Calendar Spread

[Richard795 0]

I've always wondered what happens if you hold a calendar spread right to the end of the short strike and it expires in the money?

For example stock ABC short April 1 long April 15 strike is 30, what happens if at 2:59 of the Friday the stock is at 35 will I get assigned on Monday? I know that the short and the long will both have 5 extrinsic value but would I be forced to buy X# of shares at the 30 strike price?

Also I know that one should never hold to expiration because of the gamma risk but the last calendar I did was AZO, I held it right up to the second last day then sold it for quite a profit, I would have held it longer but my short strike was about 7 in the money and with a stock at 770 didn't want to get caught.

[Yowster 7,974]

I've always wondered what happens if you hold a calendar spread right to the end of the short strike and it expires in the money?

For example stock ABC short April 1 long April 15 strike is 30, what happens if at 2:59 of the Friday the stock is at 35 will I get assigned on Monday? I know that the short and the long will both have 5 extrinsic value but would I be forced to buy X# of shares at the 30 strike price?

Also I know that one should never hold to expiration because of the gamma risk but the last calendar I did was AZO, I held it right up to the second last day then sold it for quite a profit, I would have held it longer but my short strike was about 7 in the money and with a stock at 770 didn't want to get caught.

What happens depends on if you have a put calendar or a call calendar.  Say you have a 50 strike calendar that you let the short leg expire in the money:

• With a put calendar, you will be assigned 100 shares at a price of 50. 
• With a call calendar, you wind up with a short sale of 100 shares at a price of 50, or, if you happen to own 100 shares of the stock, you would wind up selling the stock at a price of 50.

In both cases, you keep the entire up-front credit that was collected.  Also, the long legs of your calendar remain intact since those options did not expire.

[equus 26]

On 3/24/2016 at 2:20 PM, Yowster said:

What happens depends on if you have a put calendar or a call calendar.  Say you have a 50 strike calendar that you let the short leg expire in the money:

• With a put calendar, you will be assigned 100 shares at a price of 50. 
• With a call calendar, you wind up with a short sale of 100 shares at a price of 50, or, if you happen to own 100 shares of the stock, you would wind up selling the stock at a price of 50.

In both cases, you keep the entire up-front credit that was collected.  Also, the long legs of your calendar remain intact since those options did not expire.

Yowster, to follow up on this what would be the smart play if you found yourself in either situation? Would it be to flatten the shares (selling the shares in the case of the put calendar or buying back the shares in the case of the call calendar) and immediately close the remaining long leg of the calendar? Would it matter whether this was done on the Monday following assignment or later in the week? Thanks

[Yowster 7,974]

5 hours ago, equus said:

Yowster, to follow up on this what would be the smart play if you found yourself in either situation? Would it be to flatten the shares (selling the shares in the case of the put calendar or buying back the shares in the case of the call calendar) and immediately close the remaining long leg of the calendar? Would it matter whether this was done on the Monday following assignment or later in the week? Thanks

@equusIn this case, the position you'd be left with is equivalent to the calendar you had before it was assigned, as your long or short stock position is still covered by your longer dated option, but you short leg always has a time value of zero.   What the position you are left with is worth is basically the time value in your long option.   The position will have more capital allocated and if you happen to be short the stock then you'll have the interest to pay on that too.   When you close this new position will be up to you, but if you want it to behave like the calendar, you'll want to close both the stock position and the option position at the same time.