How do I manage risk of ITM exercise of SPY options

T

TheDoubtful

I was recently considering speculating with a very small portion of my IRA ( less that 0.5% ) account buying weekly SPY options on the day of expiration ( Wed or Friday ). I am not asking about the risk of the strategy but more about the danger of an extreme event occurring during the day:

1. Trading stops ( natural disaster , political event, market lock limit up/down )
2. Communications go down ( I live in California, earthquakes, power outages,etc )

Assume I have a 100 contract position that closes ITM and for reasons 1, 2 or something I haven't though of yet, I can't liquidate. So now I have options that could potentially get exercised and I suddenly have 10,000 shares of SPY , or a $2.2M position in my account the next day ( My account is a little over $100K).

I am guessing the Risk dept at my broker ( IB ) will automatically either liquidate the position if they can ( market open ) or send a DNE ( Do not exercise ) to the OCC but I have never experienced this scenario.

My questions:

1. Can I trust IB ( or any broker ) to handle this with liquidation or DNE. If neither of those happen am I responsible ( most likely ) or is my broker( not likely) responsible for the potential loss.

2. Can I have a standing notice in my account for a DNE if exercise will put me in a leveraged situation


Appreciate any insight especially from someone that may have had this event occur at IB or any broker or someone who has worked with the risk dept inside a brokerage... Did this happen to anyone during the flash crashes of the past or during tragic events like 9/11 , Lehman / Bear collapses

Thanks
 
As always, why not put this forward to IB on their chat or ticket?

I thought the norm would be, they exercise and because you are then in Margin violation they would sell at the open... But in the mean time, they probably also sell any other assets to convert them into cash.

You don't want a DNE, what if it's decent ITM? And, you could always hedge afterwards through ES futures... that would possibly help when you have portfolio margin account.

But I would just check directly with IB.

PS, I was in margin violation during GFC, and they would sell any assets at the next open... for me that was AMBAC... which in hindsight was a good thing (thanks IB!)
 
I think my broker would automatically close the options position(s) before expiration if you don't have the funds in your account to exercise/buy them if they're in the money.

But like the above person said, it's always best to ask/contact your broker specifically :confused:;)
 
TheDoubtful said:
I was recently considering speculating with a very small portion of my IRA ( less that 0.5% ) account buying weekly SPY options on the day of expiration ( Wed or Friday ). I am not asking about the risk of the strategy but more about the danger of an extreme event occurring during the day:

1. Trading stops ( natural disaster , political event, market lock limit up/down )
2. Communications go down ( I live in California, earthquakes, power outages,etc )

Assume I have a 100 contract position that closes ITM and for reasons 1, 2 or something I haven't though of yet, I can't liquidate. So now I have options that could potentially get exercised and I suddenly have 10,000 shares of SPY , or a $2.2M position in my account the next day ( My account is a little over $100K).

I am guessing the Risk dept at my broker ( IB ) will automatically either liquidate the position if they can ( market open ) or send a DNE ( Do not exercise ) to the OCC but I have never experienced this scenario.

My questions:

1. Can I trust IB ( or any broker ) to handle this with liquidation or DNE. If neither of those happen am I responsible ( most likely ) or is my broker( not likely) responsible for the potential loss.

2. Can I have a standing notice in my account for a DNE if exercise will put me in a leveraged situation


Appreciate any insight especially from someone that may have had this event occur at IB or any broker or someone who has worked with the risk dept inside a brokerage... Did this happen to anyone during the flash crashes of the past or during tragic events like 9/11 , Lehman / Bear collapses

Thanks
More...
You don't even need a disaster.
If come Friday afternoon (or Weds), you haven't closed the position, they will do it for you. At the bid. Probably around 2PM Eastern.

If you want to ride the things out until the bitter end.... you should call them and let them know you are watching the position and will close it before the end of trading. And even at that, by 3:45PM, they're gonna do it for you. (I can speak from experience on this one)

There is absolutely no way their risk department will execute and carry overnight to sell at the open. Think about it. Imagine something happened overnight and the SPY crashed and you don't have the money to cover the difference....guess who gets stuck holding the bag....they do. They will never let that happen.

Hope that helps. But as the others say.... call them. And I'm sure its written somewhere on their site too.
 
TheDoubtful said:
My questions:

1. Can I trust IB ( or any broker ) to handle this with liquidation or DNE. If neither of those happen am I responsible ( most likely ) or is my broker( not likely) responsible for the potential loss.

2. Can I have a standing notice in my account for a DNE if exercise will put me in a leveraged situation
More...

1-NO, this is your responsibility. NO matter what anyone tells you, platfrom malfunctions and technology issues are your risk. You can alway call your broker if your technology drops and don't wait for expiration day at 3:59 pm.

2-NO, not that I'm aware of, you have to file an exception. You have time after the close for this that varies from firm to firm.

Bob
 
Just a thought: if you had equal number of long calls and puts (basically long straddle or strangle), this shouldn't be a problem, right? Each exercised put would leave you being short 100 shares of SPY, while each exercised call would leave you being long 100 shares of SPY, thus cancelling each other. If for example you are interested in puts only, you could buy the cheapest calls available in order to be protected.

This is assuming the auto-exercise of both calls and puts happens at the same time, so your net SPY position would be 0 at all times. Is this the case with IB? Is a delay between the exercise of puts and calls possible?
 
Another option would be to trade SPX options. They have Monday, Wednesday and Friday weekly options, and they are cash settled so you will never need to worry about an exercise.
 
IB is legally obligated to cover your market exposure.
They try to route it back to us (better than most) via supposedly "real-time" margin checks.
(They don't do a bad job, but still, .....)

In the meantime, they recently (within the last year or two??) started a "Post-Expiry Margin" row in Margin Requirements and Available for Trading sections of the TWS Account page.

https://www.interactivebrokers.com/...oring/margin_requirements.htm|SkinName=ibskin
 
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