Do you have a spread (or vertical) facing expiration and don't know what will happen to it? Well, you've come to the right place. Below are three possible situations your spread position may face and what may happen:


If you are trading cash-settled index options such as SPX, NDX, RUT, etc. then you're battling an entirely different animal. To learn how cash-settled indexes are handled then click here.



Spread is completely in-the-money (ITM)

Spreads that expire in-the-money (ITM) will automatically exercise. Generally, options are auto-exercised/assigned if the option is ITM by $0.01 or more. Assuming your spread expires ITM completely, your short leg will be assigned, and your long leg will be exercised. For short credit spreads, this will result in your max loss, which is calculated by taking the Credit Received MINUS the Spread Width (multiplied by quantity if there is more than one spread). On the other hand, for long debit spreads, this typically results in your max profit, which is calculated by taking the Spread Width MINUS the debit paid. Each leg is charged a $5 exercise and assignment fee, regardless of the quantity per leg. 


If you are interested in avoiding exercise/assignment fees, you may want to close out of your ITM spreads before expiration. We make it easy for you to do this with $0 commissions to close!


Here's a tip: Even if you were to close a position (5-lot or less) by paying a penny or two over the spread width, you'd still be saving money by avoiding exercise/assignment fees. Bid-ask spreads can be wide, which can result in difficulty closing, but if the spread width is $5, paying $5.01-$5.10 to get a fill would be cheaper than just letting the spread expire and being charged the exercise/assignment fees on both legs. The platform will only allow you to pay $0.10 max above the spread width, so please be aware of your quantity when considering this method. To learn how to close an ITM spread, please click here.



Short Spreads

XYZ stock closes at $100 on Expiration Day
Position (1-lot)     ITM/OTMAuto-exercise?FeeResulting Position
Short 90 Call,
Long 95 Call
ITMYes$10 ($5/leg)Max Loss = Spread - Credit Received
Short 105 Call,
Long 110 Call
OTMNoNoneNone, you keep the premium received
Short 95 Put,
Long 90 Put
OTMNoNoneNone, you keep the premium received
Short 105 Put,
Long 110 Put
ITMYes$10 ($5/leg)Max Loss = Spread - Credit Received

 

Long Spreads

XYZ stock closes at $100 on Expiration Day
Position (1-lot)
ITM/OTM  Auto-exercise?FeeResulting Position
Long 90 Call,
Short 95 Call
ITMYes$10 ($5/leg)Max Profit = Spread - Debit paid
Long 105 Call,
Short 110 Call
OTMNoNoneNone, you lose debit paid
Long 95 Put,
Short 90 Put
OTMNoNoneNone, you lose debit paid
Long 105 Put,
Short 110 Put
ITMYes$10 ($5/leg)Max Profit = Spread - Debit paid


Spread is partially in-the-money

Spreads that are between vertical strikes are subject to discretionary closure by our Risk and Margin team if your account does not have sufficient funds to hold the resulting position, whether long or short. This is one situation when a defined-risk spread no longer becomes defined-risk since the long leg may expire worthless. That said, if your account has sufficient funds to hold the resulting position, then you will be assigned and charged a $5 assignment fee.



Spread is completely out-of-the-money (OTM)*

Spreads that expire out-of-the-money (OTM) typically become worthless and are removed from your account the next business day. There is no fee associated with options that expire worthless in your portfolio. *That said, there is one exception to short options position, which is a part of a spread. Despite expiring OTM, short options positions still have assignment risk. The only way to eliminate assignment risk is by closing out of your short options position before expiration.