PUT options liquidated at worst possible prices

Since the assigned long shares are forced by the legal contract of the short put to allow the long put holder on the other side who forced the exercise to sell at that strike price, the broker can't even do anything about it if they wanted to, until the next trading day when the market opens.

If the broker was really worried about margin and never gave time for the trader to make a decision, which they should unless their dealing with dunces, they'd just sell the shares in the open market first chance in the morning next day. If the long shares incurred a loss, then they'd sell the long put too, which would more than make up for it since it would have increased in value due to the drop in value of the long shares, and also given the extra time premium value in the long put since it's sold before expiration, you would get more profit than you expected from the spread.

From what I've read and posted above from my broker, you have time to exercise if you want, but if your long put has time premium, it wouldn't make sense to do that, just sell it. If your long put was trading at a discount or at bogus levels, then exercising it is the best route and will offset any margin requirements going forward.

Sit down and write out the math yourself, you'll see that you're wrong, I've already given you the three possible scenarios after early expiration for american physicals above, and even if they're liquidated automatically the next morning, they all result in maximum profit.

Again, early assignment for debit spreads in equity options is a good thing, get that through your head. It means that you get maximum profit before expiration and can move on to other trades.

Have you ever even traded an option in your life?
 
Quote from jimrockford:

Let me first explain it with cash-settled options, and then with physically settled options.

If you are trading a spread on American style, cash-settled options, then you face the following risk of extreme uncontrolled loss:

A strong market move puts the spread deep in the money at the close of trading. The short option leg is exercised, generating a huge loss. You take comfort in your long option leg, which will limit that loss, with profit left over to spare. It is, however, too late to exercise your long option leg on the same day, because you didn't receive notice of assignment on the short leg until after it was already too late for you to issue early exercise instructions (note this will always be the case). So you resolve to exercise the long option leg as soon as possible, which would be the following trading day. So you are perfectly safe, right? Wrong.

You wake up and learn that the market has gapped open violently in the opposite direction from yesterday's big move. It keeps going and never looks back. Your long option leg becomes worthless by the close. You issue exercise instructions, but you get no cash because your long option leg is now worthless. You are now stuck with the entire loss generated by the short leg.

But there is another thing that can go wrong. Suppose the loss generated by the short leg so severely reduces your account equity, that you are in violation of margin rules. The long option leg counterbalanced this loss by becoming extremely valuable, but because it is an option, its value DOES NOT count toward measuring your account equity or satisfying your margin obligations. The broker now has the right to liquidate your long option leg by selling it before you have a chance to exercise it. The broker wishes to do this in order to generate some cash, which would count toward your account equity and reduce your margin obligations. What if there is no reasonable bid at the time of sale? What if the bid is near zero? This scenario also sticks you with most or all of the loss generated by the short leg.

Here is another nightmare scenario, which applies to physically settled, American style options. You have incurred a massive loss on the short option leg, and you have been stuck with a long or short equity position by assignment of your short option leg, and you resolve to exercise your long option leg in 24 hours, so as to reverse your massive loss. But - oh no! This massive loss triggers a margin violation! Your long option leg is extremely valuable, but because it is an option, its value does not count toward measuring your account equity or satisfying your margin obligations. So, the broker has the right to liquidate your account, and your long option leg is sold at an unreasonably low price before you get a chance to exercise it, and once again, you are stuck with most or all of the loss generated by the short option leg.

A variation on that nightmare scenario might occur where your long option leg is not liquidated, but the long or short equity position resulting from your short leg's assignment is liquidated instead, because you don't have enough margin to carry that equity position. You are confident you will be OK, though, because you plan to exercise your long option leg in 24 hours. But oh no! By the time you get the proceeds from exercising your long option leg, they have dwindled to near zero, because the market moved hard and fast against your long option leg! And once again, you are stuck with most or all of the massive loss generated by the short option leg!

Here is another variation on that nightmare scenario, which can occur when you are using options in order to get a great deal of leverage, to benefit from price movements on notional underlying quantities so large you could never afford to swing them around as underlyings. Your long or short equity position is liquidated, but your long option leg is left intact, and the market does NOT move against your long leg before you can exercise it. This successful exercise results in a new long or short equity position. You resolve to play it safe by closing that equity position at tomorrow morning's open. But oh no! The market gaps hard and far against you, and because you were excessively leveraged, the gap wipes out your entire account!
More...

