITM and gets exercised,. Once that happens, the spread ceases to exist and you are left with an OTM long option. If this was a put credit spread, you might wake up the next day to discover that you have been assigned 100 shares of stock and are now required to pay for them.
Do you have the capital to buy 100 shares of the stock?
The TH-cam option gurus promote option credit spreads as a safe, easy strategy to generate weekly income. These people are only interested in generating ad revenue from their clickbait videos.
Thought my video was glitching in the beginning
Thanks so much for the warning! Too bad so many "experts" don't seem to know about this
Trade SPX spreads, cash settled to avoid being assigned
This is KEY!!! I need to look at this 1 more time. Rarely to people explain this side.
People don't feel like talking about losses and bad plays, but those help to pave the route to success. Living is getting it wrong at times, reflecting (not b*tching) on it and improving your method. Cheers mate.
This past Labor Day, I learned to close out all positions before a holiday weekend😂
Had I done that, would of locked in 1900. Instead I'm down to 300 😭
This is now the adult homework so to speak haha. Nice
Why over a holiday weekend?
@@johnwaas4864 more days for shit to hit the fan
Do tell!
Excellent information!! Thank you
Moral to the story close your option before the bell
The video covers well how an after-hour ITM put credit spread can go wrong. It also does remind people the best way to avoid catastrophe is to close the short. However, it left out a lot of the deep discussion in case the short was not closed and what choices one could have, and what their potential pros and cons are. The host said the dude could have exercised his long put position to have saved the damage. In reality, at that moment, the dude would not know his short put would for sure be assigned. I doubt his broker would even let him exercise the long put since his fund was way below what he needed to borrow. Anyway... many people made videos at the time to catch that hype and gain viewership, but nobody actually talked about the realistic nuances, which is kinda disappointing.
The TH-cam option gurus teach that your maximum risk on a credit spread is the value of the spread minus the credit. They never talk about the risk of assignment from large moves during after-hours trading. They never discuss the capital requirements to exercise a call or a put; instead, they naively assume that the long option in the credit spread will "automatically" be exercised, offsetting the presumed assignment on the short option.
They promote credit spreads as an easy, low-risk way to generate weekly income. They never talk about the low expected value of this option strategy. One bad trade can wipe out weeks of profits. In this trader's case, one bad TSLA credit spread trade wiped out his $30,000 account. He was one of the lucky ones. Other TSLA credit spread traders report in this thread losses of $300,000 or more.
Why did this trader, knowing he did not have the capital to buy 500 shares of TSLA @$410/share if assigned on his puts, fail to exit those puts prior to the close of the regular session? Why wasn't he monitoring after-hours trading? How could he not know the risk of assignment from larger moves in after-hours trading? This type of risk is identified in the mandatory risk disclosures.
This kind of thing should not be happening at all. Options regulatory council needs to prevent this kind of thing. The ability to exercise an option should depend on the stock's Closing price at 4pm on expiration Friday especially since a trader cant trade options on stocks after 4pm. What happens to the stock price after 4pm should be irrelevant. It is stupid and very costly. Something needs to be done!
It's part of the trade, the buyer of the option can decide if they exercise the option. And they can do so basically whenever.
It's pure convenience on the broker side that they default to exercising the option if you are in the money.
Also funny enough what you described as the solution caused this whole accident. The 409 option wasn't exercised because the closing price wasn't in the money.
As a rule of thumb one should always close option positions manually before the last day as the huge volatility works against you as the option seller.
A maybe better solution would be to have no separate exercise cutoff time, however I can't comment on that as I don't have any competence to discuss that part.
@@mwfiaedev5835 The short strike wasn't ITM either at the close on Friday. However, both the long and short strikes went ITM on Friday (after hours)after it was announced that TSLA would not be included in the S&P 500. The long option should've been exercised automatically by the broker and the person would've never suffered the big loss.
I agree! Options expiring on Friday’s should have the same cut off notice for the underlying share price when normal market hours close. Seems very unfair for the options to be exercised in the after market hours and nothing can be done with the options
ricomajestic remember, the option is a contract - it gives the right of exercise to the purchaser, not to a broker, so a broker can’t exercise. They should all at least provide instant alerts to the client if an option goes in the money in after hours on the expiration date.
