An early assignment is most likely to happen if the call option is deep in the money and the stock’s ex-dividend date is close to the option expiration date.
If your account does not hold the shares needed to cover the obligation, an early assignment would create a short stock position in your account. This may incur borrowing fees and make you responsible for any dividend payments.
Also note that if you hold a short call on a stock that has a dividend payment coming in the near future, you may be responsible for paying the dividend even if you close the position before it expires.
If it's at expiration | If it's at expiration |
---|---|
This means your account must have enough money to buy the shares of the underlying at the strike price or you may incur a margin call. Actions you can take: If you don’t have the money to pay for the shares, you can buy the put option before it expires, closing out the position and eliminating the risk of assignment and the risk of a margin call. |
An early assignment generally happens when the put option is deep in the money and the underlying stock does not have an ex-dividend date between the current time and the expiration of the option.
Short call + long call
(The same principles apply to both two-leg and four-leg strategies)
If the and the at expiration |
---|
This means your account will deliver shares of the underlying—i.e., sell them at the strike price. Actions you can take: If you don’t have the shares to sell, or don’t want to establish a short stock position, you can buy the short call before expiration, closing out the position. If the short leg is closed before expiration, the long leg may also be closed, but it will likely not have any value and can expire worthless. |
This would leave your account short the shares you’ve been assigned, but the risk of the position would not change . The long call still functions to cover the short share position. Typically, you would buy shares to cover the short and simultaneously sell the long leg of the spread.
Pay attention to short in-the-money call legs on the day prior to the stock’s ex-dividend date, because an assignment that evening would put you in a short stock position where you are responsible for paying the dividend. If there’s a risk of early assignment, consider closing the spread.
Short put + long put
If the and the at expiration |
---|
This means your account will buy shares of the underlying at the strike price. Actions you can take: If you don’t have the money to pay for the shares, or don’t want to, you can buy the put option before it expires, closing out the position and eliminating the risk of assignment. Once the short leg is closed, you can try to sell the long leg if it has any value, or let it expire worthless if it doesn’t. |
Early assignment would leave your account long the shares you’ve been assigned. If your account does not have enough buying power to purchase the shares when they are assigned, this may create a Fed call in your account.
However, the long put still functions to cover the position because it gives you the right to sell shares at the long put strike price. Typically, you would sell the shares in the market and close out the long put simultaneously.
Long call + short call
If the and the at expiration |
---|
This means your account will buy shares at the long call’s strike price. Actions you can take: If you don’t have enough money in your account to pay for the shares, or you don’t want to, you can simply sell the long call option before it expires, closing out the position. However, unless you are approved for Level 4 options trading, you must close out the short leg first (or simultaneously). The easiest way to do this is to use the spread order ticket to buy to close the short leg and sell to close the long leg. Assuming the short leg is worth less than $0.10, the E*TRADE Dime Buyback program would apply, and you’ll pay no commission to close that leg. |
Debit spreads have the same early assignment risk as credit spreads only if the short leg is in-the-money.
An early assignment would leave your account short the shares you’ve been assigned, but the risk of the position would not change . The long call still functions to cover the short share position. Typically, you would buy shares to cover the short share position and simultaneously sell the remaining long leg of the spread.
Long put + short put
If the and the at expiration |
---|
This means your account will buy shares at the long call’s strike price. Actions you can take: If you don’t have the shares, the automatic exercise would create a short position in your account. To avoid this, you can simply sell the put option before it expires, closing out the position. However, you may not have the buying power to close out the long leg unless you close out the short leg first (or simultaneously). The easiest way to do this is to use the spread order ticket to buy to close the short leg and sell to close the long leg. Assuming the short leg is worth less than $0.10, the E*TRADE Dime Buyback program would apply, and you’ll pay no commission to close that leg. |
An early assignment would leave your account long the shares you’ve been assigned. If your account does not have enough buying power to purchase the shares when they are assigned, this may create a Fed call in your account.
