OptionsHouse is furnishing this document to you to provide some basic facts about spread trading and the risks associated with trading spread positions. This document is not intended to enumerate all of the risks entailed in spread trading. Before trading spreads or options, you should fully understand the risks of trading options. It is expected that you will read the booklet entitled Characteristics and Risks of Standardized Options available at www.OptionsHouse.com. If you have any questions about option spreads, email us at [email protected].
Risk of Being Assigned on One Leg of a Spread Due to Early Exercise
The individual “legs” of a spread are subject to early exercise risk. This may remove the protection that certain spread positions may provide. The result of being assigned, either partially or fully, on a leg of a spread position, may result in a margin call or in losses greater than you anticipated when you entered into the position.
The Execution of a Spread Order is “Not Held” and is Discretionary
A spread is not a standardized option contract like each individual leg of a spread and, accordingly, there is no disseminated spread market that provides a benchmark price, such as the national best bid or offer (NBBO) for individual option series, for spread orders. Therefore, liquidity providers can not be held to a net price on a spread order and you may not receive the NBBO on each individual leg of a spread.
You Do Not Leg into Spreads
Spread trades are done as a single trade and are not legged or paired individual trades. When trading spreads, option prices on cross-markets may be misleading because the legs of the spread can not be executed on different exchanges to get the NBBO for each leg. Both legs of the spread must be executed on the same exchange.
Risks Associated with the Delayed Reporting of Spread Trades
Spread trades are executed at the discretion of the specialists or market makers responsible for executing your orders on the exchanges. When a spread order is cancelled or filled, the specialist or market maker may be required to take manual action that may require additional reporting. Such delays in reporting fills and cancels create risks, especially in fast moving markets. Any trade executed via the OptionsHouse spread ticket will be sent to the exchange as a spread trade and will be subject to the risks outlined above.