Option execution / assignment - disaster scenario

L

luckyputanski

Hi,
I'm wondering what would brokers do in the following situation:
- I sold ATM put
- I bought ATM Call
- I was assignment on the put, -100 shares in my account
- stock going up and up, and up....

Broker would:
1. Execute my call
2. Sell my call to cover loss on short shares. Keep short stock, if market still going up, repossessed my house.
3. Sell my call to cover loss on short shares, buy stock back.

And why? (Legal reason or broker's good will)

Thanks
 
In the above you are gold since you sold the put you would be LONG not short the shares. If you meant to say you were short the call and were assigned shares that you didn't have covered then its up to your broker. Most issue a margin call and give you time to close and/or sell the stock. Some brokers will liquidate anything else you have in addition to closing the trade. If your out of money then yes they will take your first born in trade.
 
Of course I made a mistake. Here is other example - result the same:
- sold short term call
- bought long term call
- assigned on short term call, -100 shares on account, shares going up

Does every broker have the same procedure? Let's assume I don't respond to margin call (was hit by a bus)
 
You are short AAPL weekly 550 call and long the 555. It expired today lets say at 554. Your long call expired OTM and you are the proud owner of -100 shares of apple at 550 per share. (Unless your long call was another later date expiration it doesn't help you since it expired out of the money)

so on Monday am if you don't have enough cash in the account and APPL jumps up to 600 you will be receiving a call saying wire money into your account by the end of the day to cover the shortfall. If you have gotten hit by a bus then your heirs will get the call. If your dead your estate will be on the hook. I'm sure there are a number of companies that have been stiffed...last summer I believe IB was for some 68 million (at least thats what I read on ET:) ) anywhoo all brokers will of course try and get money that is owed to them. I don't think they employee people from Chicago to break your legs but the fact is that you have a contract that is legally binding.

Now IF AAPL closed above the 555 that you had a long call on then your only out the 5 pts or $500 (per contract) and I assume if your trading options you have $500 in your account.

In terms of "auto-liquidation" no not all brokers will do that. Most brokers will let you know you have a problem and will work with you to handle it in an orderly fashion.
 
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