Sizing options by assignment, spread legs, and portfolio margin

Three sizing gates

Editorial interpretation: treat assignment, spread construction, and posted margin as three separate sizing gates. First bound the cash a short option can force into the book. Next decide whether the spread is one ticket or two. Only then compare the remaining loss of a protective overlay with the collateral a broker actually charges.

Assignment as the first cash bound

American-style stock options can be exercised on any day before expiration, while European-style index options are typically exercisable only at expiration. Early assignment is the obligation of a short American-style option to take or deliver stock before expiration.

Time value is the part of an option price that is not explained by immediate exercise value and is given up if the contract is exercised early. Exercising an option while time value remains forfeits that remaining value, so early exercise is uncommon until that value has largely disappeared. When remaining time value is 25 cents or less as expiration nears, a short option should be treated as assignable.

Put assignment obliges the writer to buy the underlying at the strike. Call assignment obliges the writer to sell it at the strike. Placing a short option inside a spread does not change the holder's incentive to exercise, so assignment odds match those of a standalone short.

One ticket or two for a spread

An option spread is a multi-leg options combination treated as one entry, exit, and abstention procedure rather than as unrelated tickets. A vertical spread has two legs and can be entered as one packaged order or built by executing each leg separately, which leaves the book temporarily one-sided.

Legging is opening or closing the pieces of a multi-leg position in separate transactions, which leaves temporary one-sided exposure. Editorial interpretation: treat the packaged order and the legged path as different sizing states, because only the packaged path keeps both legs on together from the first fill.

Remaining loss versus posted collateral

A protective put is a long stock position paired with a long put so the remaining downside of the combined book is capped at a known cash amount. That remaining loss equals the stock purchase price plus the put premium minus the put strike, which can be smaller than a strategy-based posting of 50 percent of the stock plus the full put premium.

Strategy-based margin is a posting that applies separate percentage charges to each listed piece of a position and can exceed the position's remaining loss. Portfolio margin is a posting that looks at remaining risk of the whole book in one underlying rather than stacking tactic-by-tactic charges. Margin management is choosing and monitoring the capital posted against a position so the posting tracks remaining loss instead of a fixed add-on for each listed piece.

In the 500-share protective-put illustration with stock at 91.25 and 90-strike puts at 2.50, strategy-based margin was 24062.50 and the portfolio-margin figure was 1875.