Interactive Brokers would not allow me to exercise

[hippie]

Quote from Robert Weinstein:

Thanks John

It is interesting that based on that website the OCC is jointly owned by the exchanges and they set a time limit of 4:30P CT as a cutoff time to exercise an option that does not expire until Saturday

Your link website also says that the OCC is the counter party to all transacations (much like futures) so perhaps as the counter party they legally could exercise and arb it with afterhours trading any option that went into the money that was not exercised already. since the exchange members appear to own the OCC they would be able to
make a lot of risk free gains

As I recall options used to expire on Friday and they changed it to Saturday so why only change the time of being able to exercise to 4:30 on Friday?

It may be true you can't exercise beyond 4:30pm ET on Friday if you are long an option. This doesn't mean that you are safe from IB or some big players exercising an option on you on Saturday if you wrote an option. This happened to me before.

If I really do not want an option put to me, I close it for pennies on Friday even it is slightly out of the money.

 

[pcvix]

Quote from dagnyt:

IB does not own the options and has no right to exercise. I get that you don't trust them and I get that you think they would be 'stupid' to be honest.

But why do you believe they have the ability remove options from your account and take ownership?

+1

Quote from Robert Weinstein:

It would appear that either IB is very stupid or is cheating customers or I guess there is a chance as well that all that money really is being left on the table because of some other reason (costs of staff etc...). I would guess that the cost of having someone stay late on Friday a month to hit bids/lift offers for all of the options that go ITM in after hours would be small compared to the risk free profit.

-1

 

[johnnyc]

Quote from Robert Weinstein:

Thanks John

It is interesting that based on that website the OCC is jointly owned by the exchanges and they set a time limit of 4:30P CT as a cutoff time to exercise an option that does not expire until Saturday

Your link website also says that the OCC is the counter party to all transacations (much like futures) so perhaps as the counter party they legally could exercise and arb it with afterhours trading any option that went into the money that was not exercised already. since the exchange members appear to own the OCC they would be able to
make a lot of risk free gains

As I recall options used to expire on Friday and they changed it to Saturday so why only change the time of being able to exercise to 4:30 on Friday?

I've never heard of anything like that happening. According to 888options.com the reason they expire on Saturday is:

"The reason that equity and index options expire on this day is due to the fact that this day offers the least number of scheduling conflicts, i.e. holidays."

http://www.888options.com/help/faq/expiration.jsp

CBOE says:

"Although equity options literally expire on the third Saturday of the expiration month, a day reserved for brokerage firms and The Options Clearing Corporation to confirm customers' positions, the day expiring equity options last trade is the Friday before expiration, or the third Friday of the month."

http://www.cboe.com/learncenter/concepts/basics/expiration.aspx

 

[Robert Weinstein]

Quote from johnnyc:

I've never heard of anything like that happening. According to 888options.com the reason they expire on Saturday is:

"The reason that equity and index options expire on this day is due to the fact that this day offers the least number of scheduling conflicts, i.e. holidays."

http://www.888options.com/help/faq/expiration.jsp

CBOE says:

"Although equity options literally expire on the third Saturday of the expiration month, a day reserved for brokerage firms and The Options Clearing Corporation to confirm customers' positions, the day expiring equity options last trade is the Friday before expiration, or the third Friday of the month."

http://www.cboe.com/learncenter/concepts/basics/expiration.aspx

Thank you for your post.

I have not had an out of the money at 3:31P CT option get exercised on me but I rarely will allow an option to remain short if I can close out cheaply.

It would be interesting to know how many IF ANY options that are out of the money at 3:30 but go into the money after 3:30P CT get exercised.

The OCC makes it pretty clear to me that they are the counter party for all option trades.

If I had to guess I would guess that the 3:30P CT cut off is more about protecting the option market makers that are part of the exchanges that are the owners of the OCC than any other explanation. Since the submission of exercises that are manual are done electronically its not like its a logistical issue requiring processing time of the gazillions (joke as it would be clear that the number of options meeting the criteria of being out of the money at 3:30P CT and going into the money after 3:30 and before the close of aftermarket trading at 7P CT would be pretty small relatively speaking) of options that get exercised after 4P ET on Friday expiration day.

I have asked the SEC and the OCC to explain it and I will report back what I find out. One thing appears clear to me from what I found out and read. The rules are in place to it would appear to put the non market maker option trader at a disadvantage by setting up a rule that will not allow an option holder the ability to exercise his rights with an option that is still valid, as counter party to the option writer to arb any trades after 3:30 that become profitable, or perhaps another motive that I have not thought of yet.

