IBKR and naked put assignment

T

tonyf

I have started trading options a couple of month ago and am progressing at a decent pace.
I enjoy selling naked puts on individual stocks far OTM as I would be happy to own those shares at the strike price. Now I trade with a PM account with no free cash - I am fully invested in a balanced portfolio of equities and bonds and options are sold on margin.

Now if assigned in a couple of days on expiry day, how would this work practically with IB: Would I receive an assignment notice and be given some time to sell securities to generate cash and pay for the assigned underlying?
Or will the IB auto-liquidation algo kick-in on Monday morning with no prior notice and liquidate as it pleases to satisfy the assignment?

Thank you
 
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You'll borrow money on margin to fund the purchase. Margin requirements are more or less agnostic between long stock and ITM short puts so your buying power will be almost the same. Early assignment notification is on T+1 so even if you liquidate other positions they'll settle on T+2 so you'll have to borrow money for a day (except if you use the TPLUS1 trading facility but it will cost you more to do that).
 
lpope said:
You'll borrow money on margin to fund the purchase. Margin requirements are more or less agnostic between long stock and ITM short puts so your buying power will be almost the same. Early assignment notification is on T+1 so even if you liquidate other positions they'll settle on T+2 so you'll have to borrow money for a day (except if you use the TPLUS1 trading facility but it will cost you more to do that).
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Thanks for that - just to be clear, are you saying that the margin set aside by IB for selling the put (maintenance margin) is about the same to go long the underlying?
How does the early assignment notification work? let's take for example a counterparty choosing to assign me this Saturday. Would the T+1 be Tuesday? if so, I guess I will have monday to free up some cash for this purpose....
 
tonyf said:
I have started trading options a couple of month ago and am progressing at a decent pace.
I enjoy selling naked puts on individual stocks far OTM as I would be happy to own those shares at the strike price. Now I trade with a PM account with no free cash - I am fully invested in a balanced portfolio of equities and bonds and options are sold on margin.

Now if assigned in a couple of days on expiry day, how would this work practically with IB: Would I receive an assignment notice and be given some time to sell securities to generate cash and pay for the assigned underlying?
Or will the IB auto-liquidation algo kick-in on Monday morning with no prior notice and liquidate as it pleases to satisfy the assignment?

Thank you
More...

IB has stated in their policy that it reserves the right to liquidate your option positions if it sees that you won't have enough money in your account to satisfy any potential assignment obligations. So you might not even have a chance to raise cash to buy the assigned shares. This is why selling naked options is such a bad idea no matter how far OTM they are. This could happen: https://earlyretirementnow.com/2018/12/18/the-optionsellers-debacle/

And second, even if you are prepared to acquire the shares via assignment, it's not a cost-effective way to buy shares. When you are get assigned, you will be forced to buy shares at sometimes much higher price when you could've acquired the same shares at much lower market price, forgoing much of the potential profit and deepening potential loss if your position ends up being a losing position.
 
Yes about the margin.

Sequence for early assignment is your counterparty exercises puts on Monday (T+2), you are notified on Tuesday morning (T+1), and the trade settles on Wednesday (T+0). Notification is on Monday (T+1) for automatic exercises when options expire on a Friday (T+2) but you'll 99% know that you'll be assigned based on the Friday closing price so it isn't a surprise. You can't be assigned on a Saturday, although options expire on Saturdays.
 
You won't have a margin horror story selling naked puts. People that have problems are long ITM calls and puts that are auto exercised and margin goes from the value of the option to 20% of notional. Also, people that have spreads where one leg is assigned early, typically around a dividend, and risk profile changes. Both create gap risks and smarter brokers sell people out of their positions in anticipation of these events.
 
JSOP said:
IB has stated in their policy that it reserves the right to liquidate your option positions if it sees that you won't have enough money in your account to satisfy any potential assignment obligations. So you might not even have a chance to raise cash to buy the assigned shares. This is why selling naked options is such a bad idea no matter how far OTM they are. This could happen: https://earlyretirementnow.com/2018/12/18/the-optionsellers-debacle/

And second, even if you are prepared to acquire the shares via assignment, it's not a cost-effective way to buy shares. When you are get assigned, you will be forced to buy shares at sometimes much higher price when you could've acquired the same shares at much lower market price, forgoing much of the potential profit and deepening potential loss if your position ends up being a losing position.
More...

Thanks for that. Read that article twice. They are selling naked calls. Not my game.

This, one the other hand, is my game:
 
upload_2020-10-15_13-15-59.png
 
It may apply if the likelihood of assignment was high - but it ain't in my case. Hence why I am better off getting paid instead of leaving unfilled limit orders on the exchange.
 
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