The two clocks that close a calendar or a stock-plus-put

Two clocks close the book

A calendar, also called a time-spread, is a same-strike long and short option in different expirations. The book is held so the nearer contract is expected to lose value faster than the farther one while the underlying stays near the strike. The intended path is a range-bound or slowly rising underlying through the first expiration, so the short expires while the long keeps most of its value.

Editorial reading: that path does not, by itself, close the trade. Two other clocks do. One is the broker’s margin formula, which may refuse to credit a hedge. The other is the assignment clock, which turns the leftover long option into time value that must be sold rather than exercised.

How the broker sizes a hedge

Margin-management means knowing, before entry and while the trade is on, how the broker will size buying power for stock, a hedge, or a defined-risk spread.

Under strategy-based margin, the charge is fixed per strategy and does not net a hedge. Long stock is typically charged at 50 percent of value and a purchased put is charged in full, with no reduction for the put protecting those same shares. A protective put held against long stock still bounds downside, but under those rules it is still typically paid for in full.

When offered, risk-based portfolio margin sizes the requirement from the combined book, so stock held with a matching put can require less capital than the stock alone. Brokers commonly restrict portfolio margin to larger accounts, with a size floor illustrated at $100,000.

A bullish debit call spread is typically margined at the net debit paid, not at the full notional of either call. Editorial reading: that is why the same account can treat a defined-risk call spread as a paid debit while still charging a stock-plus-put as two separate legs.

What assignment leaves overnight

Assignment converts a short option into a stock position after the other side exercises. It is typically posted the morning after exercise.

After the short nearer call is assigned, the account is short the delivered shares and still long the farther call. Exercising that farther call to cover the stock forfeits remaining time value and is generally avoided. That time-value-forfeit is why assignment is usually closed in the stock market. The standard unwind is to repurchase the short shares and sell the remaining longer-dated call rather than exercise it.

A roll if the thesis remains

A roll covers the assigned stock and reopens a farther-dated or different-strike short option, or replaces the whole calendar after a price move.

If the original calendar thesis remains, the short stock can be covered and a new nearer-dated call sold for more premium, or the book can be closed and reopened as a later-expiration calendar at a higher strike.