How to realize full profit from bull call spread

V

voltrader1

Hi, can anyone please advise on a situation that happened today?

I had a call condor on nflx. 440/445 465/470
at the open NFLX was around 449.

I couldnt sell the whole condor for a reasonable price, as the bid ask spread was 1.00.

So i tried to sell the 440/455 bull call spread. Both contracts in the money, but the best bid posted all day until 4pm was 4.45. Couldnt get filled at mid or above mid for hours so i ended up getting out at 4.55.

But thats still .45 I got jipped out of on a spread thats worth 5.00.

1. Could i have realized full profit if i let expire?
2. Can you let your bull call spreads at IB expire even if you do not have funds to pay for the 100 shares?
(I asked an IB rep and he gave vague answers, said 1. i would be in margin violation 2. i wouldnt be in margin violation if they offset eachother, but also 3. IB reserves the right not to exercise my options if it exceeds my margin.)

So my question here is what would happen if I had let both the options expire in the money? Would I have realized full profit or be in a margin call?

and How to realize full profit from these bull call spreads?

I usually trade bull put spreads that expire so this is new to me.
Thanks.
 
FXforex said:
His trade was totally different then yours. You have a ITM call spread, the legs offset each other for a net credit of $500.00 minus commissions.
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but do you have to have the margin to buy the shares? what would happen if I had let expire here at IB ?

even the rep could not clearly explain. first he said id be margin called, then that they offset each other, but dropped that line that IB could also refuse my exercise making the profit vanish.
 
In order to realize the profit of a bull call spread you must do one of two things:

1. Sell the long call and buy back the short call at a lower price. In order to do this you are subject to the bid/ask price of the calls plus the liquidity of the calls.

i.e. you will need to sell the long call at the bid and buy back the short call at the ask. In order to do this there must BE a bid or you must be able to 'excite' a purchase by your offer.

2. Let the spread expire in which case you must be able to purchase the shares with cash or margin.

It will help if your broker has easy and ready access to all the markets where the calls are traded. If you have a cheap and underfunded broker this may not be the case. The market may be there for you to get out of the spread but your broker may not have access to it, or may not WANT to have access to it because it does not provide maximum profit to him.

If you allow the spread to go into expiration:
The holder of the short calls will be able to call for the shares at the higher strike price which he is guaranteed to do if the stock price is above the short call strike. Where will you get the shares to satisfy the short call??
.............you must get them from your long call at the long call strike, which is usually fine because your long call strike is lower than your short call strike.

i.e. your must EXERCISE your long call in order to supply the shares for the owner of the calls you sold.

In order to exercise your long call you must have the money or margin to buy those shares on the exercise.

With the market closed the entity who sold you the lower call MUST come up with the shares. Either he holds the shares or he must become short the shares until open on Monday. This end is not your problem.

Either way you must have the cash or margin to complete the transaction OR the broker must front you the cash to complete the transaction... which he is not likely to want to do(especially if it is IB and you have a mini-account).

Also the broker MAY hold or have access to 'dark pool' shares and be able to complete the transaction using dark pool shares.

When you are using IB you have the additional problem that the kids they hire to actually do the work (and answer the phones) may not have a clue how to make this situation gel and may screw you out of pure ignorance.
 
I use OptionsXpress (and wouldn't except I have negotiated a discounted rate). They net out any spreads where both legs are ITM. I don't get a margin call.

This is presumably broker-dependent, but I have printouts of chats with customer service where they made it clear that I was OK if both legs expired ITM. I subsequently tested the waters with a spread where I was capable of handling the cash to buy shares on the long call, and yep, they did as they said they would. I've kept the printouts just in case. :)
 
jimmyjazz said:
I use OptionsXpress (and wouldn't except I have negotiated a discounted rate). They net out any spreads where both legs are ITM. I don't get a margin call.

This is presumably broker-dependent, but I have printouts of chats with customer service where they made it clear that I was OK if both legs expired ITM. I subsequently tested the waters with a spread where I was capable of handling the cash to buy shares on the long call, and yep, they did as they said they would. I've kept the printouts just in case. :)
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My understanding is IB does the same, ie nett/nett the legs offset so no margin required.
 
oldnemisis gives a good explanation, and i understand IB should net out the positions.

