American-style crimes: Can a bad broker steal your short position?

[Quanto]

American-style crimes: Can a bad broker steal your short position?
Can a bad broker literally steal (or otherwise close) your carefully designed/analysed short US equity option position (ie. uses American-style exercise), which has a clearly lucrative & profitable outlook, by simply claiming that an early exercise (-> early assignment) has taken place?
(This of course can happen at any time, the position does not even need to be ITM).
What can be done in such a case?

See also
https://learninginvestmentwithjasoncai.com/2023/08/18/early-assignment-risk-in-options-trading/
https://bullishbears.com/are-you-at-risk-for-stock-assignment-with-options/

 

[ph1l]

American-style crimes: Can a bad broker steal your short position?
Can a bad broker literally steal (or otherwise close) your carefully designed/analysed short US equity option position (ie. uses American-style exercise), which has a clearly lucrative & profitable outlook, by simply claiming that an early exercise (-> early assignment) has taken place?

It appears brokers are supposed to make their policy for options exercise assignment available (at least to FINRA), and this policy is supposed to be first-in, first-out or a random method.

Yes, brokers are required to establish and disclose their procedures for allocating options exercise assignment notices to short options positions in their customer accounts². The Financial Industry Regulatory Authority (FINRA) Rule 2360 (b) (23) (C) mandates this².

Firms may choose to allocate exercise assignment notices using one of the following methods²:
- A "first in-first out" basis (FIFO)
- A random selection basis
- Another equally random selection basis determined by the firm

However, the specific method chosen by the firm must receive prior approval from FINRA². Therefore, you should be able to find this information in the documentation provided by your broker, or by contacting them directly. It's always a good idea to understand your broker's policies and procedures regarding options trading.

Source: Conversation with Bing, 12/24/2023
(1) Options Allocation of Exercise Assignment Notices | FINRA.org. https://www.finra.org/filing-report...ptions-allocation-exercise-assignment-notices.
(2) Trading Options: Understanding Assignment | FINRA.org. https://www.finra.org/investors/insights/trading-options-understanding-assignment.
(3) Assignment Risk on ‘Limited Risk’ Options Spreads - TradeStation. https://www.tradestation.com/learn/...ignment-risk-on-limited-risk-options-spreads/.
(4) Ready for Options Trading? Make Sure You Understand Assignment First .... https://www.fool.com/investing/2020/12/17/ready-options-trading-understanding-assignment/.

 

[BKR88]

American-style crimes: Can a bad broker steal your short position?
Can a bad broker literally steal (or otherwise close) your carefully designed/analysed short US equity option position (ie. uses American-style exercise), which has a clearly lucrative & profitable outlook, by simply claiming that an early exercise (-> early assignment) has taken place?
(This of course can happen at any time, the position does not even need to be ITM).
What can be done in such a case?

See also
https://learninginvestmentwithjasoncai.com/2023/08/18/early-assignment-risk-in-options-trading/
https://bullishbears.com/are-you-at-risk-for-stock-assignment-with-options/

View attachment 330358

" short US equity option position"
That's either a long put position or a short call position.
If a long put the broker can't exercise early.
If a short call position and the broker does an early exercise, now you're short the stock which is still a short equity position.
How is the broker *stealing* your short position?

 

[Quanto]

" short US equity option position"
That's either a long put position or a short call position.

Nope. You must have a funny logic seeing a LongPut as a short.
I of course mean both of ShortCall and ShortPut, not any LongOption.

If a long put the broker can't exercise early.

Of course not , but LongPut wasn't meant.

If a short call position and the broker does an early exercise, now you're short the stock which is still a short equity position.

In such a Call-assignment (ie. being get "called") one has to deliver the LongStock, there is no ShortStock resulting of this all, especially not in a CoveredCall trade.

How is the broker *stealing* your short position?

B/c from my POV it's indeed like a steal of the profit potential, and on top of that also a loss (when ITM, and that usually is the case).
My carefully crafted/designed position (usually part of a bigger construct) gets demolished by this silly American-style exercise type, way before the expiration date. It needs to be replaced by the European-style where such early-assignment fraud crimes are not possible at all.

And: IMO it's even possible that the broker simply overtakes (ie. steals) this lucrative position for the remaining time of the option. Ie. there is no early-closing at the exchange (ie. no change in OI)...

 

[destriero]

Oh, you're special!

So you're short an ATM put at 0.3 and the buyer exercises. You were just paid $30 to close the position. Your risk is the same as holding the sp but now your potential gain is massively asymmetric in your favor over holding a sp and your $30 payout was accelerated.

Buy yourself a Lada or perhaps a new piss bucket.

 

[BKR88]

You must have a funny logic seeing a LongPut as a short.

When you said "short US equity option position" I thought you meant an option position that would get you short US equities.

In such a Call-assignment (ie. being get "called") one has to deliver the LongStock, there is no ShortStock resulting of this all, especially not in a CoveredCall trade.

If you're short a naked call you'll be short the stock if exercised early. You didn't specify covered call.

B/c from my POV it's indeed like a steal of the profit potential,

Any early exercise is a gift to you unless there's no premium left in the option. They can't *steal* any profit with early exercise.
***Read Dest comment above.

 

[schizo]

And: IMO it's even possible that the broker simply overtakes (ie. steals) this lucrative position for the remaining time of the option. Ie. there is no early-closing at the exchange (ie. no change in OI)...

I don't think this can happen with options, but I've seen it happen with underlying stocks where brokers call back the borrowed shares. My suspicion is that those shares were never actually borrowed. Instead, the broker was taking the other side of your trade. But who can know for sure what the real reason is.

 

[Quanto]

As everybody knows, a CoveredCall consists of a LongStock and a ShortCall.
The following 2 PnL charts clearly demonstrate the dangers of American-style:

1) The PnL chart of the CoveredCall: it surely looks good if stock rises:

2) The PnL chart of the ShortCall: it surely looks BAD if stock rises (ie. assignment risk exists, assignment is even imminent! Watch the blue line):

Conclusion: American-style (early-exercise --> early-assignment) is a big trap for the option writers,
b/c a clearly winning combi-trade (ie. the above CoveredCall) gets stopped if the stock rises! Eventhough the net result is making profit when the stock rises, if it only would not get stopped! Q.E.D.

 

[BKR88]

As everybody knows, a CoveredCall consists of a LongStock and a ShortCall.
The following 2 PnL charts clearly demonstrate the dangers of American-style:

1) The PnL chart of the CoveredCall: it surely looks good if stock rises:
View attachment 330378



2) The PnL chart of the ShortCall: it surely looks BAD if stock rises (ie. assignment risk exists, assignment is even imminent! Watch the blue line):
View attachment 330380


Conclusion: American-style (early-exercise --> early-assignment) is a big trap for the option writers,
b/c a clearly winning combi-trade (ie. the above CoveredCall) gets stopped if the stock rises! Eventhough the net result is making profit when the stock rises, if it only would not get stopped! Q.E.D.

1:
With a covered call the maximum profit is achieved if the stock closed at or above the short call on expiration.
If the call is exercised early I get the maximum profit without waiting for expiration.
Both positions are gone.
Why is that a problem?

2:
With a naked short call an early exercise allows you to lock in the desired premium decay without waiting for expiration.
You’ll have a loss to this point but your trade now has the same risk but greater profit potential than being short the call.
Why is this a problem?

 

[Overnight]

...

Buy yourself a Lada or perhaps a new piss bucket.

That is low, man.