Assignment with After Hours Movement Questions

[tjlocke99]

Hello. I know Chris had a long thread on assignment, but I am still confused by a few things.

Let's say you own an AAPL 665/670 12 Oct long vertical call spread.

12 Oct comes along and the stock closes at 664.95, and you decide to let the vertical expire worthless. At 4:10 PM the stock goes up to 671 in after hours training. You will get assigned on the short 670, but what happened with the 665 long you owned?

What I have read about most brokers if the option is $.01 in the money they will auto-exercise it for you, but in this case the stock closed OTM.

Additionally, let's say you have an account with $30k in it and you own10 of these verticals. How could you even purchase the 1000 shares?

Thank you for your time!

[cwelsh]

If the stock goes to 671 BOTH get exercised, so the net effect in your account would be to gain $500 per contract.

Options are NOT exercised on Friday, rather on Saturday, so the price is the price AFTER after hours trading (on most equities, not always true on indexes or ETFs, be sure to know when the exercise price is calculated -- sometimes it's even Thursday at 10:00am).

If you had an account with $30K and you owned 10 of the verticals, your account would reflect some really big numbers in it that normally would give your broker a heart attack and put you into margin call. HOWEVER, since both are exercised, you just net positive $5,000.00.

The bigger risk is what happens if it closes at 664.95, and then in after hours it goes to 667.00. Well the long position gets exercised, and if you had ten contracts, you now own 1,000 shares of AAPL, purchased for a price of $665,000.00. You only had $30K in your account, which means your account is now valued at (635,000.00). You will immediately be put into a regulation T call and either have to put that cash into your account, or your broker will liquidate the AAPL position at the open on Monday.

What if the price of AAPL opens at 650? (a $17,00 drop from close, a big drop, but not impossible). Well you get $650,000 for that AAPL you paid $665,000 for. That's a $15,000.00 loss, so your account is now at $15,000.00. Fun times for all.

Moral -- DONT EVER TAKE THAT RISK. The only time I ever risk assignment is a) if at close on Friday there is no real chance of assignment due to after hours trade or an assignment won't trigger a Regulation T call.

[tjlocke99]

Great response Chris. Thank you.

[Guest DShaver]

Chris,

This isn't the first time we've discussed this, but you're giving the exact opposite information that the guys at the TOS trading desk told me. I asked them this specific type of event, a stock closes at 4pm EST at 664.95 but closes between the strike after hours. They swore that since the options aren't traded in after hours that the last price used to determine whether a stock is ITM or not is what the price was at 4 pm eastern time which does make sense since you have to tell your broker yes/no on option exercises by 430pm on most brokers if they're not going to be auto-exercised. Now I never let my options expire worthless if there is any chance that a price change might happen after hours, mostly because of what you've said, but when a guy working the desk at TOS says no after hours doesn't matter and then you (Chris) says yes it does matter, who am I supposed to believe?

[tjlocke99]

but when a guy working the desk at TOS says no after hours doesn't matter and then you (Chris) says yes it does matter, who am I supposed to believe?

my money is on Chris

as an aside Chris, do you think this after-market options activity is a rule designed to benefit large institutions and MMs?

[cwelsh]

I know what the TOS guys at the TDAmeritrade option desk say, I've had this argument with them. I'll post you the CBOE link tomorrow.

I know for a FACT this is how it works because I got my #$#$ handed to me once getting assigned on after hours trading -- right AFTER having talked to the options desk an hour before close to find out. That resulted in a letter to them, and eventually a refund to my account, and an apology for "misstating information."

Don't trust the option guys at TDAmeritrade, they frequently don't know what they are talking about. That's not to say they all don't, I've run into smart ones that probably know more than me, but there are plenty that will give wrong advice. That said, if they do give wrong advice, and you lose money DIRECTLY because of it, they'll eventually refund it (have to).

[Guest tkast36]

Hello. I know Chris had a long thread on assignment, but I am still confused by a few things.

Let's say you own an AAPL 665/670 12 Oct long vertical call spread.

12 Oct comes along and the stock closes at 664.95, and you decide to let the vertical expire worthless. At 4:10 PM the stock goes up to 671 in after hours training. You will get assigned on the short 670, but what happened with the 665 long you owned?

What I have read about most brokers if the option is $.01 in the money they will auto-exercise it for you, but in this case the stock closed OTM.

Additionally, let's say you have an account with $30k in it and you own10 of these verticals. How could you even purchase the 1000 shares?

Thank you for your time!

 

Chris answered this very well. I have a similar question regarding short options prior to Expiration. 

 

If I sell a call or put and it is OTM at Market Close (Expiration may be a day or a week away yet), but the option goes ITM in After Hours Trading. Can I possibly be assigned prior to Market Open the next day?

 

Thank you.

 

Tom

[tjlocke99]

Chris answered this very well. I have a similar question regarding short options prior to Expiration. 

 

If I sell a call or put and it is OTM at Market Close (Expiration may be a day or a week away yet), but the option goes ITM in After Hours Trading. Can I possibly be assigned prior to Market Open the next day?

 

Thank you.

 

Tom

 

Tom,

 

I was going to answer this, but I think I'll let one of the gurus handle it.  On a quick note though I believe it is unlikely to get assigned if you have more trading days left until expiration because there is almost also some extrinsic value left on an option.  Unlikely but not impossible because Chris has a story or two when this happened to him. 

 

When someone exercises with extrinsic value left on it they lose that extrinsic value.  I know around ex-dividend dates this can be slightly different.

[Guest Steve]

Is there a documented rule on after hours trading and option strike prices? What I mean by this, is say after hours someone makes a rogue trade in that sends a $100 stock to $200 for less than 3 minutes before immediately dropping in after hours trading back to a normalized price of $115. Will all options everywhere with up to $200 strike price get triggered because the price crossed this threshold for 1a trade or two?