Options Exercise Question for IB

E

ET180

Question 1:

If I sell a call option and it's in the money at expiration (say by more than 3 cents per share). Can I assume that it will be exercised? If it is exercised and I sold a covered call, can i assume that my broker will take my stock and credit me strike price * number of shares represented by the option contract?

Question 2:

If I sold a naked put that is slightly in the money, can I assume that when exercised, I will be assigned the underlying purchased at the strike price sitting in my account the following Monday? Therefore, if the option is in the money (by more than 3 cents per share) can I assume that it will get exercised and therefore if I want to limit my risk and "close" my stock position before it is received, I can short the position before the market closes the day before the option exercises such that my initiated short position will be covered the next day by the stock received from the option exercise?

Update: I found the answer for question 1 here:

"What happens to my long stock position if a short option which is part of a covered write is assigned?
If the short call leg of a covered write position is assigned, the long stock position will be applied to satisfy the stock delivery obligation on the short call. The price at which that long stock position will be closed out is equal to the short call option strike price."

http://ibkb.interactivebrokers.com/..._to_prevent_the_assignment_of_a_short_option_
 
Last edited:
ET180 said:
Question 1:

If I sell a call option and it's in the money at expiration (say by more than 3 cents per share). Can I assume that it will be exercised? If it is exercised and I sold a covered call, can i assume that my broker will take my stock and credit me strike price * number of shares represented by the option contract?

Question 2:

If I sold a naked put that is slightly in the money, can I assume that when exercised, I will be assigned the underlying purchased at the strike price sitting in my account the following Monday? Therefore, if the option is in the money (by more than 3 cents per share) can I assume that it will get exercised and therefore if I want to limit my risk and "close" my stock position before it is received, I can short the position before the market closes the day before the option exercises such that my initiated short position will be covered the next day by the stock received from the option exercise?

Update: I found the answer for question 1 here:

"What happens to my long stock position if a short option which is part of a covered write is assigned?
If the short call leg of a covered write position is assigned, the long stock position will be applied to satisfy the stock delivery obligation on the short call. The price at which that long stock position will be closed out is equal to the short call option strike price."

http://ibkb.interactivebrokers.com/..._to_prevent_the_assignment_of_a_short_option_
More...

No you can't assume you will get assigned.
 
I know that it's not a certainty, but generally, what level ITM would a short put have to be to assume a >97% change of assignment? For example, can we assume that if the short put has at least $0.30 / share of intrinsic value at expiration that it will definitely be exercised? Otherwise, that would be like leaving money on the table...unless of course the stock is volatile and the put option owner is unsure about whether the stock will open higher than the value gained by executing the option the following week.

In other words, are there some guidelines for estimating the likelihood of ITM put option assignment?
 
I think that the majority of the time, for stocks that are not volatile and don't move adversely after the close, there is an extremely high probability that you will get assigned on any option that is a penny in the money. With with stocks that fall under any of the qualifiers, I can't give you any guidelines. You'll have to decide on a case-by-case basis whether it's worth closing the position prior to expiration.

If you are trading at an online broker such as IB, and an assignment would cause a margin call, they will likely liquidate you prior to the close anyway, even if the strike is a few cents out of the money.
 
rmorse said:
If you are trading at an online broker such as IB, and an assignment would cause a margin call, they will likely liquidate you prior to the close anyway, even if the strike is a few cents out of the money.
More...
The thing to watch if you're worried about margin problems around assignment is IB's "predicted post-expiry excess" balance. If that goes negative too close to the end of the last day, they might close the position (or something else?) early to avoid that risk.
 
MoreLeverage is correct. That tool is very useful. We introduce accounts to IB and other firms. This threat of auto-liquidation near expiration and from liquidity events(That can increase house margin for short periods of time), seem to be the main reason why IB clients choose to move their accounts to another clearing firm. We don't auto-liquidate for these reasons at our other relationships since a margin call is not illegal, only against IB firm policies. This policy is very typical at online retail clearing firms like IB, TD, charles schwab etc. Not as typical for institutional relationships.
 
You must log in or register to reply here.
Back
Top