C'mon lucky 7
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I sold some put spreads on NVDA last week (because the stock market is my favorite computer game), which are defined-risk options where I get some money immediately on selling them, and if the NVDA price stays above a certain level, I keep the money. If the price drops, I lose up to $250 per contract. Everything looked good till Friday when the trade war stuff happened, and NVDA fell to almost exactly the level I needed it to stay above. At close on Friday, it was 183.11, and I needed it to stay above 182.5. The funny thing is that the put option for 182.5, expiring last Friday, was still selling for $41 per contract just before market close, when it was a certainty that the price would close above that level. The reason for this is that options can be exercised for an hour or so after the market closes, by calling one's broker. People buying those puts were betting $41 that within an hour of closing, the after-hours market price would drop below 182.5. Then they'd call their broker to exercise the options, which would allow them to sell shares at 182.5, while they could buy in the after-market for less than that. It turns out that Trump did post something in the hour after close, and the price did fall to 179. So, any holder of any of those contracts could have made money by exercising their options. But generally, most people don't exercise their contracts in that circumstance, because they're not paying enough attention.
So I was the guy who would have bought those shares at 182.5, because that's what the put contract I sold, obligates me to do. But only if the person I sold the option to, exercised them after market. In more normal circumstances where the price closes below the contract price, options are automatically exercised, and buyers and sellers know exactly what will happen. But in this case, I may wake up tomorrow with a bunch of NVDA shares I was obligated to purchase at 182.5. The fun thing is that Monday is looking good and the pre-market price is currently 188, so I'd profit $550 per contract that got exercised. But it all depends on whether any of those contracts got exercised. Anybody who didn't exercise the options left free money on the table, and everybody who was buying those options just before close definitely exercised them. But I don't think all the holders of those options would be aware enough to exercise them. I won't know whether my contracts got exercised until tomorrow morning, which is when my broker notifies me about option exercises. In these cases of discretionary exercises, it's totally random which seller of the contract gets assigned. If 30% of the existing contracts were exercised, then I can expect 30% of my contracts to be exercised, but it could be any number from 0 to all of them.
I wasn't too happy in the after hours on Friday when I saw I had some unprotected short puts that might get exercised, but at least now it's fun rather than stressful. Assuming Trump doesn't post something catastrophic tonight.
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put spreads are defined risk in theory, but in this case, the risk is unlimited. Because I lost the protection of the downside long put after close Friday. If NVDA goes to zero tonight, my fun little bet where I was making $50/contract if I won, and risking up to $200/contract if I lost, would cost me $18,200 per contract. I could have de-risked by buying back all my contracts for $41 each just before close on Friday, but I let it ride.
