0

Most trading platforms provide a maximum loss calculation for options spreads, but this does not account for the possibility of early assignment which could lead to losses from margin calls, overnight interest, or the position "getting away" if one leg is traded independently as in the case of early assignment.

Is there a simple formula for calculating maximum potential loss that includes losses due to early assignment or margin calls?

0

I'm going to assume that you are referring to a vertical spread because some types of spreads such as calendars and diagonals will have variable outcomes based on other factors.

A vertical spread is a fixed position that involves a long leg and a short leg. It has a maximum risk and a maximum reward. Its P&L should be evaluated without other variables such as margin interest (if assigned) because then, it's no longer a spread, becoming long (or short) equity that is put (or call) protected.

If assigned early on the short leg, ignoring fees, the expiration P&L doesn't change because you still own the long leg. There is no simple one size fits all formula for the new position because you may or may not have the margin to support the position and the remaining long leg may or may not have salvage value (time premium).

This might be a lot clearer to you if you set up a position and then examined the various scenarios that you have suggested, and then determine the P&L of the new position(s) after assignment, along with margin charges, etc.

| improve this answer | |

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.