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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

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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.

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  • I was 100% returns on my condor (SPY)... they close my contracts after 12PM and I am down 5k after they closed it... my puts expired worthless... why the heck did my calls got executed in a loss when my short was 412 and long was 413... also... market never came close to 412 or 413...
    – thevoipman
    Apr 11, 2021 at 0:42
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    By my calculation, if Robinhood had allowed the position to remain open, and SPY had closed at $412.50, then the asker would have ended up with a short position with a market value of $26,070,000. Then SPY could well have risen as much as 5% or more by Monday morning, leaving the asker with more than a $1,000,000 loss. Perhaps they should be glad that they only lost a mere $5,688. Apr 11, 2021 at 0:53
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    @thevoipman SPY was about 410.56 when they closed your position, a 0.36% move would put your short call ITM. That is very close. Your calls didn't get executed, they bought/sold to close to protect you (and them) from very significant risk. If they had been far enough OTM they would have expired worthless as expected, but it's hard to know how far OTM a broker feels is 'safe', so that's why it's advised to avoid any situations where they'd be tempted to intervene (typically it's last hour of trading on expiration day.
    – Hart CO
    Apr 11, 2021 at 1:45
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    Robinhood has a policy of closing short options at 3:30 PM on expiration day. I assume that's only if one doesn't have sufficient margin to carry the position. Everyone who pointed out that this is appropriate risk management on their part is correct and given all of Robinhood's legal and financial issues over the past few years, it's for their own protection. It probably also appropriate for their account holders given that the majority don't have a clue about risk management. But any way you cut it, I wouldn't go near Robinhood. It's a Mickey Mouse operation. Apr 11, 2021 at 2:52
  • @TannerSwett yes, risk was there, and spy did not close at $412.50... Around 12:30, market was only at $410, but I guess I was in their risk threshold so they had to close on my behalf. Lesson learned here is to close on your own when you see fit... If i were to close around 9-11am... my lost would've been under $800...
    – thevoipman
    Apr 11, 2021 at 3:17
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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.

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  • it was for $spy... The market price was never near my short strikes... I was under the assumption that my call short and long would expire to become worthless as well? I do agree that I should've dealt with it myself rather than letting Robinhood closed/execute/sold it on my behalf... Big lesson learned for sure!!!!
    – thevoipman
    Apr 11, 2021 at 0:24

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