Short options trade ITM assignment criteria

External question — Personal Finance Stack Exchange Author: JohnZee Original post: https://money.stackexchange.com/questions/144431 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. Can someone please explain something about the option spreads? How come this broker is not exercising these short options in this video as they are deep in the money? https://www.youtube.com/watch?v=0djdzr4Jsh0 I took a class where they warned that once your short position is in the money always be afraid of it getting exercised anytime. If you don't have a big enough account to cover the assigned shares you could lose a lot of money. So they said to consider closing the short position once it's in the money. It stuck in my mind and once my short call or put is in the money I always exit the trade even if it's a loss. I know that there are still 4 days left for the expiration in these trades that John Carter is doing but still this could be millions of dollars of assignment, if it happens. Obviously if the broker or the trader on the other side is going to lose money then they won't exercise. Is there a clear formula or calculation I need to perform to see if an assignment will happen or not, the only ones I know for sure is the expiration or dividend day. Thanks John

External answer — Personal Finance Stack Exchange Author: Bob Baerker Original post: https://money.stackexchange.com/a/144443 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. American options may be exercised early if: They are ITM and the bid trades at a discount to the intrinsic value (a long option owner sells at that price). The buyer does a discount arbitrage and someone gets assigned. There is a pending dividend which offers an arbitrage So if a deep in the money option has time premium remaining, it makes no sense to exercise it since you would be throwing away the time premium by doing so. The exception to this would be if your closing commission costs exceed that time premium. As long as you own the long leg, you can't lose more than the spread's maximum risk. Where you can lose a lot of money is if the short option is ITM at expiration, the long leg expires and then you have large directional equity risk on the next trading day. How early exercise is handled depends on the broker. If exercised early and you don't have the cash and/or marginable securities to support the position, your broker will close the equity position and you likely have an account violation. You don't want your broker doing this because it often occurs in the after market when prices are unfavorable. If both legs are ITM, they'll exercise both legs.