You're wrong. A resurgence back so that ITM puts become worthless is a good thing. Because now his long position is worth much more! This is in case OP op long 119 put and short 114 puts.
The 119 gives right to sell at 119.. if this put becomes OTM then he can just sell the stock at 120+ and make more money.

Wow I just started trading options and already smarter then most:) :D

I agree when options go from OTM to ITM you have to watch out when having written option. However now I think IB is wrong for liquidating in case he had funds of 11400 per option. Why, because as you say exercises happen after hours and the market crash happened during RTH, not after hours so he could have closed the position manually when it normalized. And if he had 11400 then he could have just let the option assigned, then the day after exercise his own put, wait 24 hours and make the 500$ back. Okay, what if the market crashed to limit down. Well if OP had 11400 per option no problemo!
 
Quote from stefan_777:

What a kook. ,.

Will somebody please come in and set this guy straight?
For me, it's like talking to a wall.
More...

Impossible Stefan..I said earlier this guy is the biggest IB apologist on the boards. EVEN IB SAID THAT AUTO LIQUIDATION DID NOT FUNCTION "OPTIMALLY" ...they needed to "tweak" the system....:p so give it up...you ARE talking to a wall. No one who trades options gives a flying F what the guy thinks.
 
Quote from RichardRimes:

Impossible Stefan..I said earlier this guy is the biggest IB apologist on the boards. EVEN IB SAID THAT AUTO LIQUIDATION DID NOT FUNCTION "OPTIMALLY" ...they needed to "tweak" the system....:p so give it up...you ARE talking to a wall. No one who trades options gives a flying F what the guy thinks.
More...

Point taken.
 
<img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=2839425>


Quote from jimrockhead:

My nightmare scenarios... nightmare scenarios... a nightmare scenario... nightmare...
More...
 

Attachments

Quote from jimrockford:

I don't know. I suspect that perhaps, in the case of a long equity position, resulting from assignment of a short put, exercising the long put to reduce a margin deficiency might risk triggering disciplinary action against the broker. I suspect that if it is against the law, it is because there are risks which are not immediately apparent to retail idiots like us. Perhaps some brokers will allow it, even if it is against the law. I suspect that in the case of a short equity position, resulting from assignment of a short call, some brokers may allow exercise of the long call on a same day substitution basis, and that the law does permit this margin treatment for call spreads, but that other brokers have policies refusing to allow it. I suspect that they refuse to allow it because there are risks not immediately apparent to retail idiots like us. I also don't know if it is legal, under any circumstances, for a broker to exercise an American style option, as part of a margin liquidation, without first obtaining exercise instructions from the customer. Does anybody know?




I'm not at all sure that there is any rule requiring a broker to impose margin requirements upon the exercise of a profitable option when combined with liquidation of the position resulting from the exercise. I suspect that any such margin requirement would be imposed by the individual broker's policies. My nightmare scenarios did not depend upon the existence of any such margin requirement. If such requirements are imposed, either by law or by your individual broker, then they provide yet another category of nightmare scenarios, in the event that you can't meet that additional margin requirement.

If an equity position is liquidated at a loss, this liquidation might still reduce or eliminate the account's margin deficiency. Perhaps this reduction would go far enough to meet any margin requirement imposed upon exercise of the long option (if there is such a requirement). But because the equity position has been liquidated, the long option is not hedged and its gain is not locked in, and the market could move hard against the long option and render it worthless before there is any chance to exercise it, and so, this would still be a nightmare scenario. It is a nightmare because you can exercise the long option leg, but it becomes worthless before you have a chance to do so.



Sometimes markets are closed by unexpected disruptions, and it is not possible to sell. Remember the 9/11 World Trade Center terrorist attack? Sometimes markets are operating and open for business, but there is no bid for your option or other security. Sometimes there is a bid, but no reasonable bid. Have you already forgotten what happened last week? Have you already forgotten that in this very thread, the OP's long options were liquidated for far less than their intrinsic value? Ask yourself: why did IB liquidate the OP's long options for prices far less than their intrinsic value?

The right to exercise an option spread's long leg is a safety valve protecting the option spread trader from extreme losses, particularly when it is not possible to sell the long leg for a reasonable price. It is wise to protect exercise rights, by avoiding margin liquidations which might jeopardize them.
More...

yes, your broker can exercise the long option if need be. If you read over your options agreement & margin agreement you're required to sign to trade these I'm sure it's in there. If you had a long put to offset your assigned long position and the broker was to liquidate at a price below the put's strike that's a slam dunk arbitration win for you.