(when all legs are in-the-money or all are out-of-the-money)
If all legs are at expiration | If all legs are at expiration |
---|---|
For call spreads, this will buy shares at the long call’s strike price and sell shares at the short call’s strike price. For put spreads, this will sell shares at the long put strike price and buy shares at the short put strike price. In either case, this will happen in the account after expiration, usually overnight, and is called . Your account does not need to have money available to buy shares for the long call or short put because the sale of shares from the short call or long put will cover the cost. There will be no Fed call or margin call. |
Pay attention to short in-the-money call legs on the day prior to the stock’s ex-dividend date because an assignment that evening would put you in a short stock position where you are responsible for paying the dividend. If there’s a risk of early assignment, consider closing the spread.
However, the long put still functions to cover the long stock position because it gives you the right to sell shares at the long put strike price. Typically, you would sell the shares in the market and close out the long put simultaneously.
How to buy call options, how to buy put options, potentially protect a stock position against a market drop, looking to expand your financial knowledge.
... More ways to contact Schwab
Chat
A butterfly spread 1 is a common strategy among option traders who anticipate a stock's price to be at or close to the butterfly's short strike prices at expiration. The butterfly spread is typically put on as a debit, meaning the trader pays a net premium to initiate the trade.
However, by making a small adjustment to a butterfly spread, it's possible for a trader to potentially turn the debit into a credit through what's called an unbalanced, or broken wing, butterfly.
Following are some examples of potential spreads. For these examples, the assumption is that the underlying stock is trading at $70, and the call option chain looks like this:
Call strike | Call bid | Call ask |
---|---|---|
75 | $1.65 | $1.70 |
80 | $1.10 | $1.15 |
85 | $0.65 | $0.70 |
90 | $0.30 | $0.35 |
A standard butterfly spread is made up of either all calls or all puts, with three equidistant strikes on a 1x2x1 ratio (see image below).
For illustrative purposes only.
In this example, a trader is using a butterfly spread with calls. Using the data from the option chain in the table above, the trader could buy the 75-80-85 call butterfly by buying one each of the 75 and 85 calls (the wings) at their ask prices and selling two of the 80 calls (the body) at the bid price. With the stock at $70, this butterfly would cost $0.20, plus transaction costs ($1.70 + $0.70 – (2 x $1.10).
The point of maximum profit for this butterfly spread (and the apex of the diagram above) is if the stock settles at $80 at expiration. The 75-strike call would, in theory, be worth $5, and the rest of the options would expire worthless, for a potential profit of ($5 – $0.20 initial debit x 100) $480. And the point of maximum loss? If the underlying stock is on either side of the wings, below $75 or above $85, the trader loses the initial debit, $20, plus transaction costs. Traders should consider, however, that short options can be assigned at any time up until expiration regardless of in-the-money 2 (ITM) amount.
As expiration approaches, options might have different risks. Depending on where the underlying stock settles on expiration day, and assuming all in-the-money short and long options are assigned and exercised, respectively, a trader might be left with different positions (see below).
If the stock settles... | the trader will likely end up with... |
---|---|
below $75 at expiration, | no position as all three strikes expire worthless. |
between $75 and $80 at expiration, | a purchase of 100 shares from the exercise of the 75-strike call. |
between $80 and $85 at expiration, | selling short 100 shares from the exercise of the 75-strike call and assignment of two 80-strike calls. |
above $85 at expiration, | no position as all three strikes are exercised/assigned. |
Transaction costs, including exercise and assignment fees, may vary depending on the brokerage firm.
If the underlying stock is near the 80 strike as the option expires, a trader might not know if they've been assigned until after the market closes, so they must wait until the next trading day to cover their position. Additionally, exercise and assignment costs may be higher than standard commission rates. Some option traders choose to unwind such positions before expiration to potentially help reduce these risks.
A trader might decide to "break" the butterfly wing by initiating a spread at a credit instead of a debit. One approach is to choose a higher (and thus less expensive) strike for the last leg (see below). This might allow a trader to collect an initial premium, but it might also expose them to more potential risk.
Referring back to the prices in the option chain table, assume that instead of buying the 85-strike call for $0.70 as the far wing, a trader bought the 90-strike call at $0.35. It costs less and turns the trade into the 75-80-90 broken wing (or "skip-strike") butterfly, and instead of paying $0.20 for the butterfly spread, a trader could take in a credit of $0.15 (with the standard multiplier of 100, that's $15, minus transaction costs).