@@TochkaZreniya Actually that is not true. Most brokers will automatically exercise your option at expiration in a situation like this if it is in ITM unless you tell them not to. At least that's what TOS would do.
This is why I close spreads the morning of expiration win lose or draw
I think what we should consider here is, that "at expiration" should not be defined with market close. Rather you should consider 4:30 pm your "expiration" so - if you own a contract DO NOT COUNT ON THE CLOSING BELL and CLOSE your position. PERIOD. Even if it costs you 2 Dollars per contract fee, it's much better to close a position than having assignment risk.
What if, on that day a company is giving news after the closing bell? then spread you owned one minute before market close, that had a 99% profit turns into an afterhour nightmare.
ALWAYS close your option positions esp. spreads, when they are nearly at the full profit.
If the option has CASH SETTLEMENT it's a complete different story ;)
Great info. Isn't it something that brokerage firm should take care to save their customers (credit/debit spreads are the most conservative strategies within options). Could you please name a brokerage firms, who takes care of these scenarios automatically? Do we have a chance of this scenario occurring before expiration?
I greatly appreciate this very rare but possible scenario. Great explanation thanks a lot!
Thank you so much for this! I have watched nearly 100 videos about options trading and no one has mentioned this at all
One side of a credit spread is for insurance. One more thing for insurance is to put in a limit order for a
$0.00 debit spread to close. This will close the trade when the market closes and it becomes worthless.
Thats why I like Covered Calls. If for some reason I get assigned after close day of expiration it means I met maximum profit. For Spreads and Iron Condors Tasty Trade teaches taking profit @ 50% on 45 DTE positions. Around 21 days evaluate the trade and decide to take profit, roll it out, or hold on for little while longer. I will even take 25-30% profit if it happens in the first two weeks.
Always assume that it best to take profits early and reset with a new trade. I really hate holding on to any trade to day of expiration (exception being Covered Calls - If there is no profit rolling out why close the Covered Call?).
Sometimes consistency pays off, Now it's my 2nd year in the online market and it's been great, though I have has my share of losses but looking at my numbers I can't complain.
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Don't feel bad about your losses. The stock market is as complicated as it is compelling. Earning off the your trades takes years of constant practice. It takes skill and Expertise something you can't buy but develop faster by employing the help of a professional broker.
Traders need to understand something It would be foolish to go into something you've never done before and gain.. unlike someone who has been into it everyday and night for years.. just like a school you need to write exams and pass before you can be certified or in this case make profit..... A pro trader is always advised.
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You have no idea how much I appreciate this video. I'm very new to options, I've been writing covered calls and selling naked puts recently to kind of experiment, but spreads have my full attention and interest. I have 20 pages of notes on them and the crazy thing is that I still dont even halfway understand them, and I'm not gonna hop into a trade like this without fully understand it. Great video, I subbed.
"Naked Puts"? Or do you mean cash secured puts.
Playing with TSLA shares that is 400+ a piece and moves like a yo yo in no time, leaving it for expiry over a long weekend is simply a No No. Solution is to close out the position before market closes, take the gain or loss whatever it is , at least it is defined and firm. Good video but I think it's stretched way too much and repeats itself twice/thrice..
Looks like it is called "pin risk"
I've always advocated my family and friends to always close before expiration, feels bad for those who let their options expire and this happens
8:25 solution is to close options before expiration
THIS IS ONE OF THE BEST DISCUSSION ON OPTIONS TREADING RISKS! I HAD NO IDEA ABOUT THIS RISK,
This is why I no longer keep options trades open after the day before expiration regardless of position, too much risk involved that close to expiration. I buy contracts with 2-3 weeks minimum left before expiration and always close my positions 1-2 days before expiration
The threat is with short options.
jabberwocky1969 not necessarily, I’ve had brokers close open calls early on expiration day when the underlying shares are on a run up, screwing me out of profits. I just don’t like dealing with all the negative potential variables on expiration day, so I usually close my weekly Friday expirations on the Wednesday or Thursday before in most cases. Or at the very latest before noon on expiration day, wether it’s a long or short position
Yep. Thats a common sense. I thought everybody knew this shit. I guess not, huh.
Boyer Industries You said the BROKER closed your long call position. Did they, legally, can do it? Why the broker would do it? Are they the counterpart?
Great video!
