A different view on why GME was restricted in some brokerages

[zghorner]

Good points. I think the YOLO strategy was to buy OTM calls and the MM when they sell them buy stock to hedge driving the price up and up. The fear is a good number of the RH crowd don't understand assignment. Some don't grasp if you let them expire you need to have the capital to purchase the shares. Your only exit is to sell the calls or short the stock you'll be assigned before they expire but most of those accounts don't have the excess buying power to do that. I'd agree something doesn't add up.

At that point the broker just liquidates the position and the trader gets the cash value...and in this case they just buy more stonk on Monday.

 

[newwurldmn]

That's that one guy who decided to trade in options not understanding at all how option expiry works and really committed suicide for nothing. But that's not RH's problem.



And that's RH's stupidity. Why punish the traders/investors by doing something that's unconstitutional for their own stupidity and incompetency?

what makes robinhood’s actions unconstitutional?

 

[zdreg]

Good points. I think the YOLO strategy was to buy OTM calls and the MM when they sell them buy stock to hedge driving the price up and up. The fear is a good number of the RH crowd don't understand assignment. Some don't grasp if you let them expire you need to have the capital to purchase the shares. Your only exit is to sell the calls or short the stock you'll be assigned before they expire but most of those accounts don't have the excess buying power to do that. I'd agree something doesn't add up.

A buyer of an option can never be assigned. He can only exercise his option or automatically have the option exercised if is in the money at expiration. The exception is if the customer opts not to exercise by giving notice to the broker not to exercise. Customers frequently opt out if the stock price is slightly in the money at expiration to avoid exercise because they don't want to take the risk of some news coming out over the weekend before the exercised hits their account at Monday opening which could turn a profit into a loss. They also don't want to be or be forced to liquidate their position because of a margin call and inability to have enough capital forthe new position.

IB has the right idea They automatically liquidate the position at the opening no if or buts, if you you don't have money/stock to maintain the new position.

 

[zdreg]

At that point the broker just liquidates the position and the trader gets the cash value...and in this case they just buy more stonk on Monday.

Incorrect. The client receives the profit/loss from his transactions+ a margin call.

 

[zdreg]

Especially considering all the "elite traders" that are also missing the crux of it all.

Your post is worthy of a thread of its own.

 

[zghorner]

Especially considering all the "elite traders" that are also missing the crux of it all.

Would you be willing to elaborate a little bit?

 

[Spaghetti Code]

It's the MM's who sold the calls and bought the shares at increasing prices and those short-sellers who are scrambling to cover that are going to default and the clearinghouses that need to make everything whole that's going to run into counter-party risk. So instead of pressuring the MM's to put in more capital, they are pressuring the retail brokers like RH and IB to put in more capital instead.

I think you are agreeing with me? I think we are both saying Robinhood was under no pressure due to OP's premise, which is that the long shares could not be sold.

 

[Overnight]

...Some don't grasp if you let them expire you need to have the capital to purchase the shares. Your only exit is to sell the calls or short the stock you'll be assigned before they expire but most of those accounts don't have the excess buying power to do that. I'd agree something doesn't add up.

I thought this was explained to me once in the options forum...

Why do they need to have the capital to purchase the shares, if the options are all deep in the money at expiry (or even before expiry and you just want to call away the shares)?

Extreme example to make it easy. You have $1K in account.

2 years ago you bought a Jan 31th 2021 option with a 50 strike when the stock was 5 bux per share. The options at the time cost, I dunno, $1 let say. So you spent $500 for the option. You now have $500 cash in the account

So on Thursday Jan 28th 2021 you exercise the option and the stock settled at 300 per share.

You are assigned the shares at the price of 50, but since the stock is at 300, there is instantly $30,000 NAV in your account, (+ the $500 cash.) The next day (Friday) you then sell the shares at 300 (assuming no movement) and voila?

 

[zdreg]

humorous. you repeat a statement from caroy which was incorrectly worded.
I guess it was beneath your ability to comprehend the correction. Exercise is the right of the buyer. Assignment is associated with the seller of the option.

Pray tell and there may be reasons why do you do an early exercise and possibly be subject to a margin call which could have been avoided by selling the option?

To top it off your voila is a baseless assumption. The stock could open up at 159 or 600. Your goal was not to have a position in the stock, neither long or short but to be in options so as to leverage your capital.

 

[D&D Finance]

Whatever. This dude made $2.7 million in a single day with gme!