In theory, if the stock is below $75 at expiration, instead of losing the price paid at order entry, the trader has received a premium after transaction costs. That's why some traders might use a broken wing butterfly as a substitute for an out-of-the-money 3 (OTM) vertical credit spread 4 . But, unlike credit spreads where the maximum profit potential is limited to the entry credit, broken wing butterflies retain the profit potential of the regular butterfly. With this example, if the stock settles at $80 at expiration, the maximum profit of this broken wing is potentially $5 plus the entry credit of $0.15 (or $515 with the standard multiplier), minus transaction costs.
A trader can also review the "if-then" expiration scenarios illustrated above using the 90 strike to evaluate potential setbacks after expiration.
Breaking off, or unbalancing, that wing brings a trader something they might not want—added risk. Because a trader is moving the wing further OTM, they're potentially increasing their risk. For every dollar further away the wing is moving, a trader potentially increases the risk of the trade by $1 ($100 with the multiplier). In this example, moving the highest wing from the 85-strike call to the 90 strike adds $500 of risk, for a worst-case scenario of $485, plus transaction costs ($500 – the $15 initial credit).
thinkorswim® platform
For illustrative purposes only. Past performance does not guarantee future results.
Additionally, a debit butterfly, with equidistant wings, often incurs no additional margin requirements. However, when a trader "breaks" a wing or skips a strike, it's considered a debit spread and a credit spread, so a trader will likely be required to post additional margin.
When evaluating the added potential risk of a broken wing butterfly, some traders set the middle strike of the broken wing at the far end of their expected range for the underlying stock. That way, it'd take a bigger-than-expected move to get the stock to a potential "danger zone." For some traders, it can make sense to close the trade early if it becomes too risky for their strategy or tolerance.
Broken wing butterflies aren't appropriate for every trader, every market, nor every level of implied volatility. But understanding the mechanics of the strategy can help a trader decide whether the strategy makes sense for them.
Because broken wing butterflies can be complicated, it might make sense to practice with a paperMoney ® account before attempting this strategy.
1 Typically a market-neutral, defined-risk strategy composed of selling two options at one strike and buying one each of both a higher and lower strike option of the same type (i.e., calls or puts). The strategy assumes the underlying will remain relatively unchanged during the life of the trade, in which case, as time passes and/or volatility drops, the combined short options premiums exhibit more decay than the combined long options premiums, resulting in a profit when the spread can be sold for more than its original debit (which is also its maximum loss).
2 Describes an option with intrinsic value (not just time value). A call option is in the money (ITM) if the underlying asset's price is above the strike price. A put option is ITM if the underlying asset's price is below the strike price. For calls, it's any strike lower than the price of the underlying asset. For puts, it's any strike that's higher.
3 Describes an option with no intrinsic value. A call option is out of the money (OTM) if its strike price is above the price of the underlying stock. A put option is OTM if its strike price is below the price of the underlying stock.
4 A defined-risk directional spread strategy composed of an equal number of short (sold) and long (bought) calls or puts with the same expiration in which the credit from the short strike is greater than the debit of the long strike, resulting in a net credit taken into the trader's account at the onset.
More from charles schwab.
Related topics.
Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Please read the options disclosure document titled Characteristics and Risks of Standardized Options before considering any options transaction. Supporting documentation for any claims or statistical information is available upon request.
Spread trading must be done in a margin account. Multiple-leg options strategies will involve multiple commissions.
All stock and options symbols and market data shown are for illustrative purposes only and are not a recommendation, offer to sell, or a solicitation of an offer to buy any security. Commissions, taxes and transaction costs are not included in this discussion, but can affect final outcome and should be considered. Please contact a tax advisor for the tax implications involved in these strategies.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
This strategy profits if the underlying stock is outside the wings of the butterfly at expiration.
A short call butterfly consists of two long calls at a middle strike and short one call each at a lower and upper strike. The upper and lower strikes (wings) must both be equidistant from the middle strike (body), and all the options must have the same expiration date.
The strategy is hoping to capture a movement to outside of the wings at the expiration of the options.
This strategy tends to be successful if the underlying stock is outside the wings of the butterfly at expiration.
MAXIMUM GAIN
MAXIMUM LOSS
The investor is attempting to correctly predict an upcoming move in either direction, usually for a limited debit, if any.
