Assignment, cash requirements.

R

raf_bcn

Hello
I would like to ask you a few questions about how the assignment mechanism works, and how the broker does,
and what are the implications on the required margin. Again a non experinced questions, sorry.
Let's say it is a multileg SPY strategy, American style options, so could be early assignement and are physically settled.
_ ITM call

The sold call it is deep itm, above 0.90 delta, since the begining of the strategy. Probably if there is dividend payment I will be early assigned.
So how will assignment procces occur?
I.e. In the moment of the sale SPY was at 225
sold call strike 200 for a credit of 25.65 , the Broker requires a margin of 7.200,00 .

and now spy is at 235 .
_ If I don't hold the Underlying, Spy in the example,
_I will have to purchase spy at 235 and sell to the call's holder at 200, How is it done?
1)I will have to have 23.500,00 in cash in my account to deal with the assignment, to buy 100 SPY,
2)or it is done by the difference between 235 and 200?
3)or the broker let me sell 100 spy to the buyer without having those 100 spy. In that case, the broker will charge a large comission or what.
If 2 it is true, I would have to have in the account 3.500,00 approximatly 1.000,00 more that what I received to sell the call. These 1.000 would be the lost.
If 1 it's true, it is possible to use the margin requirement of 8.000,00 to buy 100 SPY ? or I will have to have 8.000 + 23.500 in the account during the settlment?
If 3 it is true, I suppose my new position it is short Spy. The margin will increase to 35.000,00. And what is the short rate for Spy? really don't know.
It seems to be option 2 the best, maybe not for the broker.


_ ITM put
I.e. sold a put strike 260 for a credit of 35.40, when Spy was at 225. The margin required is 8.200,00
Now SPY is at 215
_The owner of the put wants to exercice. I will have to buy 100 Spy shares at 270.
1)I will have to have 27.000,00 in the account to buy 100 shares.
2)It's done by the difference between 270 and the current price, 215.

In option 1) Will have to have 27.000,00 in the account beyond the margin , or can use also the 8.200 in the margin to buy 100 shares.
And what happens if only have the margin requirement, 8.200 in the account and don't have money to buy 100 shares?
my question is if it is possible to say the broker to sell 100 spy first and then buy the 100 I have to buy for the put.
In 2) there will be no problem with the margin.

I want to see if there are any hidden dangers in selling ITM options, apart of the low liquidity.
I again appreciate your answers.
 
Hi
Some information I have found. In case there is someone interested.

1_If the assigned call writer buys the stock in the market for delivery, the writer only needs the cash in his brokerage account to pay for the difference between what the stock cost and the strike price of the call, since the writer will immediately receive cash from the call holder for the strike price. Similarly, if the writer isusing margin, then the margin requirements apply only to the difference between the purchase price and the strike price of the option. Full margin requirements, however, apply to shorted stock.

2_An assigned put writer will need either the cash or the margin to buy the stock at the strike price, even if he intends to sell the stock immediately after the exercise of the put. When the call holder exercises, he can keep the stock or immediately sell it. However, he must have the margin, if he has a margin account, or cash, for a cash account, to pay for the stock, even if he sells it immediately

3_Assignment can happen at any time - it is contolled by the option buyer.
If you do not have enough funds in your account to cover long or short stock, you should close the position immediately (or your broker will do it for you).
Spreads give more protection against being assigned, but they do not protect you unless BOTH legs are in the money.
If you have a short call position, there is additional assignment risk if that call is in the money at the time of the dividend.


4_In some brokers during assignment, you have one day to adjust your position (the next business day) without incurring the additional margin required for a short stock position. If you cover the position that day you are granted something called “same-day substitution” and you are not required to put up any additional margin.
What happens in IB?

5_Stock options expiring in the current month that are $0.01 or more in the money will be automatically exercised by the OCC without the need for any explicit instructions from the broker.
Index options expiring in the current month that are $.01 or more in the money will be automatically exercised by the OCC without the need for any explicit instructions from broker.

6_In IB, There is no commissions charged as the result of the delivery of a long or short position resulting from option exercise or assignment of a U.S. security option (note that this is not always the case for non-U.S. options).

Sources. Interactive Brokers,
http://tastytradenetwork.squarespace.com/tt/blog/options-assignment,
http://www.1option.com/index.php?/a..._why_is_option_assignment_notification_so_sc/
 
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