Rotten trade

L

lejmorro

These are the basics of a trade IB executed for me last Friday morning (closing a SPY broken wing butterfly).

Trade ID Option Execution Time Xchange Execution Price

46391559 SPYIQ 121 Call Sold 2008-09-19 09:30:02 ISE 3.85

46391565 SPYIS 123 Call Bought 2008-09-19 09:30:02 ISE 4.30

46391584 SPYIX 128 Call Sold 2008-09-19 09:30:02 ISE 0.53

As you can see, the 121 call was sold at 3.85 and the 123 call (even though it has $2 less intrinsic value) was bought at 4.30.

Even allowing for slippage, bid-ask spreads, market volatility etc, this is a rotten trade. How can the 121 call, which had nearly $6 of intrinsic value at the time of execution, be bought and sold for $3.85? This is not some junior miner, this is the most liquid, most heavily traded stock on the planet. How can the highest bid for an in the money option at the opening bell be 30% less than its intrinsic value?

Does anyone think I should notify some option body or something, not for the money which is lost, but for the principle? Or do the experienced traders say, anything goes, intrinsic value does not necessarily mean anything.

Thanks for your interest.
 
you could try to dispute this, allthough this is really really late at this moment. Further more you should never ever trade options at market on the opening, that's just asking to be raped.
 
wow I agree you were royally screwed....thats nuts...but a market on open order is basically bending over. There was an incredible ES spike to 1290ish then rocket back down which could have been a cause. With a butterfly ...even broken wing... you shouldn't have to panic in closing it. Always wait at least 15 minutes after the open before putting in your LIMIT order...you can always adjust the limits later.

I would call your broker and ask for clarification because if the trades were actually made at the same time there should not have been that much difference in price.
 
Quote from lejmorro:

These are the basics of a trade IB executed for me last Friday morning (closing a SPY broken wing butterfly).

Trade ID Option Execution Time Xchange Execution Price

46391559 SPYIQ 121 Call Sold 2008-09-19 09:30:02 ISE 3.85

46391565 SPYIS 123 Call Bought 2008-09-19 09:30:02 ISE 4.30

46391584 SPYIX 128 Call Sold 2008-09-19 09:30:02 ISE 0.53

As you can see, the 121 call was sold at 3.85 and the 123 call (even though it has $2 less intrinsic value) was bought at 4.30.

Even allowing for slippage, bid-ask spreads, market volatility etc, this is a rotten trade. How can the 121 call, which had nearly $6 of intrinsic value at the time of execution, be bought and sold for $3.85? This is not some junior miner, this is the most liquid, most heavily traded stock on the planet. How can the highest bid for an in the money option at the opening bell be 30% less than its intrinsic value?

Does anyone think I should notify some option body or something, not for the money which is lost, but for the principle? Or do the experienced traders say, anything goes, intrinsic value does not necessarily mean anything.

Thanks for your interest.
More...

To answer your question, when bid/ask spreads are gigantically wide - any prices are possible. But, if seeing those wide bid/ask spreads, you voluntarily entered individual market orders, you got exactly what you deserved. Sad as it is.

1) You should have opened a problem ticket labeled INQUIRY immediately. It may be too late, but do it anyway. Today.

2) Did they 'buy you in' because of a margin call, or was this a voluntary trade you entered yourself?

3) When they buy you in, they place orders at the market - an obscenity in itself. I have told them this repeatedly (even though this has not been a problem for me personally), but they don't care.

4) As you already read above, NEVER NEVER NEVER enter a market order in options.

5) if you had entered a spread order, with a LIMIT price, this would never have happened to you. You may not have been filled, but you would not have been hurt this badly.

It is unconscionable for any firm to allow a customer to sell a credit spread for a debit and it's even worse to allow a customer to sell a call $2 under parity. I believe IB should have protected you, but their primary consideration is not allowing a customer to take huge losses and leave IB holding the bag.

Call them on it. Reason with them. They may do something for you. Do it today - and don' wait until Monday. The sooner the better. But these options have expired and they will want to know why you did not let them know immediately.

I would also call and punch #2 - 'trade problems' - but it is rather late to be protesting. Be polite and explain what happened.

Mark
http://blog.mdwoptions.com/options_for_rookies/
 
Thanks for all your replies.

I am in Australia. The order was set up by myself (an unattended MARKET order). Of course, if nothing else, I have paid a few thousand dollars to learn a painful lesson.

I did open a Message Ticket with IB the same time I wrote the ET post, have heard nothing yet, maybe will call them before the market opens tonight (AUS time).

Moving forward, the reason I put on the (stupid) unattended MARKET order was because I panicked about the possibility of exercise of the 123 call.

So, if SPY was at say 126 on expiration day, and somebody exercised my 20 x 123 short calls, 10 of them would be covered by the 121 call but what about the other 10. I presume, if I was able to trade, I could have just bought 10 in the money calls and exercised them and my 121 and the 123's would have been covered. As I said, a painful lesson.
 
Quote from lejmorro:

Thanks for all your replies.

I am in Australia. The order was set up by myself (an unattended MARKET order). Of course, if nothing else, I have paid a few thousand dollars to learn a painful lesson.

I did open a Message Ticket with IB the same time I wrote the ET post, have heard nothing yet, maybe will call them before the market opens tonight (AUS time).

Moving forward, the reason I put on the (stupid) unattended MARKET order was because I panicked about the possibility of exercise of the 123 call.

So, if SPY was at say 126 on expiration day, and somebody exercised my 20 x 123 short calls, 10 of them would be covered by the 121 call but what about the other 10. I presume, if I was able to trade, I could have just bought 10 in the money calls and exercised them and my 121 and the 123's would have been covered. As I said, a painful lesson.
More...

My pleasure. I want to help.

IB doesn't respond to these tickets as quickly as they should

There's nothing you can do now about sending in a market order. the computer doesn't treat a market order as a spread. It just (foolishly) executes each side 'at the market' As you said. Lesson learned.

There is NOTHING wrong with being assigned an exercise notice on an ETF. You would simply be short 1,000 shares. If your account cannot hold that position, simply buy it back (quickly the next morning or IB will buy it back for you) - but there is NO reason to panic.

Nor is there any reason to buy calls just so you can exercise them. That's paying time premium for no reason.

Hope you do better next month.

Mark
 
you would not have been exercised untill the end of the day, if you had closed the position by then, you could not have been exercised, so you had all day to close your short position ... this looks idd like a painfull lesson in rather exceptional circumstances.
 
Thanks to your prompting, I discovered IB have a desk open from 1600-200 hrs on Sunday (which correlated to Monday morning in Australia) and called it.

Nice guy called Scott took a little bit of persuading that the sale of the 121 call (at $2 below parity) was dodgy but then agreed to follow it up further, using the Course of Sales etc.

Another lesson learned is I need to follow things up faster. The fact is on Friday, I was so shocked by the trade I didnt want to look at the matter of facts. More objectivity required!
 
Quote from lejmorro:

Another lesson learned is I need to follow things up faster.
More...

Yes you do.

Remember someone else was on the other side of the trade. If IB is going to try to get a trade adjustment, the other person must agree. You have to get to that person ASAP.

And if your broker is going to give you the cash difference from their error account, they need to know quickly also.

Mark
 
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