Scott Sheridan at Tastyworks has been saying this for years to Tastyworks customers!
NEVER EVER leave an OTM spread on to expire worthless!
This is why Tastyworks has free/zero closing commissions.
Even still .. Scott would take care of this.
I am glad you added a link to this video in your second "options for beginners" video. As soon as I saw it come up on screen I paused the one, and played this one. Made me very glad that I opted to watch more of your content before jumping in to options trading. coming from stocks and forex, I was already thinking about doing something similar to this, the only thing that keeps putting the K-bosh on getting a solid plan formed around having multiple positions open like this was that whole "could be assigned" mixed with the fact that each contract can be exercised for 100 shares of the stock it represents. I figured a good way to plan for that eventuality is to make sure you have enough money to cover an assignment, should it happen. It seems you can never know if, or when, an assignment will come your way, because you never know when the person on the other side of the trade is going to exercise or not. I haven't seen any videos of anyone doing it yet, but I would also assume that there are people who buy options specifically to exercise them at a later point in time, since options are a much less risky way of going about buying stocks. As a stock buying strategy I can see this being a great way to secure a position in a stock without having to actually own any of that stock. I think this is probably what happened to this person, unfortunately, and the person that exercised the options, more than likely does after hours trading quite often and was waiting for the stock price to drastically change in the after hours market. If the price didn't change, no big loss on their end, if it did change to a favorable position then they exercise the options the bought and now have a very favorable position in the underlying stock that they were already planning to be in. If any of that made sense. If my perception of the situation seems a little weird, I apologize. I have never traded options on a real account, and have only done a couple of trades, more than 2 years ago, on a paper trading account.
Very good info , thank you 🙏🏻
This exact same scenario happened to me. Still can't believe these wrongheaded rules even exist. OCC listening?
Some facts:
- S&P released critical index information while the options markets were still open. That is potentially illegal and is never supposed to happen.
- A seemingly very safe $1 wide spread disappears only in after-hours and assignment occurred. This rule appears to be completely asinine. Again..OCC ?
I probably have not been trading options quite as long as Chris but I am far from new. I would wager that very traders even know this potentiality is even possible. It shouldn't be!
a game that is designed to cultivate on beginners.
If you don’t understand this can happen, you should not be trading options! It’s very basic stuff. Nobody reads all the details you are ‘required’ to read before requesting options level in your account, then they have this shit happen and freak out. A short leg is always RISK. What’s the very first rule of trading (anything)? Always control your risk!
@@gavinliu2121 But beginners are TOLD that, repeatedly. But they get all goo-goo eyed over hearing about 500% profits in one day. And that’s entirely possible, hell I’ve had trades make over 10x in half a day, sometimes even in 15 minutes. But risk is always lurking. Nobody is preying on anyone else, it’s just a very vicious game. If you don’t understand the rules, and the possibilities, don’t play!
@@brucea550 Okay Einstein LOL
@@barrycw1 I’ll never be able to say ‘the exact same scenario happened to me’. I’ve had my share of bad trades, but not over simple details like letting expiring short options go into afterhours. There is so much free education available, nobody has an excuse for doing something that crazy.
As soon as you say things like “ A seemingly very safe $1 wide spread disappears... ” and then try to blame the clearing house or the broker, it shows you haven’t educated yourself about options and trading rules. The trade didn’t vanish, it played out according to the rules you didn’t understand. Not trying to make you feel worse about it, but it gets old hearing people try to blame the ‘system’ that they didn’t understand.
And just so if anyone wondering about early assignments due to ex-dividend dates, you dont have to worry about it when you have a credit put spreads. That's why I like them over debit spreads. Because, you are always obligated to buy if the short leg is assigned.
Great video and good looking out.... Very little discussion about this issue... Another issue/challenge is the inability to close out positions, hence leaving you stuck & exposed!
This is a great example of why most people should never do $1 wide spreads. Trader would've been 80% better off with just one spread of 410/405 puts... you probably get a better fill with a $5 wide spreads too, and lower overall fees.
Option are complicated derivatives. Don’t trade option before fully understanding how it works or be the reason you lose more money for beginners watching this video. There’re other ways to simplify the process with the help of an optimum advisory.
It is better to entrust the creation and managing of your trading portfolio to professional, or to create your portfolio exactly like professionals, to follow a large whale like a small fish.
