WSBers playing with fire and getting burned: NKLA hard to borrow early assignments on call spreads

[blazespinnaker]

As a general rule - The largest positions that I carry overnight with respect to notional value (not margin) will only total about 10% of my trading accounts. And this is an "arbed" position - ie a conversion. So with Portfolio margin - the margin for this type of position may only be $100 but the notional value may be $500K +. When you have traded for 30+ years - you see lots of bad stuff that can happen.

For those paying attention - there are now about 100 equities (with options) whose borrow rates are about 30% + and another 100 that could easily be there in a matter of days.

And I will not carry a short call position of a htb name that is even close to a possible assignment.

Also, there can be significant risk in names that don't have high borrow rates.

Unfortunately, most have to learn the "hard way".

Yes, now that I think about it, I can see equities suddenly sneaking into and up hard the htb list in the middle of carrying a spread. And early assignment on a friday. Yeah, that would be a clusterf**k.

This has never happened to me, but I haven't been trading options for 30 years.

 

[Cabin111]

I see banks doing this...Maybe pension funds. But a $5,000. account, never should have been allowed!! But you said "here, please take my money"..."I know exactly what I am doing and the risk involved". I think of credit card companies on college campus a few days before class begins. 18 year olds have no idea what hit them!!

Shakespeare said it best...Gilligan's Island put it to music!!

 

[Atikon]

A few items to note (all based on IB)
1) They can't loan out your shares unless you authorize it, hence the "stock yield enhancement" program (which you have to opt in to...it is not active by default: https://ibkr.info/node/1838. Note that you can't select piecemeal. You either allow them to borrow any shares in the account or none. You probably want to read the specifics of the program where they go into the details on the process. Note: 1) You can still sell calls against the stock, 2) you can sell your stock at any time, 3) you can opt out of the program at any time.

2) Nothing guarantees they loan your shares out. If they do, you split the rate 50/50 (can't recall the link, but dig on their site or ask customer service). Currently on NKLA, it's 897%. You can check this by adding a "shortable" column on TWS. It'll be lime green for easy to borrow and dark green for hard to borrow and will show the number of shares available for shorting.

3) Interest is calculated based on the closing price. Interest is an annual figure, so the daily rate is approximately %/100 * Closing Value/365. There's also a bit of rounding done: https://ibkr.info/article/1146 so it won't exactly match the above calc.

4) If you are assigned and don't have shares, you automatically are going to incur 1 day of interest. You won't know if you have been assigned until about 10pm PST (which is when I see assignments/expiration post in IB). I seem to recall IB saying they post it after their daily system update which is normally around that time, but I can't find that link. You can easily confirm it with an IB chat with customer service. If you are assigned on Friday, you're obviously on the hook for two days.

5) Basically you have the extended session (5pm PST) to pick up shares to cover your assignment. After that, you have to wait for pre-market, which is 1am PST the following day, so it won't matter if you cover then. If there is not a lot of time decay left in your shares, there is a pretty good chance you can be assigned, especially if it's getting near expiration. There's always a chance that somebody who knows (or think they know) something which may make them want your shares and be willing to eat the premium.

6) The fee won't hit until settlement (T+3), so it takes a few days to post in your account. You'll see it in the "MTD interest"

If I missed anything or posted any errors, please let me know (especially if def from IB wants to chime in).

How TF did Etrade not excercise his long legs with this small account size?

 

[newwurldmn]

How TF did Etrade not excercise his long legs with this small account size?

That’s not their job. It’s the account owner’s to manage the positions.

 

[zoned_post_meridiem]

Just curious, why do you think that? If it's not on the hard to borrow list, what's the risk that you see with a spread?

I've never ran into a problem here as I never trade reg sho crap as a rule.

Because it can leave newbie traders suddenly short 5200 shares. On a run-of-the-mill stock like JPM, you're suddenly short over half a million dollars. Yes, you're hedged with the other side of the spread, but if (like OP) you're assigned at a time where you have to hold overnight before you can execute your long side, you're on the hook for interest.