Also think about it this way.
You exercise the long ITM calls and are then long stock.
You expect the short ITM calls to be exercised and this should close the long....
what happens if they dont get exercised (for whatever reason)

IB immediately closes out your long on Monday that you cannot fund.
Your risk is negligible, with pretty good upside, because someone did not give you a short at 45. Instead of closing the position at 45 you close it at 49 (?) Brilliant.

This is obviously risky when the short closes just ITM by a few cents. It can happen.
In these situations - safest bet is to close the position.

You should also be aware of the costs of closing a position v automatic exercises and closing things out. IT often explains some of the spreads charged, but in this case 45c seems expensive.
.......
I would have thought IB has to exercise your ITM calls that you are long, even if you dont have the margin to cover the shorts, as they have to assume that the ITM calls will be exercised to close the position out. Otherwise, IB is effectively saying - you have to close the position out in the market by crossing the spread (find another broker), or they are saying, we wont exercise an unfunded long unless the short exercise is first received......if the other broker does this also it becomes a mexican standoff.....unlikey .

This has all the relevant information - and unfortunately IB is not that user friendly for getting info by phone for smaller accounts.

http://ibkb.interactivebrokers.com/tag/expiration
 
SIUYA said:
oldnemisis gives a good explanation, and i understand IB should net out the positions.

Also think about it this way.
You exercise the long ITM calls and are then long stock.
You expect the short ITM calls to be exercised and this should close the long....
what happens if they dont get exercised (for whatever reason)

IB immediately closes out your long on Monday that you cannot fund.
Your risk is negligible, with pretty good upside, because someone did not give you a short at 45. Instead of closing the position at 45 you close it at 49 (?) Brilliant.

This is obviously risky when the short closes just ITM by a few cents. It can happen.
In these situations - safest bet is to close the position.

You should also be aware of the costs of closing a position v automatic exercises and closing things out. IT often explains some of the spreads charged, but in this case 45c seems expensive.
.......
I would have thought IB has to exercise your ITM calls that you are long, even if you dont have the margin to cover the shorts, as they have to assume that the ITM calls will be exercised to close the position out. Otherwise, IB is effectively saying - you have to close the position out in the market by crossing the spread (find another broker), or they are saying, we wont exercise an unfunded long unless the short exercise is first received......if the other broker does this also it becomes a mexican standoff.....unlikey .

This has all the relevant information - and unfortunately IB is not that user friendly for getting info by phone for smaller accounts.

http://ibkb.interactivebrokers.com/tag/expiration
More...

Still no real answer here. Does anyone here let their bull call spreads expire without the margin to cover the stock purchase at IB and end up ok?
 
SIUYA said:
oldnemisis gives a good explanation, and i understand IB should net out the positions.

Also think about it this way.
You exercise the long ITM calls and are then long stock.
You expect the short ITM calls to be exercised and this should close the long....
what happens if they dont get exercised (for whatever reason)

IB immediately closes out your long on Monday that you cannot fund.
Your risk is negligible, with pretty good upside, because someone did not give you a short at 45. Instead of closing the position at 45 you close it at 49 (?) Brilliant.

This is obviously risky when the short closes just ITM by a few cents. It can happen.
In these situations - safest bet is to close the position.

You should also be aware of the costs of closing a position v automatic exercises and closing things out. IT often explains some of the spreads charged, but in this case 45c seems expensive.
.......
I would have thought IB has to exercise your ITM calls that you are long, even if you dont have the margin to cover the shorts, as they have to assume that the ITM calls will be exercised to close the position out. Otherwise, IB is effectively saying - you have to close the position out in the market by crossing the spread (find another broker), or they are saying, we wont exercise an unfunded long unless the short exercise is first received......if the other broker does this also it becomes a mexican standoff.....unlikey .

This has all the relevant information - and unfortunately IB is not that user friendly for getting info by phone for smaller accounts.

http://ibkb.interactivebrokers.com/tag/expiration
More...


wtf, the cost (0.45) is the risk charged by the mkt. This was not a case of closing ITM by a few cents over the short-strike. My God, the only thing you ppl are good at is beating a dead horse.
 
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