Yes there is a margin requirement to exercise a long option if the end result is a new opening position. In the scenario you provided the position resulting from being assigned on the short leg had already been liquidated. It would make no sense to exercise the option anymore and most likely you could not do it because you'd put yourself into a margin call. I believe in the scenario you provided you didn't have sufficient margin to maintain the assigned long position which was liquidated at a loss so there would be no way you'd have sufficient margin to take on the new position. The only thing that would make sense would be to sell the option, especially if you were concerned the market would reverse after you gave exercise instuctions.

I'd say your reaching quite a bit by bringing up the 9/11 reference. Thats happened how many times in the history of the market's existence? And if the market was closed you would not be able to exercise your long position also. The only way you should be getting less than intrinsic value would be if you were foolish enough to place a market order to close out your position during a time when spreads were huge. You could place a limit order or do same day substitution. If your broker was to liquidate your options and you received less than intrinsic value, I'd say you have an arbitration case there as well.

You're way overthinking all this. You should go back and re-read Stefan 777's posts, he is correct.
 
Quote from somedudetrader:

So IB has opened a ticket to my complaint and has given me a link: http://www.iiroc.ca/English/MemberResources/Brochures/Documents/InvestorProtectionBrochure_en.pdf

This is part of the response to the complaint: "Depending on the complexity of this issue, the review process may take several days to weeks. The Investment Industry Regulatory Organization of Canada (IIROC) recommends that a final response be provided within a maximum of 90 calendar days."

Now should I wait for them on this, or should I hire an attorney as some has suggested, or take it to arbitration by myself? If they take the full 90 days to give me a response (which may even take longer because 90 days is only a 'recommendation'), I won't have much time to go to arbitration myself and my chances of getting some justice on this issue will be less when the issue is still hot.
More...

If it doesn't get resolved within a couple of weeks, I would take it to arbitration. You do not want to lose your chance of arbitration due to delays.

Please do post your final outcome...

Good luck!
 
Quote from MoreYummy:

What IBj suggests: IB is the only one making the judgement call, of course they dont want to close the position, and make unhappy customers come here to rant about it. If customer dont come here to rant about it, they are happy to close it ! They are making commission sooner too.

Also the only way not to get liquidated like this is not have more than 30% excessive margin, the only way to guaranteed it wont happen is 1) dont trade at all, 2) trade with someone else that can have Human brain or have a perfect designed risk system.
More...

Yeah I generally agree with the options you have presented. IB mean well but their whole corporate dogma goes against reform in this situation. The fact is, we've found a situation which no computer can handle and only a human can make the right call. That is the achilles heel for an all-electronic broker.

The choices are i) expose yourself to grey swans ii) don't use margin or shorts with IB iii) don't use IB until they recognise this problem and fix it.
 
Quote from TraderZero:

There seems to exist a mistaken assumption by some here that there exists some implied right to a liquid or even marginally rational market in any stock, option contract, futures contract, or any other financial asset. Sometimes markets are liquid, sometimes they are not.

Markets are generally irrational to some degree, they are either too positively skewed or too negatively skewed most of the time. Correlations exist at times, those same correlations break down at times. Sometimes by a little bit, sometimes by tremendous amounts. Because a correlation or some semblance of rationality existed yesterday or even 5 minutes ago does not mean it will exist tomorrow or two minutes from now.

Trading on margin exposes you to these risks. You therefore either learn to deal with them, or you're in the wrong line of business.

And if you don't know the terms under which you're accepting margin loans, you're DEFINITELY in the wrong line of business.
More...

You are missing the point. Trading at a rational broker does not expose you to the risk of an instant portfolio-wide margin liquidation just because someone high-ticked 1 share of one of your short positions at 100 times the last traded price. It never has done and it doesn't now - except possibly at IB.

Hence, the rational way to mitigate that risk is to stop using margin, hedging, and short-sales at IB.

In any case, being a total risk puritan is silly when the death rate is 1% per annum. Pretty much every professional trader has been short, or long on margin, at least once in their career and has thus run these risks. The odds of it busting you out in some crazy market 100 times worse than Oct 1987 are far lower than the odds of of being run over by a bus, getting your wealth confiscated by the government or capricious lawsuit, going insane, or other unhedgeable risks. So your position makes no sense.
 
You must log in or register to reply here.
Back
Top