selling OTM naked calls - Option Clearing Q

A

Abundance Magnet

Hi,

what happens when you sell a call option and then the stock is halted? I am considering sell OTM calls on a stock that has just had some very bad press. if the stock is halted or de-listed, could I still get assigned if it is Out of the Money? How would I deliver on the halted stock? I called the OCC and they said that technically, I could get called on it (by wording of the contract). If my call is out of the money when it happens, how would I deliver on a halted stock? I can't imagine why I would get called since it is OTM but wanted to understand the scenario more fully before proceeding to sell an OTM call...

thanks!
 
Abundance Magnet said:
what happens when you sell a call option and then the stock is halted? I am considering sell OTM calls on a stock that has just had some very bad press. if the stock is halted or de-listed, could I still get assigned if it is Out of the Money?
More...

Yes, but if the call is OTM, why would the buyer exercise after bad news and a halt?
 
Robert Morse said:
Yes, but if the call is OTM, why would the buyer exercise after bad news and a halt?
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I think he's imagining it's halted on good news (takeover or whatever). Presumably he'd wind up short and at the mercy of his broker.
 
I have no idea but wanted to know in the event that somebody makes a weird error like that... I would still have to fulfill the obligations of the contract...
 
truetype said:
I think he's imagining it's halted on good news (takeover or whatever). Presumably he'd wind up short and at the mercy of his broker.
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actually, the reverse. halted on bad news... it's a weird Q but wanted to understand the risks and how the system works...
 
Abundance Magnet said:
I would still have to fulfill the obligations of the contract...
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Yes, the OCC can direct part of that assignment to your short. You can't be bought in while the stock is halted and they might be able to borrow the stock, you never know. You might end up with a high margin requirement until the stock resumes and you can buy it back. If delisted, it would be listed OTC.
 
Robert Morse said:
Yes, the OCC can direct part of that assignment to your short. You can't be bought in while the stock is halted and they might be able to borrow the stock, you never know. You might end up with a high margin requirement until the stock resumes and you can buy it back. If delisted, it would be listed OTC.
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i see... so I would 'buy it' at current MV and deliver to the buyer (caller exercised) at the OTM price. sounds like a profitable scenario now that i am typing it out...

If I am shorting at a lower price than what I am selling to the call buyer at, wouldn't that be a net positive equation? Or am required to buy the stock while it is halted, resulting in a crazy fill price?
 
Abundance Magnet said:
i see... so I would 'buy it' at current MV and deliver to the buyer (caller exercised) at the OTM price. sounds like a profitable scenario now that i am typing it out...

If I am shorting at a lower price than what I am selling to the call buyer at, wouldn't that be a net positive equation? Or am required to buy the stock while it is halted, resulting in a crazy fill price?
More...

You are making this too complicated. If you have no stock position, and you get assigned a call, you will be short the common. Your clearing broker needs to make delivery by borrowing the shares in house or at another clearing broker. If they can't borrow the shares, it is called a failure to deliver and the buyer will issue a buy in notice. If the stock has halted, they can't buy you in. They can charge you a VERY high fee while you are short. When the stock opens for trading, you can buy it back or they will do it for you, unless they could make delivery, then you will just be short and you will have to cover the margin and short stock fees.
 
Robert Morse said:
You are making this too complicated. If you have no stock position, and you get assigned a call, you will be short the common. Your clearing broker needs to make delivery by borrowing the shares in house or at another clearing broker. If they can't borrow the shares, it is called a failure to deliver and the buyer will issue a buy in notice. If the stock has halted, they can't buy you in. They can charge you a VERY high fee while you are short. When the stock opens for trading, you can buy it back or they will do it for you, unless they could make delivery, then you will just be short and you will have to cover the margin and short stock fees.
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this line confuses me:

" If the stock has halted, they can't buy you in. They can charge you a VERY high fee while you are short. "

why would i be charged a fee if I can't be bought in while the stock is halted?
 
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