IB: naked call exercise and stock non-borrowable

[teun]

Does anybody know what happens in this scenario (naked call exercise and stock non-borrowable)?

I cannot find this on the IB website. Up to now I only sold calls on larger stocks (which were probably always borrowable, I never checked). The default behaviour is that after fridays expiration you are short the physical stock.

But what will happen if written calls on small, non-borrowable (in this example with IB) stocks are ITM at expiration? Will IB give away the shares anyway thereby creating a naked short stock position?

 

[spindr0]

Your last paragraph makes no sense. If you are assigned on a short call, you sell shares. If you have no long shares, the result is a short equity position. There's no give away. You are borrowing shares to sell (if available).

When a lender wants to sell his shares and the stock is non-borrowable, a borrower gets an afternoon notice and has to cover short shares by 4 PM unless IB finds other shares to borrow. If he doesn't cover, IB will at 4 PM at the closing asked price - possible even after 4 PM since I've had time stamps later than that. I've never been auto closed without notification.

It's a good idea to work the order during the afternoon since there may be an opportunity to do better than the closing ask, particularly since illiquid stocks tend to have wider B/A spreads and sometimes you can get lucky with a fill near the bid.

It would seem to me that if you sell naked calls, get assigned a naked equity position and there are no shares available to borrow, you're going to see a sell at the strike price (assignment) and a closing buy at the EOD ask and you'll end up flat.

 

[teun]

Quote from spindr0:

Your last paragraph makes no sense. If you are assigned on a short call, you sell shares. If you have no long shares, the result is a short equity position. There's no give away. You are borrowing shares to sell (if available).

When a lender wants to sell his shares and the stock is non-borrowable, a borrower gets an afternoon notice and has to cover short shares by 4 PM unless IB finds other shares to borrow. If he doesn't cover, IB will at 4 PM at the closing asked price - possible even after 4 PM since I've had time stamps later than that. I've never been auto closed without notification.

It's a good idea to work the order during the afternoon since there may be an opportunity to do better than the closing ask, particularly since illiquid stocks tend to have wider B/A spreads and sometimes you can get lucky with a fill near the bid.

It would seem to me that if you sell naked calls, get assigned a naked equity position and there are no shares available to borrow, you're going to see a sell at the strike price (assignment) and a closing buy at the EOD ask and you'll end up flat.

OK, thanks.

About the auto close point. Last January (21) I had some short ITM calls which were exercised. I didn't got a notice on friday (or any other day). On sunday I opened TWS and I was simply short the shares (on friday evening I didn't see this position yet).

So the shares weren't bought by IB. From your post I understand that in case the underlying stock was non-borrowable I would have seen an additional buy (and no short position). Is that correct?

 

[rew]

If a short call is assigned and the stocks are not borrowable you will have to buy the shares at market and sell them at the strike, taking an immediate realized loss.

 

[spindr0]

Quote from teun:

About the auto close point. Last January (21) I had some short ITM calls which were exercised. I didn't got a notice on friday (or any other day). On sunday I opened TWS and I was simply short the shares (on friday evening I didn't see this position yet).

Intraday notices aren't sent for a pending assignment. They're sent for a pending 4 PM buy in of a short equity position.

So the shares weren't bought by IB. From your post I understand that in case the underlying stock was non-borrowable I would have seen an additional buy (and no short position). Is that correct?

That would be my assumption if the stock is non-borrowable. The best thing to do would be to call IB and verify if this is true.

 

[weewilly]

if the stock is not on their box list, your itm naked calls will fail-to-deliver immediately and you will buy-in at the end of the day. even if they locate shares for you, you will enjoy paying hefty hard-to-borrow interest rates on that short.

if the stock is not on the list, don't short it.

http://www.interactivebrokers.com/en/p.php?f=shortableStocks

 

[donnap]

Quote from teun:



I cannot find this on the IB website. Up to now I only sold calls on larger stocks (which were probably always borrowable, I never checked). The default behaviour is that after fridays expiration you are short the physical stock.

There have been times when SPY wasn't borrowable at IB. I wouldn't assume that any equity is always borrowable.

 

[dagnyt]

Quote from teun:

Does anybody know what happens in this scenario (naked call exercise and stock non-borrowable)?

But what will happen if written calls on small, non-borrowable (in this example with IB) stocks are ITM at expiration? Will IB give away the shares anyway thereby creating a naked short stock position?

Why would you ever allow yourself to be in this position?

Just buy back your short options prior to expiration. You are allowed to take losses on some trades.

Mark

 

[pickupsticks]

I sold some deep in the money calls that were 2 months from expiry on a small cap last week that had no borrow with IB (that is why I sold deep in the money calls) Some weirdo exercised that same day. IB did not force a buy in. I guess they found a borrow, who knows.....

 

[teun]

Quote from donnap:

There have been times when SPY wasn't borrowable at IB. I wouldn't assume that any equity is always borrowable.

I just came across a link where this is confirmed:

http://zerohedge.blogspot.com/2009/04/spy-have-become-hard-to-borrow.html