Can Options Assignment Cause Margin Call?

[cwelsh]

By Christopher B. Welsh

I've had three emails in the past month on people being assigned on positions and receiving margin calls, and generally not knowing what happened. I advise everyone to completely research and become familiar with the exercise/assignment aspect of option trading. If you don't you can find your entire account blown out over a weekend.

Assignments occur in two basic varieties. First, on expiration Friday (or Thursday or Wednsday depending on the instrument your trading, but most commonly on Friday). If you have a position that is .01 in the money, or more, you WILL be assigned. For instance, if you have a 100 Call on stock XYZ that expires today, and XYZ closes (AFTER HOURS) at 100.01, you will find that you own, sometime Saturday, 100 shares of XYZ that you paid $100/share for.

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[Optrader]

Very good article and eye opener

Thanks chris

I once was holding a regular calendar actually a pre earnings calendar which was up 50% after earnings and left it to expire on friday as it was oit of money

A news of take over comes friday evening and stock takes of 20% and i end up closing spread on monday at almost 100% loss

Things like this are not imaginable but they can happen and we tend to blame on bad luck whe the correct thing to do is manage risk at all times

Things like 9/11

Funny thing is even today people have positions which can be blown out if another black swan event happens

I know its human tendency to ignore or even forget such events and that is very astonishing to me

Options trading is extreme leverage and people have to always keep that leverage in mind and tolerable limits

With few dollars you can control thousands and blow thousands

First is risk management and then profits

[Optrader]

The article advises that we should not hold on to expired options  whether we are buyer or seller as both are at huge risk .

 

always safe to close both short/long options  i.e all positions before friday expiry.

 

Lot of people want to save comissions by letting options expire and this article says just dont do it  due to extreme leverage the options have.

[4REAL]

Hey Kim,

I got in GME early, meaning before ex-date for dividend

of last Friday March13.

I got in the (-March27 +April17) 3-week 40 call calendar.

Last week I got this (standard) message from IB stating that there might be

a risk of an early assignment.

Thursday I called IB and they could not provide me a clear answer.

All they could say was that, because of the dividend ex-date

there was a risk, even if the calendar was OTM.

Closing price Thursday was 39.70.

According to IB the call buyer (for the short leg) could exercise till Thursday evening.

To avoid a margin call I sold some calendars on Thursday, only to buy them back on Friday.

In your experience was there in this case a real risk of early assignment ?

Thanks for your insight

CJ

[Kim]

It never makes sense to exercise option which is OTM. The option holder will give up all the premium of the option for much smaller dividend.

[Kim]

And if you think about it one step further, it would be actually a blessing to get assigned OTM options. Getting assigned 41 calls is basically being short the stock at 41, while the stock is at 39.70. So even if this happens, you cover the stock, book the profit (the difference between 39.70 and 41) and sell the long calls for whatever value they have. This would be a HUGE gain.

[Wenna]

@cwelsh@Kim

 

I wonder if I have a short put @100 not closed before expiration and the stock price is 100.01 after market. Am I 100% assigned by my broker? In other words, if there is any chance even if my short option is in the money, the option still expires worthless? 

 

I also confused if I have a long call position @100 not closed and the stock price is 100.01,  if I do not request to exercise this in the money call, will I be assigned stock at 100?

 

Thanks a lot!

 

Edited August 28, 2017 by Wenna

[Guest JM23BG]

Hi

Please can someone tell me what is the latest time SPY short weekly options can be traded on the expiration day to close the position.  I am with IB if that makes a difference?????

TIA John

[Pirol]

Hi,

i found this article helpful:

http://www.optiontradingpedia.com/answers/what_to_do_when_short_leg_of_put_spread_assigned.htm

 

is this really the case?

Quote

 

However, in most cases, the account holder usually do not have enough cash/margin to take delivery on the underlying stock itself. In such cases, the broker will automatically sell the resultant long stock position leaving you with the resultant profit/loss from the transaction and the long put leg. When your short options are marked for assignment, the process takes place immediately so there will be no time for you to manually close out the short put leg at all. 

Even though such a partial liquidation of a options spread position might sound scary and complex, it actually works to your advantage if your broker is good enough to cover the whole transaction of exercising the puts and selling the resultant stocks simultaneously with minimal slippage. Yes, it is advantageous because of the fact that when you write options, you really want to profit from the decay of its extrinsic value which happens completely only upon expiration of those short put options. When your short put options are assigned early, the entire extrinsic value evaporates all at once, so you profit from it before even reaching expiration, allowing you to reap an early profit or to write a second short put leg within the same month. In either case, your returns increases if the slippage from the transactions do not end up to be more than the extrinsic value of the short put leg. 

In conclusion, when you own a put vertical spread and do not have the funds to take assignment on the short put options, your brokers would usually liquidate the resulting stock position automatically, posting the resultant profit or loss in your account. You would not normally be given the time or pre-warning to manually close off the short put options since the assignment takes place almost immediately upon receipt.

 

Pirol

[greenspan76]

44 minutes ago, Pirol said:

Hi,

i found this article helpful:

http://www.optiontradingpedia.com/answers/what_to_do_when_short_leg_of_put_spread_assigned.htm

 

is this really the case?

 

Pirol

Yes, I believe it is generally the case. I've only had this happen 3 times. In each case, I tried to close my position within the first 10-15 minutes of the open. Two out of three times, I fully closed the position myself and on the third time, I partially closed before IB automatically closed the rest (actually, they only closed enough to make me margin-compliant and I still had a few options left that I had to then manually close)

Edited April 25, 2018 by greenspan76

[mrw02536]

I was assigned yesterday on the short side of a 1 week calendar. Without thinking I just exercised the long and washed the sale. I should have thought to sell the stock and sell the long put for what would probably have been a small credit to cut my loss.