Well said Dave, not everyone understands the commitment involved while trading and not everyone is ready to lose
Even now I still welcome all help, literally, any help is good, it can only make me better.
Kimothy Olsen yeah I’m doing alright trading on a managerial position
Victoria Kokka Olsen depending on whom you’re asking, Trading successfully can either take up one’s lifetime to master or one big push of luck at an extremely opportune occasion, I’m investing in a fruitful partnership to ensure lucrative tradings on my account.
I never let my options expire even if it is OTM I close it out. It’s not worth the risk to keep the contracts open. After watching this I’m even more certain not to let my options expire.
Do you day trade using call debit spreads?
Osmar Castillo nope I don’t day trade.
I tried closing contracts that were "worthless", but my brokerage platform said "N/A" and I felt forced to hold my contracts open. I guess I could have called the brokerage firm.
Q uantum no you can’t close the contracts worthless. You gotta pay at least 1 cent x 100 and in some cases 5 cents x100 to close.
@@nikhilshetty007 Yep better to lose $25 than $30,000 as in this case! TDA minimum is 0.05 I think.
This is very critical information. Thank you very much for the videos. I am usually paranoid about options getting exercised. I always cut my losses and trade it.
ALWAYS buy back your short units @.05, for just this reason and also because you are floating insurance for the person on the other end of your trade that bought the put.
Guy was there collecting pennies and lost whopping 30K. Sending prayers to him. Thank you for this video chris.
yeah man, feels terrible. imagine going to bed thinking you pocketed a nice $2500 only to wake up to that nightmare.
He probably should have collected pennies on T or BAC or WTRH or WKHS lol.
@@G33KST4R He has since committed suicide. RIP sir :-( Please be careful everyone.
A Hass wtf? :/
@@pazuzuxx Source?
How come the 409 put didn't get automatically exercised?
I have the same question.
Because the strike price never reached 409 that day (Friday) and it went worthless, 409 PUT buy order was invalid on Monday.
I belive that excercise on after hours trading is only manual, you have to do this yourself.
@@vking4535 With my brokerage at least, the strike price does not need to reach the strike of your long leg. If the short leg gets assigned, the brokerage automatically exercises your long leg, regardless if the stock price reached it or not.
@@PoopLoop202 I didn't know that long options that are OTM can also be exercised. How is that possible???
Excellent explanation. Usually the specific mechanics of how these options actually work doesn't matter, except when they do - and those edge cases will wipe you out.
I was under the impression that if you get assigned on the short leg, the brokerage automatically exercises your long leg to cover, there is no need for you to do anything. Anytime I've had a spread with the short leg getting assigned, that's what happened.
simple
close your option trades before expiration. that should be options 101
That should be illegal. When the mkt closes it should close for everyone.
indeed, my frend
Exactly
it had extended hour , as same as pre-market hour
The market isn’t technically closed, it’s just past the “regular session”. You can still buy and trade stocks and technically trade options if your brokerage allows that.
It does! YOU, Java, call call your broker (3:00 - 4:30 C) and exercise your ITM put just like anyone else.
That's why you should always buy to close sold options before market close.. Pointless risk. What if there is a black Swan event after hours Friday and you sold puts that were worthless at 3:55pm friday but then go up massive after hours. You can destroy your account for no reason
I've made the same mistake as this guy. I only lost $1,000 as my account was small. Never ever let your sold options expire. Always buy them back even if it means paying commission. It's just not worth the risk.
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Exactly why you always close it out at end. Even if you have to spend a little extra to not achieve max profit never want this unnecessary risk.
True man, Just posted a video about my biggest losses on my channel if youre interested, id love to hear your feedback
This is very educational, thank you! It makes no sense to me how this can even happen, but it did and that is why the video is so helpful!
Always monitor stock options in after hours. This is why I trade SPX index options (or ES Future options) over SPY options. Also I would have liked my broker to exercise the options for me in such an instance, but of course you cant rely on that.
What's the positive on the ES futures option(since you mentioned it. I have not traded them)?
TD ameritrade closes every negative otm option on my account on fridays. Now I now why. Thanks for the info.
