Getting assigned put but with not enough cash to purchase

jbperez · Sep 13, 2011

Quote from Eliot Hosewater:

Assignments are made over the weekend after the market closes. If you only had 20% of the cash to buy your broker would most likely sell it at market price at the open on Monday. If it drops so much that 20% wouldn't cover it then the broker would start selling other assets. If still not covered then you might find a For Sale sign on your house or car.

Ok, so if I get assigned the broker would buy the underlying for my account (on margin I suppose) on market close and sell it on Monday and it would be like an automatic buy/sell then... ?

Since the margin on options is ~20% of the underlying, unless the price of the underlying moves by 20%, the option margin would be enough to cover the difference.

I suppose my more specific question here is if it is possible to have just enough cash to meet the buy/sell difference or am I really required to have enough cash to buy the entire assignment.

If this were a cash-settled index option, you of course would just have to pay for the difference(?) but would it be possible have an assigned equity put treated in a similar manner?

loufah · Sep 14, 2011

Quote from jbperez:

Since the margin on options is ~20% of the underlying, unless the price of the underlying moves by 20%, the option margin would be enough to cover the difference.

I suppose my more specific question here is if it is possible to have just enough cash to meet the buy/sell difference or am I really required to have enough cash to buy the entire assignment.

The margin on the underlying may be 30% or more. Check with your broker to see what will happen. Worst case is they assign the stock to you, you get a margin call, and they automatically sell enough of your stock at market to meet the margin call.

Some brokers will automatically have you buy the short puts as expiration approaches if they see you don't have enough money to cover an assignment.

Eliot Hosewater · Sep 14, 2011

Quote from jbperez:

Ok, so if I get assigned the broker would buy the underlying for my account (on margin I suppose) on market close and sell it on Monday and it would be like an automatic buy/sell then... ?

Since the margin on options is ~20% of the underlying, unless the price of the underlying moves by 20%, the option margin would be enough to cover the difference.

I suppose my more specific question here is if it is possible to have just enough cash to meet the buy/sell difference or am I really required to have enough cash to buy the entire assignment.

If this were a cash-settled index option, you of course would just have to pay for the difference(?) but would it be possible have an assigned equity put treated in a similar manner?

The main thing to consider is that brokers will not be left holding the bag, they will do whatever they can to protect themselves first.

jbperez · Sep 14, 2011

Quote from Eliot Hosewater:

Assignments are made over the weekend after the market closes. If you only had 20% of the cash to buy your broker would most likely sell it at market price at the open on Monday. If it drops so much that 20% wouldn't cover it then the broker would start selling other assets. If still not covered then you might find a For Sale sign on your house or car.

Ok, so if I get assigned the broker would buy the underlying for my account (on margin I suppose) on market close and sell it on Monday and it would be like an automatic buy/sell then... ?

Since the margin on options is ~20% of the underlying, unless the price of the underlying moves by 20%, the option margin would be enough to cover the difference.

I suppose my more specific question here is if it is possible to have just enough cash to meet the buy/sell difference or am I really required to have enough cash to buy the entire assignment.

If this were a cash-settled index option, you of course would just have to pay for the difference(?) but would it be possible have an assigned equity put treated in a similar manner?

spindr0 · Sep 14, 2011

Quote from jbperez:

Supposing I get assigned and don't have enough cash to purchase the underlying, what would happen?

Say, I sell 1 contract GLD put @ 170 strike price and the price falls to 168, but I don't have the $17,000 to buy 100 shares GLD, will I get somehow penalized for this, or would I just get $200 ($2 difference) deducted from my account to cover the immediate buy/sell?

Hmmmm....
Margin violation?
Restricted account?
Bitch on ET for weeks?

zdreg · Sep 14, 2011

Quote from Eliot Hosewater:

The main thing to consider is that brokers will not be left holding the bag, they will do whatever they can to protect themselves first.

....and their other customers from the actions of clueless customers.

jbperez · Sep 21, 2011

Ok, a lot of people seem to think it's a bad idea to sell a put without having enough cash in one's account to cover the entire assignment amount.

But what if this was part of a put spread?

Consider:

* sell 1 contract GLD put @ 174 strike price
* buy 1 contract GLD put @ 170 strike price

If the price falls to 172 on expiry and I get assigned the 174 put while the 170 put expires worthless...

Say I don't have the $17,400 to purchase 1 contract GLD, but I do have at least the $400 to cover the difference between my sold put and bought put (which expired worthless).

What is the situation here and what should I worry about? That GLD might fall even further below 170 on monday but my bought put would now be worthless in covering against that ?

If GLD closed 172 on expiration, why can't I just settle the $2 difference rather than having to purchase the entire contract outright?

noob_trad3r · Sep 22, 2011

You entered a trade and now you ask all these questions after pulling the trigger?

jbperez · Sep 22, 2011

You entered a trade and now you ask all these questions after pulling the trigger?

No. These are theoretical questions. (and I don't understand the snarky attitude of _some_ of the people who can't seem to help at all but have a lot of snide comments)

The original question was rather simple:

If I sell an equity put and get assigned, is it possible to just settle the difference between put strike price and current price or is it mandatory to take delivery first (saturday?) and then sell on monday(?).

The difference is critical because of two things:

a) possibly much larger option margin outlay when selling a put
b) pin risk (if you can't take delivery and sell on the same day)

The general answer I got was you better have enough cash at hand to take delivery which then led to the 2nd question: If this is the case, what then would be the point of selling a put spread to guard against price moving against you too far?

e.g. in the case of a put spread:

- sold strike price @170
- bought strike price @165

It would be nice if this meant that no matter what happens, the maximum cash I'd need to have on hand to cover is the $500 difference rather than the $17000 needed to take delivery of the contract.

In the case where you can't just settle the difference, what would happen if the underlying closes 167 on exp. friday and I get assigned then:

a) underlying stays at 167 on saturday/monday (I suppose I can just execute a buy/sell?)

or

b) underlying falls to 160 on saturday/monday (does this mean that the buy leg of the put spread is worthless?)

iceman1 · Sep 22, 2011

Quote from jbperez:

Ok, a lot of people seem to think it's a bad idea to sell a put without having enough cash in one's account to cover the entire assignment amount.

But what if this was part of a put spread?

Consider:

* sell 1 contract GLD put @ 174 strike price
* buy 1 contract GLD put @ 170 strike price

If the price falls to 172 on expiry and I get assigned the 174 put while the 170 put expires worthless...

Say I don't have the $17,400 to purchase 1 contract GLD, but I do have at least the $400 to cover the difference between my sold put and bought put (which expired worthless).

What is the situation here and what should I worry about? That GLD might fall even further below 170 on monday but my bought put would now be worthless in covering against that ?

If GLD closed 172 on expiration, why can't I just settle the $2 difference rather than having to purchase the entire contract outright?

typical lazy ______

I bet anything you are in your 20s, and want everyone else to spoon feed you, do your work and give you all the answers that your calculator will not solve since you likely can't think all that well on your own too feet. But, you want to gain or realize all the good stuff even if you don't earn or deserve it. The hard work ain't for a guy like you. :-)

lol

Am I close? Bet I am