Considering how the some of the option exchanges as well as the rules in option trading puts everyone at an unlevel playing field compared to the option market makers I would think the ability to deny a request of an option holder with a life option would be the most likely reason. Anything beyond that would seem to be really hard to defend in put to the task.

 

[Robert Weinstein]

Quote from pcvix:

+1



-1

Good use of numbers, looks like a zero sum game. No such thing but interesting non the less.

Maybe you can answer this. Who DOES own stock and options that we are buying and selling?

Do you think that when you "buy" a stock that you own it? Most likely you do NOT and your nothing more than a ledger entry and your ownership consists of an "interest in the stock"

the OCC according to their website is the counter party to all trades.

Why are options that are not yet expired not allowed to be exercised while trading is still going on in the stock?

 

[def]

Quote from Robert Weinstein:

Thank you for your post.

I have not had an out of the money at 3:31P CT option get exercised on me but I rarely will allow an option to remain short if I can close out cheaply.

It would be interesting to know how many IF ANY options that are out of the money at 3:30 but go into the money after 3:30P CT get exercised.

The OCC makes it pretty clear to me that they are the counter party for all option trades.

If I had to guess I would guess that the 3:30P CT cut off is more about protecting the option market makers that are part of the exchanges that are the owners of the OCC than any other explanation. Since the submission of exercises that are manual are done electronically its not like its a logistical issue requiring processing time of the gazillions (joke as it would be clear that the number of options meeting the criteria of being out of the money at 3:30P CT and going into the money after 3:30 and before the close of aftermarket trading at 7P CT would be pretty small relatively speaking) of options that get exercised after 4P ET on Friday expiration day.

I have asked the SEC and the OCC to explain it and I will report back what I find out. One thing appears clear to me from what I found out and read. The rules are in place to it would appear to put the non market maker option trader at a disadvantage by setting up a rule that will not allow an option holder the ability to exercise his rights with an option that is still valid, as counter party to the option writer to arb any trades after 3:30 that become profitable, or perhaps another motive that I have not thought of yet.

Considering how the some of the option exchanges as well as the rules in option trading puts everyone at an unlevel playing field compared to the option market makers I would think the ability to deny a request of an option holder with a life option would be the most likely reason. Anything beyond that would seem to be really hard to defend in put to the task.

You imply the rules were set to favor market makers. That isn't the case. Keep in mind that these settlement dates were made well before the concept of after hours trading existed.

Also, keep in mind options are priced to the close of trading on the last trading day. You are essentially asking for that time to be extended one day and thus are actually asking for a free option. Keep in mind there is also a great deal of uncertainty if you are short an ATM option on expiry. You can make a good guess if you'll get assigned but you will never know until the OCC does its processing. It cuts both ways.

 

[Robert Weinstein]

Quote from def:

You imply the rules were set to favor market makers. That isn't the case. Keep in mind that these settlement dates were made well before the concept of after hours trading existed.

Also, keep in mind options are priced to the close of trading on the last trading day. You are essentially asking for that time to be extended one day and thus are actually asking for a free option. Keep in mind there is also a great deal of uncertainty if you are short an ATM option on expiry. You can make a good guess if you'll get assigned but you will never know until the OCC does its processing. It cuts both ways.

Yes Def,

I do imply that the rules are in favor of the market makers. There are lots of rules that are in favor of the MMs including a ban on non MMs to make a market which means wider spreads and a license to print money at the expense of all the other market participants.

The charges for order cancellations. For example the CBOE I believe charges a dollar or at least IB charges a dollar for that. Why doesn't the ECNs charge for stock cancellations? Answer is easy the cost is very small. I would imagine the cost is much less than a penny and some exchanges charge 10 cents.

I have done some further research on this and IB sets a cut off time of 3:30P for execution while others have a 4:30P cut off time. This gives the buyer of an option another full hour of time during what is sometimes a very good time to be in the market.

I am not asking for a free option. It doesn't expire until Saturday. There is a great deal of uncertainty in all trading thats part of the game IMHO so I don't understand why that is being brought up at all.

More importantly and most importantly to me, why does IB have a cut off time of 3:30P CT when the OCC is 4:30P CT and all it takes for an IB customer to exercise is push a button on TWS and not call a desk or anything else?

I have been advised others can do it including a broker that I am very seriously considering moving to as the costs of trading are right in the same area as IB and may be cheaper as they do not have a minimum $1 ticket charge which makes trading 100 share lots less expensive as well as trading in options of size 1. Granted I don't trade that small much of the time but sometimes but that doesn't mean I like paying $1 when I could pay less than half when I do.

How about it Def? Can we get IB to keep up with some of the others and offer a 4:30P cut off time or would you suggest that people that want to trade/buy options on expiration Friday use another broker as they will get another hour to exercise compared to IB?

