Catastrophic Risk from Put Spread

[Andrew-Scott-Music]

I am mentally running through a scenario that could lead to catastrophic loss, and would like your comments as to whether it is possible.
It goes like this:
 

Could this happen?
On Thursday AMZN is trading at $500
I  open the following vertical put spread:
       Sell 10 AMZN $500 puts with Friday expiry
       Buy 10 AMZN $495 puts with Friday expiry.
On Friday Amazon closes at $499.
On Saturday I get assigned on the short $500 puts, obliging me to buy 1000 shares of AMZN stock on Monday at $500.
Also on Saturday, my long $495 puts expire worthless.
On Sunday the AMZN CEO reveals details of a massive debt, downturn in profit, and a lawsuit opened against the company.
On Monday AMZN stock opens at $250.
I am obliged to buy 1000 shares of AMZN stock at $500.
To pay for the stock I need to quickly deposit $500K in my account.
In the unlikely event that I am able to do that, I now own $250K worth of share that I paid $500K for.
I have lost $250K in less than a week.

 

Unlikely, but possible?
 

[Kim]

Absolutely.

 

This is why I always recommend closing all spread positions before expiration.

[luxmon]

Good food for thought.  This twist on your scenario could be even more gut wrenching - Say AMZN shoots up on Friday intraday and your spread is almost 0 and you're happy as a clam.  The news from the CEO you mention comes out right after the close Friday and the stock trades lower after hours but you're out at the bar for happy hour with your buds and fail to realize the opportunity to exercise your 495 put.  The buyer of your 500 put happens to see the news and calls his broker to exercise the option.  I couldn't imagine the heartache on Monday.  

 

I let OTM put broken wing butterflies in the indices expire once in a while but haven't held vertical spreads in single name stocks through expiration in a long time (from now on, never).