Where did I screw up?

[DJF 0]

I'm kind of stumped about a recent trade.  May I spell it out for you?  I opened and credit spread for DRI (sold 105 strike for a credit of 1255; bought 125 for a 100 debit).  I understood the contract buyer's break even point to be 117.55 (strike price plus premium paid).  Even with their earnings beat, the underlying price fell.  I normally sell out of these contracts before expiration, but as the stock price stayed well below the 117.55 i was eyeing, I decided to hold out for 100% of the premium collected.

The stock price ended well below that 117.55 but above the 105 strike.  I thought I was the seller of a worthless contract, but 100 shares got called away.  Now instead of realizing max profit, it appears I'm getting hit with max loss.  I'm still not exactly sure how all the account activity will settle.  I got another credit for 100 shares at 105.  I obviously need to buy the shares back (to close the position).  When I calculate this, I naturally lose on that transaction as the shares are higher than 105, but I don't exactly know how to combine everything in this transaction and follow what's happening.


I'm wanting to understand the scenario a bit better.  Any help?  Thanks in advance.

 

[Yowster 9,180]

4 hours ago, DJF said:

I'm kind of stumped about a recent trade.  May I spell it out for you?  I opened and credit spread for DRI (sold 105 strike for a credit of 1255; bought 125 for a 100 debit).  I understood the contract buyer's break even point to be 117.55 (strike price plus premium paid).  Even with their earnings beat, the underlying price fell.  I normally sell out of these contracts before expiration, but as the stock price stayed well below the 117.55 i was eyeing, I decided to hold out for 100% of the premium collected.

The stock price ended well below that 117.55 but above the 105 strike.  I thought I was the seller of a worthless contract, but 100 shares got called away.  Now instead of realizing max profit, it appears I'm getting hit with max loss.  I'm still not exactly sure how all the account activity will settle.  I got another credit for 100 shares at 105.  I obviously need to buy the shares back (to close the position).  When I calculate this, I naturally lose on that transaction as the shares are higher than 105, but I don't exactly know how to combine everything in this transaction and follow what's happening.


I'm wanting to understand the scenario a bit better.  Any help?  Thanks in advance.

 

I'm not sure what expiration you used.   Your spread break-even was 117.50 based on your credit collected, but that doesn't change the fact that you were still short a 105 call.    You sold shares for $105 when your short call was exercised, but you still got to keep the entire 12.55 credit you collected. so your are still money ahead because you effectively sold those shorts for 117.55 (105 strike price  + 12.55 credit collected), which is higher than the current stock price of 112.89.   As long as you previously had the shares to sell in your account (ie. you are not currently short shares) then you don't need to buy anything back to close the position (if you didn't have the shares in your account to cover the short call then you would have to buy back the short shares, but even in this case you'd be money ahead based on the current stock price).   If your long 125 call hasn't expired yet, then you can sell that for whatever its worth.

[TrustyJules 3,212]

If I might add to what Yowster said the problem in your thinking is this±

10 hours ago, DJF said:

but as the stock price stayed well below the 117.55 i was eyeing,

Its logical that you eyed that level when you were watching the position but each option is in fact independent of the other. For what happens at expiration your break-even on a spread only tells you what your net position will be. Like Yowster said you were still short the 105 calls even if the 125$ ones were OTM. You should have closed the ITM position on 105 before expiry (or perhaps you were assigned ahead of time but thats rather rare) - in any case the consequence is that you are short shares, you should have called your broker ASAP and told him to buy them after market or at the open on Monday. Otherwise you have an unhedged short position. Financially you should be ok like Yowster explained:

Credit received: 12.55$

Execution and buyback of $105 strike short call: sold price 105$; purchase price 113$ (based on Friday's close)---> Debit: 8$

Profit: 4.55$ minus commissions.

 

Oh and just in case you thought that, the 125$ calls expire worthless and are not executed to satisfy the 105$ calls.

Edited September 23, 2018 by TrustyJules

[Azov 20]

It’s also important to remember that the holder that exercised the call is almost certainly not the person who originally bought the call from you. The OCC “randomly” assigns short options for assingment/exercise, so you have no way of knowing what the breakeven was for the person who actually exercised the call. It’s possible that they bought the call on a downtick, in which case the $105 strike was profitable for them at expiration. And even the person you sold it to might have exercised to recapture ~$7 of the premium they paid. 

 

The bottom line is that if an option you sold is going to expire in the money, it’s very unlikely you’ll collect 100% of the premium you sold (absent an unlikely and risky series of market moves in your favor). As Jules said, the best course of action in the future is to close out the position before expiration and lock in a nice profit. 

 

Make sure you call your broker first thing on Monday. Hope all goes well in the morning!