 

[Jerkstore]

Quote from Robert Weinstein:



I do imply that the rules are in favor of the market makers. There are lots of rules that are in favor of the MMs including a ban on non MMs to make a market which means wider spreads and a license to print money at the expense of all the other market participants.

The charges for order cancellations. For example the CBOE I believe charges a dollar or at least IB charges a dollar for that. Why doesn't the ECNs charge for stock cancellations? Answer is easy the cost is very small. I would imagine the cost is much less than a penny and some exchanges charge 10 cents.

Order cancellation fees are the only rule that would favor the MM's. In practice though this rule is more for the exchanges that have to process massive amounts of data.

Besides, have you looked at the options markets lately? They are mostly a pennywide. MM's are not printing money at the expense of other participants. Most options MM firms I know of either went out of business or had a flat year in 2009, while volumes hit a new record! The only companies making consistent money are the ones that are able to both get paid payment for order flow (on their brokerage side) AND internalize the same retail order (via deals with brokers like Citidel/Etrade or via their own brokerage wing's retail customers, like IB).

The vast majority of retail orders are internalized. The public never sees them.

Additionally, MM's have to pay .65 per contract for payment for order flow to customer designated orders (which is what YOU are). This means that the good orders are eaten up by their originating brokerage company, while the rest go to the public exchange to trade against a sucker MM. There is no way for a MM to make money on anything less than a 3 penny wide market--especially when internalization results in immediate adverse selection of trades.

MM's are a dying breed.

 

[Jerkstore]

Once upon a time, customers had longer to exercise their options than MM's. Now, the rules of when to exercise an option are the same for every market participant. No one knows what they were assigned on until after processing on Saturday, but the notices have to be in by 4:30 central.

GOOG is always an interesting study. I am convinced that some large company forceably pins the stock when they can. This allows them to collect a large amount of decay on the pinned strike, and buy back everything at 2:55 on Friday. However, this group would be left with a large delta position as they force the stock up/down a few $$. To make up for this, the company will overbuy the pinned strike at 2:55, and exercise options to flatten out their delta position.

If you are short options on that line in GOOG you will often get assigned options that technically close OTM.

 

[Robert Weinstein]

Quote from Jerkstore:

Order cancellation fees are the only rule that would favor the MM's. In practice though this rule is more for the exchanges that have to process massive amounts of data.

Besides, have you looked at the options markets lately? They are mostly a pennywide. MM's are not printing money at the expense of other participants. Most options MM firms I know of either went out of business or had a flat year in 2009, while volumes hit a new record! The only companies making consistent money are the ones that are able to both get paid payment for order flow (on their brokerage side) AND internalize the same retail order (via deals with brokers like Citidel/Etrade or via their own brokerage wing's retail customers, like IB).

The vast majority of retail orders are internalized. The public never sees them.

Additionally, MM's have to pay .65 per contract for payment for order flow to customer designated orders (which is what YOU are). This means that the good orders are eaten up by their originating brokerage company, while the rest go to the public exchange to trade against a sucker MM. There is no way for a MM to make money on anything less than a 3 penny wide market--especially when internalization results in immediate adverse selection of trades.

MM's are a dying breed.

Order cancellation fees are the only rule that would favor the MM's. - I am sorry but I can not agree with that, others are not able to bid and offer at the same time. This is maybe the biggest disadvantage as it keeps the spreads wider and lowers flexibility for traders. This is a VERY big deal and costs everyone else huge amounts of money especially when taking a stop loss and you have to get out. Sorry but I have looked at option pricing and NO most are not penny spreads. Even the ones that can trade in penny spreads are often not because of lack of liquidity which again is because of the limitation on who can bid/offer at the same time



Additionally, MM's have to pay .65 per contract for payment for order flow to customer designated orders (which is what YOU are). - here is the Fee schedule for the CBOE but I don't see how it adds up to that amount. Your number doesn't really pass the smell test either as IB charges a lot less for volume traders. http://www.cboe.com/publish/feeschedule/CBOEFeeSchedule.pdf

There is no way for a MM to make money on anything less than a 3 penny wide market - who cares?? so they cant make money with SPY and C. Sorry but the specialist is gone in NYSE and costs for everyone else went down big time(I am pretty sure I am not the only one who has been screwed by the specialist more than once). The pits in CHI are dying also. good riddance as they increase the transaction costs for everyone else compared to computers. This is not a welfare work program this is the free market and there are a lot of other countries that would love to have the markets we have and if we don't evolve we will miss out and that means everyone misses out.

I dunno what you do in this biz but for me I am sick of being a second class citizen in the market place that has to try to compete in an unlevel playing field. Let the free market do its magic, it works pretty well in my opinion