But more importantly, it puts a lot of psychological stress on a newbie trader with a $5k account to suddenly be that deep in the red. Maybe you don't 100% understand how option assignments work, or what your long leg allows you to do. Maybe it's just the fact that you're 19 and in the hole -- in reality, even if maybe not in theory -- half a million dollars. It's not a good place to be in. And yes, if you open an options spread, you should know all this stuff and stay calm ... but we all know that won't always be the case.

 

[blazespinnaker]

Because it can leave newbie traders suddenly short 5200 shares. On a run-of-the-mill stock like JPM, you're suddenly short over half a million dollars. Yes, you're hedged with the other side of the spread, but if (like OP) you're assigned at a time where you have to hold overnight before you can execute your long side, you're on the hook for interest.

But more importantly, it puts a lot of psychological stress on a newbie trader with a $5k account to suddenly be that deep in the red. Maybe you don't 100% understand how option assignments work, or what your long leg allows you to do. Maybe it's just the fact that you're 19 and in the hole -- in reality, even if maybe not in theory -- half a million dollars. It's not a good place to be in. And yes, if you open an options spread, you should know all this stuff and stay calm ... but we all know that won't always be the case.

I think you might be conflating this discussion with something else.

 

[zoned_post_meridiem]

I think you might be conflating this discussion with something else.

Maybe? I'm seeing a 5k account (i.e., likely new trader) running a fistful of spread options. Bad for new trader's mental stability; bad for firm's risk management. I don't see a compelling reason to let a small-account trader open a ton of option spreads.

 

[Cabin111]

Was mowing the back lawn...Thinking about your situation. You could try and sue. But in the last 10-15 years no broker allows it...In the fine print. You could try arbitration...But I think you will lose. You will say "they did me wrong"!! "They should have never allowed me to get into this situation". The broker will come back with a reply in two minutes and it will be done. The broker will say this client misrepresented him/herself. See when filling out the option form agreement, they said they were an expert trader in options. They also said they had at least 3-5 years experience trading complicated options, including margins, (that is how they allowed you to get into this situation). A few weeks later you'll get your answer in the mail...You lose. Oh, and you have to pay your half of the arbitration cost!!

Oh, and the broker may wish to talk to the local DA...This client may have committed fraud!! I don't think they would do that (reputation and all...If it got in the news). Eyes wide open from here.

 

[blazespinnaker]

Someone already sued ETrade for this. https://www.courtlistener.com/recap/gov.uscourts.nysd.527355/gov.uscourts.nysd.527355.1.0.pdf

Ongoing - https://www.courtlistener.com/docket/16518777/rupnow-v-e-trade-securities-llc/

I haven't looked to see if finra has anything.

Etrade changed to show this when shorting, not sure if it's showing for put spreads:

"it now informs customers in the trade preview window that the security they are shorting is hard-to-borrow and what the indicative borrow rate is going to be"

 

[Cabin111]

Someone already sued ETrade for this. https://www.courtlistener.com/recap/gov.uscourts.nysd.527355/gov.uscourts.nysd.527355.1.0.pdf

Ongoing - https://www.courtlistener.com/docket/16518777/rupnow-v-e-trade-securities-llc/

I haven't looked to see if finra has anything.

Etrade changed to show this when shorting, not sure if it's showing for put spreads:

"it now informs customers in the trade preview window that the security they are shorting is hard-to-borrow and what the indicative borrow rate is going to be"

I think they will come back by saying you should have called to see what the current rate is for the "hard to borrow" stock...Before trying an option with such a risky move. They may even say the words "hard to borrow" would be indicative of how risky this move is!! You presented yourself as an expert, did you not?? They would ask you if you knew what an "uncovered position" means. Do you understand margins and float on accounts? If you say no, they would say you lied on your option form!! If you had made $100,000. from this account there wouldn't be a problem. Just saying...