The short call butterfly and short put butterfly , assuming the same strikes and expiration, will have the same payoff at expiration They may, however, vary in their likelihood of early exercise should the options go into-the-money or the stock pay a dividend.
While they have similar risk/reward profiles, this strategy differs from the long iron butterfly in that a positive cash flow occurs up front, and any negative cash flow is uncertain and would occur somewhere in the future.
The maximum loss would occur should the underlying stock be at the middle strike at expiration. In that case, the short call with the lower strike would be in-the-money and all the other options would expire worthless. The loss would be the difference between the lower and middle strike (the wing and the body), less the premium received for initiating the position.
The maximum profit would occur should the underlying stock be outside the wings at expiration. If the stock were below the lower strike all the options would expire worthless; if above the upper strike all the options would be exercised and offset each other for a zero profit. In either case the investor would pocket the premium received for initiating the position.
The potential profit and loss are both very limited. In essence, a butterfly at expiration has a minimum value of zero and a maximum value equal to the distance between either wing and the body. An investor who sells a butterfly receives a premium somewhere between the minimum and maximum value, and profits if the butterfly's value moves toward the minimum as expiration approaches.
The strategy breaks even if at expiration the underlying stock is above the lower strike or below the upper strike by the amount of premium received to initiate the position.
An increase in implied volatility, all other things equal, will usually have a slightly positive impact on this strategy.
The passage of time, all other things equal, will usually have a negative impact on this strategy if the body of the butterfly is at-the-money, and a positive impact if the body is away from the money.
The short calls that form the wings of the butterfly are subject to exercise at any time, while the investor decides if and when to exercise the body. The components of this position form an integral unit, and any early exercise could be extremely disruptive to the strategy. In general, since the cost of carry makes it optimal to exercise a call option on the last day before expiration, this should not pose a problem. But the investor should be wary of using this strategy where dividend situations or tax complications have the potential to intrude.
And be aware, a situation where a stock is involved in a restructuring or capitalization event, such as a merger, takeover, spin-off or special dividend, could completely upset typical expectations regarding early exercise of options on the stock.
This strategy has expiration risk. If at expiration the stock is trading right at either wing the investor faces uncertainty as to whether or not they will be assigned on that wing. If the stock is near the upper wing, the investor will be exercising their calls from the body and is fairly certain of being assigned on the lower wing, so the risk is that they are not assigned on the upper wing. If the stock is near the lower wing the investor risks being assigned at the lower wing.
The real problem with the assignment uncertainty is the risk that the investor's position when the market re-opens after expiration weekend is other than expected, thus subjecting the investor to events over the weekend.
Comparable Position: Short Put Butterfly
Opposite Position: Long Call Butterfly
IMAGES
VIDEO
COMMENTS
A call butterfly is a combination of a bull call debit spread and a bear call credit spread sold at the same strike price. The long call options are equidistant from the short call options. Entering a call butterfly will typically result in paying a small debit. The initial amount paid to enter the trade is the maximum defined risk.
Butterfly spreads are designed to profit from different levels of volatility. A long call butterfly spread can help you profit when volatility is low and you think the stock will not move much during the life of the options. A long call butterfly spread could be created by purchasing 1 in-the-money call option contract at a low strike price ...
Therefore, the risk of early assignment is a real risk that must be considered when entering into positions involving short options. While the long calls (center strike price) in a short butterfly spread have no risk of early assignment, the short calls do have such risk. Early assignment of stock options is generally related to dividends.
Figure 2 displays the risk curves for an OTM call butterfly. Figure 2 - FSLR 135-160-185 OTM Call Butterfly. The trade displayed in Figure 2 involves buying one 135 call with FSLR that's trading ...
A short iron butterfly spread is a four-part strategy consisting of a bull put spread and a bear call spread in which the short put and short call have the same strike price. All options have the same expiration date, and the three strike prices are equidistant. In the example above, one 95 Put is purchased, one 100 put is sold, one 100 Call is ...
37294. VIEWS. Butterfly spreads are one of the most popular trades among professional traders, second only to Iron Condors. The are amazingly versatile and unlike Condors, they have a favorable risk/reward ratio. You're going to learn more today about Butterflies than you thought possible, so grab a coffee and strap in.
