Example 1: Long Options
- Account deposits $5,000.
- Account buys 500 contracts of out-of-the-money SPY calls that are expiring that day for $0.10. (Total cost = $5,000)
- The account doesn’t sell the SPY calls before the market closes, they close in-the-money, and the account doesn’t submit a “Do No Exercise” request.
- SPY is down $3.00 the following day.
In the situation described above, all of the calls would automatically exercise, and the account would be long 50,000 shares of SPY the following day. If SPY were down $3.00 on the next trading day, then the account would lose $150,000.
Example 2: Option Spreads
- Account deposits $10,000.
- Account sells 200 at-the-money dollar wide put spreads in SPY that are expiring that day for $0.50. (Buying power reduction = $10,000)
- The spreads are out-of-the-money at the end of the day, so the account doesn’t close the position.
- SPY is down $3.00 in the extended hours and down $4.00 the following day.
In the situation described above, the short puts will likely be assigned, but there is no way to know for sure until the following day. If the puts were assigned, the account would be long up to 20,000 shares. If SPY was down $4.00 on the next trading day, the account would lose $80,000.