So someone here posted a particular scenario where in they had to form a spread to avoid the costs of delivery. But what made me wonder is what exactly happens if you let a spread expire. The question I am trying to ask is that doesn’t the netting off in the expiry of a spread simply mean that you arent obligated to either take delivery/give delivery but the costs and profit and loss associated with the exercising of such still apply. Let me explain with an example -
So first I am gonna go with the same scenario that made think about this query in the first place.
So let’s just say that on the expiry I am holding an ITM short call and I don’t have the underlying shares to deliver. To avoid doing delivering, I take a long futures position and let the spread expire. So what happens now? Even though I have netted off the obligation itself, I am still obligated towards the counterparty i.e. for the short call I am still required to deliver the stocks and for long futures I am still obligated to take delivery of the stocks. What I am guessing is that the shares that would be delivered to me would get delivered to the person who I am holding short call against and the money received from the call buyer would go to the party that I am long futures against. And of course the loss arising out this situation would be born by me along with the charges of exercising both the contracts.
Is that right? Is my assumption for the consequences of letting a spread expire correct?