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How can you "wipe out" your account if you don't close a spread? AFAIK Robinhood does not allow for naked calls/puts or selling strangles without a collateral u

How can you "wipe out" your account if you don't close a spread? AFAIK Robinhood does not allow for naked calls/puts or selling strangles without a collateral upfront.

koolba 8y ago
If you don't close a spread prior to it expiring then it's possible for a execution of the option by the counter party. In that situation you can be forced to either provide the securities (if you sold calls) or forced to buy the stock (if you sold puts). As it happens at the expiration of the option you no longer have the option to exercise the other half of your spread. As the margin required for a spread is substantially less than the full price of the security (which is the whole point of the spread), you can end up in a situation where you're forced to buy more stock than the total liquidation value of your portfolio. Plus this happens at the close on a Friday (as that's when option expiration happens) so you can't liquidate the stock until Monday morning and you're at the mercy of the opening price. If the quantity of options sold is large enough and the price moves against you far enough, you can get completely wiped out. It's your responsibility to close out your spreads prior to close. FYI, this situation can happen even if they're out of the money as the counter party to the worthless option could still choose to exercise it.
- radiusvector 8y ago
  Could you give me a concrete example? To me, it sounds like you are describing a naked short call, or a short put. It is not a spread. By definition, spreads have limited risk, and limited rewards. The four main types of spreads. Take a look at the PNL diagrams. It is limited risk. https://www.optionseducation.org/strategies_advanced_concepts/strategies/bear_call_spread.html https://www.optionseducation.org/strategies_advanced_concept... https://www.optionseducation.org/strategies_advanced_concepts/strategies/bear_put_spread.html https://www.optionseducation.org/strategies_advanced_concept... https://www.optionseducation.org/strategies_advanced_concepts/strategies/bull_call_spread.html https://www.optionseducation.org/strategies_advanced_concept... https://www.optionseducation.org/strategies_advanced_concepts/strategies/bull_put_spread.html https://www.optionseducation.org/strategies_advanced_concept...
  - koolba 8y ago
    Read this article: http://tastytradenetwork.squarespace.com/tt/blog/options-assignment http://tastytradenetwork.squarespace.com/tt/blog/options-ass... The situation I’m describing is when the sold option expires in the money but the purchased cover does not. It won’t automatically execute and you’re left with essentially a naked short.

How can you "wipe out" your account if you don't close a spread? AFAIK Robinhood does not allow for naked calls/puts or selling strangles without a collateral upfront.

koolba 8y ago

If you don't close a spread prior to it expiring then it's possible for a execution of the option by the counter party. In that situation you can be forced to either provide the securities (if you sold calls) or forced to buy the stock (if you sold puts). As it happens at the expiration of the option you no longer have the option to exercise the other half of your spread. As the margin required for a spread is substantially less than the full price of the security (which is the whole point of the spread), you can end up in a situation where you're forced to buy more stock than the total liquidation value of your portfolio. Plus this happens at the close on a Friday (as that's when option expiration happens) so you can't liquidate the stock until Monday morning and you're at the mercy of the opening price. If the quantity of options sold is large enough and the price moves against you far enough, you can get completely wiped out. It's your responsibility to close out your spreads prior to close. FYI, this situation can happen even if they're out of the money as the counter party to the worthless option could still choose to exercise it.

radiusvector 8y ago
Could you give me a concrete example? To me, it sounds like you are describing a naked short call, or a short put. It is not a spread. By definition, spreads have limited risk, and limited rewards. The four main types of spreads. Take a look at the PNL diagrams. It is limited risk. https://www.optionseducation.org/strategies_advanced_concepts/strategies/bear_call_spread.html https://www.optionseducation.org/strategies_advanced_concept... https://www.optionseducation.org/strategies_advanced_concepts/strategies/bear_put_spread.html https://www.optionseducation.org/strategies_advanced_concept... https://www.optionseducation.org/strategies_advanced_concepts/strategies/bull_call_spread.html https://www.optionseducation.org/strategies_advanced_concept... https://www.optionseducation.org/strategies_advanced_concepts/strategies/bull_put_spread.html https://www.optionseducation.org/strategies_advanced_concept...
- koolba 8y ago
  Read this article: http://tastytradenetwork.squarespace.com/tt/blog/options-assignment http://tastytradenetwork.squarespace.com/tt/blog/options-ass... The situation I’m describing is when the sold option expires in the money but the purchased cover does not. It won’t automatically execute and you’re left with essentially a naked short.