At this time, we’re going to have a look at an instance of a failed bull put credit score unfold commerce.
In actual fact, the dealer awoke Friday morning to see that he was assigned 100 shares of Tesla, though it was not on the expiration of his choice.
This is called an early project.
Let’s see what occurred and get out of this mess.
Contents
The dealer entered a bull put credit score unfold on June 24, 2025, as a result of Tesla (TSLA) broke out of a pendant chart sample with a robust bullish inexperienced candle the day earlier than…
The bull put credit score unfold consists of promoting the $350 strike put choice.
That is the choice that he’s brief, also referred to as the brief strike.
And it consists of shopping for the $345 strike put choice to restrict the potential loss.
That is the lengthy strike.
Date: June 24, 2025
Value: TSLA @ $341.85
Promote to open one July 18 TSLA $350 put @ $23.73Buy to open one July 18 TSLA $345 put @ $20.98
Credit score: $275
Each choices expire on July 18, and the P&L graph at expiration appears to be like like this…
In contrast to typical credit score spreads which are positioned far out-of-the-money, this put credit score unfold is positioned at-the-money, proper the place TSLA’s present value is.
When it’s positioned this near the cash, the unfold behaves like a bull name debit unfold. The danger graphs of the 2 appears to be like would look the identical.
The aim of this at-the-money credit score unfold is to not gather credit score and revenue from time decay however relatively a directional wager on the upward motion of TSLA inventory.
That is evidenced by the very low theta (0.39) and the numerous optimistic delta of 4.09.
We will see from the upward-sloping T+0 line that the revenue of the unfold will increase as the worth of TSLA will increase to the correct alongside the horizontal axis.
On July 1, TSLA dropped to $300.
Oops, the inventory is transferring within the improper path.
That is additionally a failed breakout sample.
The sample broke out to the upside, which is the thesis of the commerce.
However now the inventory is beneath the pendant sample.
This invalidates the sample.
The bull put credit score unfold is at a lack of -$172:
As a result of the unfold is a defined-risk commerce and the dealer couldn’t lose greater than $225, the dealer most likely thought the inventory may bounce again and proceed to carry the unfold.
Max potential loss = width of unfold – credit score obtained = $500 – $275 = $225
Pattern Iron Condor Buying and selling Plan
The morning of Friday, July 18, is expiration day.
Whereas some expiration dates are AM expirations the place settlement is on the morning of the day of expiration, this was not one in all them.
This Friday, July 18, is a daily PM expiration, which signifies that the bull put credit score unfold is because of expire on the finish of the buying and selling day.
Nonetheless, when the dealer checked his account one hour after the market opened, he noticed that he had 100 shares of TSLA inventory that he didn’t have earlier than.
Moreover, he noticed that he not had the brief put choice.
The July 18 TSLA $350 put that he had shorted (initially offered) was not in his account.
The dealer realized that his brief put choice was assigned.
Since this was technically not on the expiration of the brief choice, it meant that he was early-assigned.
This meant that somebody on the opposite facet of the commerce, who’s holding the lengthy July 18 TSLA $350 put contract, determined to train that contract.
To train this put contract means to train the correct to promote 100 shares of TSLA on the strike value of $350.
The counterparty should have wished to unload 100 shares of their TSLA inventory for any variety of causes — one in all which is likely to be that TSLA is asserting earnings the approaching week.
As a result of the worth of TSLA was round $326 on the time, promoting at $350 is an efficient deal.
The $350-strike put choice is taken into account “in-the-money” as a result of it has intrinsic worth (the one who workouts it might revenue).
In any case, if this put choice continues to be in-the-money at expiration on the finish of the buying and selling day (which it almost certainly would), the brokers would have mechanically exercised this selection of the counterparty.
For the reason that counterparty offered the 100 shares, somebody needed to take these 100 shares. Our dealer was the holder of the brief put of that contract.
Our dealer needed to take (or purchase) these 100 shares at a value of $350 per share.
That could be a value of $35,000 to purchase these shares.
Nicely, if the account measurement is giant sufficient and the dealer doesn’t thoughts proudly owning 100 shares of TSLA, he can proceed to simply maintain TSLA inventory.
But when the account measurement is simply $50,000, then these 100 shares of TSLA signify a excessive directional threat and an outsized allocation of the account to at least one inventory.
Thankfully, the dealer nonetheless has an extended $345-strike put choice that permits him to promote these 100 shares at $345 per share if he decides to train this put choice.
The put choice is about to run out on the finish of the buying and selling session.
He can name his dealer to train the put choice now.
Or if TSLA continues to be beneath $345 on the time of expiration, his dealer will auto-exercise that put choice for him at expiration.
Both means, he finally ends up promoting his 100 shares at $345. Having purchased at $350 and offered at $345, he loses $5 per share.
Misplaced $500 general, however partially offset by the $275 credit score that he obtained initially firstly of the commerce.
Due to this fact, his internet loss is -$500 + $275, or -$225, which is the max threat of the credit score unfold (as calculated beforehand).
There may be one other means he can deal with it.
No have to name his dealer.
No want to attend for expiration. Clear up this mess straight away.
He sells his 100 shares of TSLA straight away on the market value of $326.30.
Then he sells his lengthy $345 put choice, fetching a value of $19.50 (on a per share foundation), or a internet value of $1950 for one contract.
Preliminary credit score from bull put unfold: $275
Assigned 100 shares at $350 per share: -$35,000Sold 100 shares at $326.30 per share: $32,630Selling this lengthy put choice: $1,950
Web P&L: -$145
This loss is lower than the utmost potential loss.
Both the place was not at max loss on the time, or it could possibly be that TSLA moved favorably after the project.
Observe that it’s potential to promote the 100 shares and the lengthy put in a single transaction. As a result of one is a hedge for the opposite, it’s splendid to promote them each about the identical time.
Credit score spreads are defined-risk trades.
So they’re appropriate for starting choices merchants.
Should you commerce sufficient of them, you may encounter a scenario the place shares of inventory are assigned early.
However that isn’t something scary if what to do and deal with early assignments.
The outlined max threat of the credit score unfold continues to carry true as much as the purpose of expiration, even you probably have been assigned early — so long as you handle it correctly.
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We hope you loved this text exhibiting an instance of a bull credit score unfold project.
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Disclaimer: The knowledge above is for instructional functions solely and shouldn’t be handled as funding recommendation. The technique introduced wouldn’t be appropriate for buyers who aren’t accustomed to trade traded choices. Any readers on this technique ought to do their very own analysis and search recommendation from a licensed monetary adviser.
