How to protect your personal assets from margin debit balance?
- Thread starter prash
- Start date
Sorry, you had $1M exposure/position? You should be very very worried about these things then! I hope I misunderstood.
Cool, hello fellow aviator! Sounds like you were at least at the commercial rating. I never got past the student level. Life got in the way. I had dreams, but alas. But from the lowest rungs to the highest, I like to think all is pilots understand the risks. I am sure you have way more cool "incident" stories than I, but I have a couple. Would be fun to swap in PM some day.
Sorry folks, carry on.
My trading account < 100K. It was a bull call-spread of max profit/loss around $10K, however I did NOT took the position OFF, and price sat in the middle, and hence the exposure to the actual shares was around $1M. The stock was Amazon.
Sorry I ask, if your max profit/loss was $10K, how did you ended up with a risk of losing $1M?
Due to pin risk, one of the hedge option becomes worthless, and other one becomes ITM. With that, I could have ending up shorting $1M worth of AMZN shares, and then buy on whatever market price is on following Monday/Tuesday. I estimate this could have resulted in total loss of > $100K, which includes interest loan to exercise, market price of AMZN on that day, etc...
Ok if it's a bull-call spread, that means the strike price of the call you shorted is HIGHER than the strike price of the call that you longed. If that's the case, if you could end up shorting $1M worth of amzn shares, then that means your other leg, your long leg is worth even more, how can one of the "hedge option" which I take you mean the long leg be worthless? If your short call is becoming ITM, that means you are winning, you can do one of the following to cash in the profit:
1. You can buy back the short call that's about to become ITM and just let the long call ride and close it when the underlying goes up further and then close the long call. Even if you don't let the long call ride and you close it right away, you would still end up with a profit.
Or
2. If you know FOR SURE that the underlying would DEFINITELY be higher than BOTH of the strikes then just don't anything and let them exercise against each other on their expiration dates and you collect the diff. between the two strikes. That way all you lose is the premiums but you might save some commissions and some energy.
It's called a bull-call spread for a reason, it means when the underlying is bullish, you win, no matter what. If you are still not sure, post the details of your setup here and we'll take a look.
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Sorry, took long to respond. Position was as below.
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Sell AMZN 1402.5/1405 Call Spread 26 JAN 18, which was a bearish call spread. Sorry, if i mentioned it was bull call spread.
The pin risk here was on that day, AMAZON was hovering around 1402.5. After hours, it went to slightly above that, but below 1405 price. There was a risk right here, since I didn't close the position, I could have been in short AMZN position with strike @ 1402.5, and my long call would have been worthless. I had 10 contracts on these, so the total shorting would have been
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1402.5*100*10 = 1,402,500 = $1.4M.
If that would have been the case, on coming Monday, I would have to borrow funds from the broker, around $1.4M +/-, pay margin interest on that, and sell it immediately, booking loss/profit, based on how much AMZN fluctuates. A 10% fluctuation, would have immediately resulted in $140K net loss, which would get me into a margin debit balance. Pls let me know if this makes sense, or if I my understanding is incorrect. Appreciate your time, and any valuable inputs.
Overall, I am in net loss, due to many wrong positions lately, so i have taken a break, to learn TA better, and hoping to get my hands dirty again.
Ok is this Jan 26 2018 expiration? So it's already expired? Ok well in that case, you did the right thing by holding onto the positions then. It was cutting it really close but AMZN closed at 1401.19 on that day, still below your short call so you would've pocketed the entire premium from holding onto that credit spread to its expiration. If you had been exercised against, then you might've been in a bit of trouble since the brokerage usually won't settle your account until Monday so you wouldn't be short until Monday, Jan. 29 and on Jan. 29, AMZN shot up to 141X and with you being short at 1402.5, your losses would've been (1402.5 -1410) X 1000 = $7.5K with commissions. But it would still NOT be $1.4 Million in debit for you because you would NOT have been buying the stock for $1.4M if you got assigned, you would've been SHORT the stock IF you didn't already own the stock at the time when your short calls were exercised against you. When you short a call and somebody exercise that call against you when the call is ITM and you don't own the stock, you would be SHORTING the stock not buying the stock; the person who exercised the long call would be buying the stock from you, the call seller. Your account would've been $1.4 million in credit because you shorted the stock. It's just that you would be slightly short-squeezed on Monday because the market price of AMZN on Monday went up.
Now assuming that AMZN went up further on Jan. 26 and really past your short call strike of 1402.5, then you would've had to close out that short call to avoid being assigned and potentially being short-squeezed should you be assigned and at the same time hope that your long call goes up higher to recover some of your losses.
I would recommend you to study a bit more about the basics of options regarding exercising and etc. in addition to technical analysis. Option trading is more about optimizing trading outcomes more than anything else I find.