A lot of traders see the Max Loss number on Robinhood or Tastytrade and think that’s the end of the story. But there is a massive gap between theoretical max loss and real-world assignment risk.
Take for example:
You sell a Bull Put Spread on $PLTR.
• Short Put: $25 strike
• Long Put: $23 strike
• Credit received: $0.40 ($40)
• Displayed Max Risk: $160
On expiration Friday, $PLTR closes at $24.00:
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Your $23 Long Put expires worthless (it's OTM).
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Your $25 Short Put is In-The-Money and you are assigned.
The Result:
Come Monday morning, you don't have a $160 loss. You have a $2,500 long stock position per contract. If you were trading 10 contracts to size up, you are now long $25,000 of stock. If you don't have the buying power, your broker will likely liquidate you at the market open, regardless of price, leading to a Buying Power Shock or a massive margin call.
These defined Risk metrics don't account for:
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In-Between Strike Risk (Pin Risk)
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After-Hours Movement
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Buying Power Volatility
Question:
How many of you actually hold spreads through the Friday close, and how do you monitor the above risks?
The 3 Risks Your Broker Doesn't Highlight in the Max Loss Tab
byu/Gullible_Parking4125 inoptions
Posted by Gullible_Parking4125
5 Comments
true. But clearly anyone who’s holding onto expiry & with price action around the strikes should be managing the position
Anyone who is holding American style options to expiry under the illusion of max loss probably should not trade options.
Why holding an ITM short put through expiration if you don’t have the cash to buy the stock? Just close the trade before expiration.
Pray the price stays or goes up by Monday morning and sell. Personally, I’d close it out before it expires but I was new and stupid once and that’s how I got out of it.
Technically, at expiration, it is your max loss; any additional loss is due to market movement after expiration.
Having said that, it’s Options 101 to close spreads prior to expiration.