You should also talk about scenario where the stock gives out dividend. The short leg could get exercised early (like before ex-dividend date) even though the short leg still has extrinsic value. In this case the extrinsic value is less than the dividend, so it's make sense to exercise the option.
Right, that's an assignment scenario, but that's a different discussion than what is going on and explained in this video.
@@projectfinance Yes, let's not make this confusing.
An incredibly easy fix for this would be too either exercise in the money options automatically at market close only if they are in the money at market close. Or, give everyone all weekend to exercise their options. Or they could eliminate after hours trading in Fridays.
It’s really dumb that they set up the system so this problem can occur. It shouldn’t even be possible.
I had no idea about this thank you so much for this video. You are the only one I’ve seen talk about this.
Glad it was helpful!
This is why I always get out on Thursday
With $TSLA ask and bid how was he able to sell a $1 spread with $1 premium.
Because selling a put a little bit over the put that you bought decreases the price essentially. He wasn’t buying a 409 put outright, he was reducing the cost with the short 410 put
Hello, this is very usefu l information, thank you very much. What I didn't understand well is that 409 is expired for good, trader couldn't exercise tomorrow when market open? It was very last day of option right?
FYI Robinhood will not let you close an option like this one at 0.00 which was at 100% profits, you would have to close it for at least 5 cents or give back at least $5 because you can only buy/sell options in 5 cent increments, cannot list $0.00 as the close price, and cannot close it negative, or in other words, you cannot get more a of credit then the max gain which does happen when the options price gets screwed up, some of my credit spreads often push into -$1 but I can't close them early without cutting my profits since there's very poor coding in the Robinhood app. I wrote them twice but they always say stupid stuff like " You couldn't close your spread because you picked credit instead of debit" well for their info if you pick debit $0.00 to get the full 100% it won't let you select close at all, it instantly says value must be above zero, then if you put in 1 cent it says must be 5 cent increments, update to 0.05, then if you select yes, it subtracts $5 from your credit if it can close your spread.
Options are a gamble and nothing more. Everyone can think they have the market and charts figured out, but the big boys with the big $$$ got you beat. Invest in good companies and you’ll get good results
What are you even talking about...options can be used to offset risk
This is a bad thought that should have been kept inside their mind and not escape into the wild.
Thanks for the video. Usually I never let a position expire, one time I came close. I was in a losing FB Iron Condor(IC) and I was riding it on Friday expiration. The short call was ITM and I was hoping that the stock would lower to allow the challenge call side to become OTM. In the middle of the day the stock never went OTM and I closed the position for a small loss. Luckily that position stayed ITM especially after watching this vid. Now I will never let anything go to expiration - you are no longer in control of the position after the close/after expiration.
I think you can let the long option expire if it's worthless so you can save on the commission and if it by chance moves in the money you can exercise it before 4:30pm as in this case. Is this correct?
@@rupulstilskin I have no idea. I don't know how to exercise a position after hours. I've been assigned and have exercised a protective option, but never after hours
Thanks for getting this information out, Chris. I am glad you're out there watching out for us.
This type of thing seems WAY under-discussed on options training videos. When the confirmation window for a spread purchase pops up on the screen, it should say something like "Maximum profit $1500, Maximum loss: $500 (or 13X your net worth)." People new to trading and who may not fully understand the intricacies and protocols of expiring options put a lot of trust in the safety net of their spread. And the fact that this huge price movement occurred half an hour after market close on the date that the options expired makes the whole thing smack vaguely of collusion and predation. Thanks for posting.
Thank you for sharing this. I'll be closing my positions from here on out instead of letting them expire. Max profit isn't worth the potential of losing large sums of money.
You got it! You just have to make sure to close the short options. You can't get assigned on options you own. I trade with tastyworks and they automatically close near-the-money options for you before expiration to avoid this type of thing. Some commenters have mentioned their brokerages do the same.
Save some commission, just buy back the sold strike. Only the buyer of the option has the right to exercise.
Always close out all spread positions before expiration (debit or credit spreads). You don't want to get caught in no-man's land between the strikes, or in situations like this . Closing out the positions eliminates much headache and grief. Also, in this case, TSLA is notorious for a lot of after hours volatility, but any stock is subject to after market swings - all it takes is a bad news item or some tweet by the CEO to cause havoc, and your DOTM spread is suddenly DITM and you're in DS!
What a hell of a lesson today.