Assignment risk: Selling the options exposes the trader to the risk of early assignment. Short put assignment: ... For a butterfly, one side of the spread may be slightly in the money unless the underlying is at the short strike. To experience more significant time decay, expirations that are less than thirty days out could be chosen. ...
Assignment Risk. Options can be assigned at any time prior to expiration if an option is in the money. With so many moving parts the risk of assignment is real, with the other disadvantage that the butterfly spread collapses if any leg is assigned. This is manageable, but is a real risk.
A butterfly spread is an options strategy that combines both bull and bear spreads. These are neutral strategies that come with a fixed risk and capped profits and losses. Butterfly spreads pay ...
Butterfly Spread Options Example. Suppose American Airlines stock is trading at $40 in June. An options trader executes a long call butterfly by purchasing a July 30th call for $1100. Writing two July 40 calls for $400 each and purchasing another July 50 call for $100.
Yes, this type of spread involves assignment risk, and must be managed early to prevent surprises. Tesla is right now $700, and I sold the 1000.00 call, so right now its quite far away, and hence no risk of assignment. Butterfly is a debit spread. We buy a call spread, and sell another call spread further out.
This is the long put that a regular put butterfly would have. Therefore, the breakeven price = $333 -$1.16 = $331.84. If the broken wing butterfly is established for a debit, there is also an upper breakeven price: Upper breakeven = Strike price long put (ITM) - net debit paid.
The broken wing butterfly spread can be a fantastic strategy to use to maximize your risk to reward on an option trade. It's always important to compare different option strategies when determining how to best play a move in a particular stock. — Originally Posted December 19, 2023 - Broken Wing Butterfly Spreads - Everything You Need ...
Understanding assignment risk in Level 3 and 4 options strategies. With all options strategies that contain a short option position, an investor or trader needs to keep in mind the consequences of having that option assigned, either at expiration or early (i.e., prior to expiration). Remember that, in principle, with American-style options a ...
Therefore, the risk of early assignment is a real risk that must be considered when entering into positions involving short options. While the long puts (center strike price) in a short butterfly spread have no risk of early assignment, the short puts do have such risk. Early assignment of stock options is generally related to dividends.
It costs less and turns the trade into the 75-80-90 broken wing (or "skip-strike") butterfly, and instead of paying $0.20 for the butterfly spread, a trader could take in a credit of $0.15 (with the standard multiplier of 100, that's $15, minus transaction costs). In theory, if the stock is below $75 at expiration, instead of losing the price ...
Can someone explain the risks of a butterfly spread. It says in the P/L chart that the max profit is $485 and the max loss is -$15 on a Tesla option. ... Correct, pin risk (assignment) is a problem that can cost you a lot more money. Getting out of spreads in volatile stocks can sometimes be a problem, too, but TSLA's pretty liquid, so many not ...
A put butterfly is a combination of a bear put debit spread and a bull put credit spread sold at the same strike price. The long put options are equidistant from the short put options. Entering a put butterfly will typically result in paying a small debit. The initial amount paid to enter the trade is the maximum defined risk.
To do this I wanted to open a butterfly spread 299/300/301, this would cost me somewhere around $5 to open 1 butterfly spread and according to TOS my max profit is $100. This seems too good to be true to be honest and am worried about being assigned because I am selling to open the $300 calls. I am wondering what type of risk I am looking at ...
A short call butterfly consists of two long calls at a middle strike and short one call each at a lower and upper strike. The upper and lower strikes (wings) must both be equidistant from the middle strike (body), and all the options must have the same expiration date.
Therefore, the risk of early assignment is a real risk that must be considered when entering into positions involving short options. While the long calls in a long butterfly spread have no risk of early assignment, the short calls do have such risk. Early assignment of stock options is generally related to dividends.
Therefore, the risk of early assignment is a real risk that must be considered when entering into positions involving short options. While the long options in an iron butterfly spread have no risk of early assignment, the short options do have such risk. Early assignment of stock options is generally related to dividends.
Therefore, the risk of early assignment is a real risk that must be considered when entering into positions involving short options. While the long puts in a long butterfly spread have no risk of early assignment, the short puts do have such risk. Early assignment of stock options is generally related to dividends.