Overview

Auto-liquidation is the process we use to close options spreads that have a short leg expiring on the current trading day. It runs automatically on expiry day for any client holding a qualifying spread.

Why we automatically close expiring spreads

It's tempting to think that spreads are safe to hold into expiration because the maximum loss is already defined. That's true on paper — but only if both legs settle together as expected. In practice, several things can go wrong:

• Assignment isn't predictable from moneyness. The holder on the other side of your short option can choose to exercise their long position — or submit a "do not exercise" instruction — at their discretion. An out-of-the-money short can still be assigned, and an in-the-money short might not be. We can't tell ahead of time which way it'll go.
• Spreads only stay defined risk if both legs settle together. If your short leg is assigned but your long leg isn't exercised (or the other way around), you no longer have a spread. You're left holding a naked stock position — either long shares you may not be able to fund, or short shares you didn't intend to hold.
• US-listed equity options settle in stock, not cash. A short call assignment means you're obligated to deliver 100 shares per contract. A short put assignment means you're obligated to buy 100 shares per contract at the strike price. For a single contract on a stock with a $100 strike, that's $10,000 of stock to settle per contract.
• Settlement happens after market close, with gap risk. Exercises and assignments are processed overnight on expiry day. Until this process is complete, you don't know whether your short options will be assigned. If the underlying moves sharply between market close and the next session, what looked like a defined-risk spread can turn into a much larger loss.

Closing the spread before settlement begins eliminates all of this. Neither leg goes through the standard exercise and assignment process, so there's no stock delivery. You realize the spread's market value at the time of close and walk away with no open position.

How and when auto-liquidation runs

Auto-liquidation follows a fixed schedule on every expiry day:

• 2:40 pm ET — We stop accepting new orders with a sell-to-open on contracts expiring that day in eligible accounts.
• 2:45 pm ET — We cancel any pending orders with a sell-to-open on an expiring contract.
• 3:15 pm ET — Auto-liquidation begins. We submit limit orders to close all qualifying spreads in client accounts.

We price each order based on current market quotes and adjust the limit through the afternoon to give the order the best chance of filling before market close.

Which spreads are affected

Auto-liquidation applies to any spread in your account where at least one short leg is expiring on the current trading day. That includes:

• Vertical spreads
• Calendar spreads
• Diagonal spreads
• Butterflies and Iron Butterflies
• Condors and Iron Condors

There are two cases where we skip auto-liquidation because there's no meaningful assignment risk:

• Calendar and diagonal spreads where the short leg is out of the money. The expiring short leg won't be assigned, and the long leg still has time on it.
• Spreads where every leg is out of the money, worthless, and the notional value of the underlying stock is less than $10,000,000 USD.

What you can do instead

You can close any spread yourself from the Wealthsimple app or on the web at any point during the trading day. If you want to choose the timing or pricing of your close, do it before 2:40 pm ET to stay ahead of the auto-liquidation schedule.

You can't opt out of auto-liquidation. Turning off auto-sell has no effect on this process — auto-sell only applies to long options that are in the money, not spreads.

Example: A bad outcome at expiry

To make the assignment risk concrete, here's a scenario where a spread held to expiration produces a much larger loss than its defined risk suggests.

You sell 10 ABC 99/100 put credit spreads and collect a net credit of $400 when opening the position. That means you:

• Sold 10 puts at the $100 strike (your short leg)
• Bought 10 puts at the $99 strike (your long leg, for protection)

On paper, your maximum loss is the spread width minus the credit you received:

• Spread width: $100 – $99 = $1.00 per share ($100 per contract)
• Across 10 contracts: $100 × 10 = $1,000
• Net credit received: $400
• Maximum loss: $1,000 – $400 = $600

Here's how expiry day plays out:

1. ABC closes at $101. Both legs are out of the money. You expect the spread to expire worthless with no further action needed.
2. An hour after the close, ABC drifts down to $99.90 in extended-hours trading. Your short $100 put is now slightly in the money based on the after-hours price; your long $99 put is still out of the money.
3. The trader on the other side of your short $100 put decides to exercise and you must buy 1,000 shares of ABC at $100 — $100,000 of stock.
4. Your long $99 put expires worthless. There's no offsetting hedge and no opportunity to exercise the long $99 put.
5. Over the weekend, news comes out and ABC opens Monday at $90.

You're now holding 1,000 shares purchased at $100, currently worth $90 each. Your loss on the stock position is:

• Stock value loss: 1,000 × ($100 – $90) = $10,000
• Net of the $400 credit you originally collected: $10,000 – $400 = $9,600

The defined risk of $600 turned into a $9,600 loss because only the short leg was assigned — the long leg, which was supposed to cap your exposure, expired worthless. Auto-liquidation is designed to prevent exactly this scenario by closing the spread before either leg reaches the standard exercise and assignment process.

Frequently asked questions

Related articles

• Trade multi-leg options spreads
• Understand exercising options and assignment
• Use auto-sell for options
• Trade options in a margin account