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Failed Iron Condor while market price was under Short Call Spread

Personal Finance & Money Asked by thevoipman on May 10, 2021

Symbol is: SPY. My short call spread was at $412, and market price was $410.50… I was 100% in returns until RH closed my call spread for a negative $5,688… I do not understand what I did wrong here… any help on this is greatly appreciated.

Failed Iron Condor while market price was under Short Call Spread

2 Answers

Every broker has some risk-management that will intervene in certain situations. A common situation that gets managed by the broker is when a spread is in danger of expiring with one leg ITM as was the case in your situation. Most brokers I'm familiar with will risk-manage positions in the last hour of market hours on expiration day.

If they had let it go to expiration and it closed between your strikes, you'd have been assigned -63,200 shares and your long call would expire worthless. If the underlying opened higher on Monday you'd need $63,200 for each $1 increase in the underlying to cover your short shares.

To avoid that risk, they closed the position on your behalf. You should learn how your broker manages these sort of situations because they all have their own approach (but most would likely do the same thing in this case). The typical recommendation is to manage positions yourself before they intervene. Many options traders do not let spreads expire unless they are very far OTM or they have cover for the short leg(s).

Other common advice is to trade fewer wider spreads rather than many very narrow spreads, and many people suggest avoiding weeklies and managing with 14+ dte. Everyone has their own strategy so wouldn't suggest any of the above suits everyone, but it is definitely important to understand which scenarios prompt your broker to intervene and what steps they will take.

Correct answer by Hart CO on May 10, 2021

There's some missing information in this.

Was the underlying near or even over $412 during the day? If so, you should have dealt with the short call yourself yesterday, if not sooner.

You sold the Iron Condor so you received a credit. Was it larger than the call spread close out loss?

AFAIC, Robinhood has a dubious option close out policy. I believe that it's 3:30 PM. If they don't already do so, they should notify account holders of the need to close out short options due to the large directional risk that arises should the underlying finish b/t the two strikes (the long leg expires worthless).

A good rule of thumb is to avoid trying to squeeze out the last nickel of a short option position. Take the win.

Answered by Bob Baerker on May 10, 2021

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