Call options on expiration: Pay out instead of assignment?

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iPittyTheFool

First of all, I have an Interactive Broker account and I use the Trader Workstation.

I started trading call options some months ago. Now I have a question about the execution of these option.

On expiration when the option is OTM it expires worthless, if it's ITM the underlying stock will be assigned to my account automatically. But if I wanted to own the stocks, I would have bought them right away without the extra costs of the premium. So currently I sell the options before expiry.

In worst case I forget about the option, it gets executed, but there's not engouh money on my account, so IB closes some of my other positions to buy the shares. I'd really like to avoid that situation.

Is there any way to tell IB/TWS to just cash in my ITM call options on expiry instead of executing them?
 
U.S. based account using conventional margin ? Short call exercise would get you short stock not long stock. Short put exercise would get you long stock. The short position would still have a margin requirement, but it shouldn't be vastly different the requirement that the naked call carried. That is the basis for conventional margin requirements in options - remember in a margin account it's minimum - not initial margin. Can you ask for a contrary exercise notice to not have your option exercised? Not from the short side - you can file a contrary from the long side. Sounds like there is some confusion in your post. Short call gets you short stock on assignment.
 
Hello,

I think from your post you have BOUGHT a CALL option on a stock.

I.e., XYZ was trading at 100$, you BOUGHT a Call Option for 1$ at strike 110$.
Now, XYZ is trading at 120$.

You will get assigned XYZ and be forced to pay 110$/stock.

So you have a few options:
1) Do you have enough cash to cover the purchase of XYZ @ 110$/ea ? If so, you can be assigned without problems.

2) If not, do you have enough margin to cover the purchase (do you have a margin account? If you are unsure if you have a margin account or how much margin you have it is strongly advised that you start reading how margin works at IB and how to calculate your margin profile in TWS. There should be posts and tutorials on this).

3) Simplest, just sell the CALL option back into the market. In theory:

XYZ Call Option Strike 110 when underlying at 120$ can be sold for 10$/ea.
You paid 1$/ea.
You profit 9$/ea.

I noticed you stated in your post '... without the extra costs of the premium'. This is an odd way to look at it. If you bought a call option the idea was to use the premium instead of cash to make a profit. In the above example, this is exactly what happened.

Perhaps you are alluding to not wanting to ever hold the stock and only want to do a pure option play? In which case, it is your responsibility to close out in time. I'm not sure of any way to say in TWS: 30 minutes before expiration if option ITM close out at mid price.

Would be an interesting feature if there was.

Also it is valid to point out: If you are assigned you can immediately (well, next day) sell it back and get the profit that way. And fortunately IB does not charge assignment fees.
 
You could also short the stock just before expiration so that the option exercise cancels your short position. Using Trader Work Station, you can do an immediate irreversible option exercise for US options during regular US option trading hours, so you don't even have to wait until Saturday, and you could do this a few options at a time if you're limited by margin.

Of course you lose any remaining premium this way, so it is something you probably would only do very close to expiration.
 
Can someone go over the worst case scenario of someone selling a vertical call spread with strikes 1 interval apart and a vertical put spread with strikes one interval apart on an account with very low margin?
 
Wow. Thanks a lot for the answers so far. I like the activity in this forum:-)

For clarification:
  • I don't have a margin account, it's a pure cash account. So margin is not an option for me.
  • Yes, I'm talking about long calls, not short calls or puts. My question really only regards buying call options. Sorry for the confusion.
  • With costs of the premium I'm referring to an option's time value, which decreases over time until it zero on expiration. So if I wanted to own the stocks anyway, I could just buy them and wouldn't have to pay the time value. To answer the question: Yes, I want to do a pure option play:-)
As you already said, I can sell the stocks right back to the market after assignment, but I wanted to avoid this extra action. I assumed there must be a default setting to tell the TWS like 'don't assign the option, just pay out it's value to the account'. As if IB would buy the stocks, sell them right back and pay out the difference.

@toonerdy: Shorting the stock is really an interesting idea. I will definitely think about that...
 
I don't think IB supports what you're wanting. I suspect you're going to require a method of executing an offsetting trade right before expiration -- sell the call or short the stock, but you probably can't short the stock since you have a cash account. Alternatively, sell the call.

Look in to MOC (Market On Close) orders. These may help to achieve what you're after.
 
What you want doesn't exist. Since you have a cash account and can't afford being assigned on your long calls, you will need to sell them before expiration.
 
I guess you're right. I thought it's a common problem, that's already been solved. But obviously it's not. So I will have to close the calls myself before expiration.

But anyhow, thanks for your answers. I definitely learned a lot...
 
On the Wednesday of a regular expiration week you can request contrary exercise. You broker may have an earlier cutoff so check with them. It means your option will not be auto-exercised if eligible. There is no auto sale mechanism for expiration - you'll need an actual order to do that.
 
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