Two Questions

Arnie Guitar

Arnie Guitar

1. If you were long an ITM Call and did nothing at expiration, what would happen?


2. Let's say you're short 10 META ITM Calls and long 10 META ITM Calls at a lower strike.
You're assigned the 10 short Calls but don't have enough cash in your account to cover, do they automatically use your long Calls to cover.

Or wouldn't they let you write the short Calls no matter how many long Calls you had if your account couldn't ... I'm goofing up here.

In other words, if you had a 10k account, they're not going to let you write 10 META Calls no matter how many long Calls you had?


I think I worded question #2 poorly, I hope I conveyed my question correctly.
 
#1. You would be long stock.
#2. In your example, both options are ITM and both would be exercised into offsetting stock positions. If your short were ITM but the Long were OTM, and you did not have enough cash for the stock, your broker would likely not allow you to exercise those calls and you would lose the premium.

Arnie Guitar said:
1. If you were long an ITM Call and did nothing at expiration, what would happen?


2. Let's say you're short 10 META ITM Calls and long 10 META ITM Calls at a lower strike.
You're assigned the 10 short Calls but don't have enough cash in your account to cover, do they automatically use your long Calls to cover.

Or wouldn't they let you write the short Calls no matter how many long Calls you had if your account couldn't ... I'm goofing up here.

In other words, if you had a 10k account, they're not going to let you write 10 META Calls no matter how many long Calls you had?


I think I worded question #2 poorly, I hope I conveyed my question correctly.
More...
 
Mark raises some interesting issues, but let's get past that. Say stock is $47 and expiration is PM this Friday. You're long the $40 calls and short the $ 45. $10,000 cash in the account.
Your broker will see a contrary exercise notice and if they are any good they'll shoot you an email. The $5 spread is the issue, with one caveat, and that's an early exercise of the $45. Now make the stock price higher and the first rule is that a broker will NEVER put their own balance sheet at risk. So starting tomorrow they will blow you out of the position. They won't exhibit judgment in any way - like reducing the size of the positions. Some shops' risk departments would have blown you out already. Customers are notorious for hiding from their brokers approaching or at expiration. Also, think about the stock selling off near the close on Friday - they won't let you play with their money. In addition, you'll have a margin violation.
BTW - the prices you'll get blown out at will ALWAYS be the crappies fill of the day. Somehow it just always works out that way.
 
Hmm? Why would he want to exercise the long calls if they were otm? And assuming both questions refer to the time of expiration there would not be any premium left in the otm calls. So, what premium?

Robert Morse said:
#1. You would be long stock.
#2. In your example, both options are ITM and both would be exercised into offsetting stock positions. If your short were ITM but the Long were OTM, and you did not have enough cash for the stock, your broker would likely not allow you to exercise those calls and you would lose the premium.
More...
 
mervyn said:
In my experience if you don’t have enough cash to cover the assignment, your positions will be liquidated. If your account has enough money, you will be assigned.
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This is an important detail if you don't have the cash to cover the assignment. The assigned stock would be liquidated when the market opens on Monday. And that could be at a loss.

This is a good thread from 2005 when ITM options at expiration where assigned then liquidated for a $10,000 loss:

Margin Call on an IB IRA account (Need Suggestions)
https://www.elitetrader.com/et/threads/margin-call-on-an-ib-ira-account-need-suggestions.51251/
 
???

You stated in your scenario that it's Friday. So what "tomorrow" are you referencing? Guaranteed there will be NO liquidation or reduction in any position. Both long and short itm calls will be auto-exercised and the resulting underlying positions netted. And your comments about brokers and their balance sheets makes zero sense. Customers sign customer agreements and a broker is in violation if it arbitrarily reduces positions or issues margin calls when there is no margin deficiencies. Before trading close if the account does not slide into margin deficiency then there is nothing whatsoever the broker can do to mess with the account and its positions. Not legally, anyway. Your points don't really make sense.

ETJ said:
Mark raises some interesting issues, but let's get past that. Say stock is $47 and expiration is PM this Friday. You're long the $40 calls and short the $ 45. $10,000 cash in the account.
Your broker will see a contrary exercise notice and if they are any good they'll shoot you an email. The $5 spread is the issue, with one caveat, and that's an early exercise of the $45. Now make the stock price higher and the first rule is that a broker will NEVER put their own balance sheet at risk. So starting tomorrow they will blow you out of the position. They won't exhibit judgment in any way - like reducing the size of the positions. Some shops' risk departments would have blown you out already. Customers are notorious for hiding from their brokers approaching or at expiration. Also, think about the stock selling off near the close on Friday - they won't let you play with their money. In addition, you'll have a margin violation.
BTW - the prices you'll get blown out at will ALWAYS be the crappies fill of the day. Somehow it just always works out that way.
More...
 
Last edited:
Arnie Guitar said:
1. If you were long an ITM Call and did nothing at expiration, what would happen?
More...

It will auto-exercise if you did nothing which I assume is not specifying to the broker that you do NOT want to exercise.

Arnie Guitar said:
2. Let's say you're short 10 META ITM Calls and long 10 META ITM Calls at a lower strike.
You're assigned the 10 short Calls but don't have enough cash in your account to cover, do they automatically use your long Calls to cover.

Or wouldn't they let you write the short Calls no matter how many long Calls you had if your account couldn't ... I'm goofing up here.

In other words, if you had a 10k account, they're not going to let you write 10 META Calls no matter how many long Calls you had?


I think I worded question #2 poorly, I hope I conveyed my question correctly.
More...

Ok do you have enough cash to buy the shares from exercising the long ITM calls? If you do, then there is no problem cuz you can use it to exercise the long ITM calls to cover the assignment from shorting the calls. If not, then brokers like IB would force liquidate your options positions. I dunno about your broker. Cuz once your short ITM calls are assigned, you will be in a losing short position i.e. short-squeezed immediately so you would need the shares from exercising your ITM longs to cover it but if you don't even have enough cash to buy the shares from exercising your ITM longs, then it would be difficult.
 
Thank you to everyone who responded.
I apologize for my poorly worded question #2.

Let me try it this way:

Fred Fartblossom currently has 150K in his account, all cash.
Fred is approved for option trading and has done lots of small option things over the years.
Fred could obviously place an order for a Balanced Vertical Debit Spread.
He'd like to buy 1 AMZN Jan 145 Call and sell 1 AMZN 150 Jan Call.
Broker says, "No problem Mr Fartblossom."
Then he thinks, "I'm confident in this, I'll up the order to 10 and 10".
Then he thinks, why stop there, let's go 100 and 100.

What determines how many contracts Fred can do?
1,000 and 1,000?
10,000 and 10,000?

AMZN takes off and goes to 175 before expiration.

He's covered the short Jan 150 calls by owning the long Jan 145's.

Change this to a Vertical Credit Spread and I can figure that out,
but I'm foggy if it were a Debit Spread.

What determines how many contracts Fred can do in a Balanced Vertical Debit Spread?

I hope I worded this right.
 
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