Early assignment risk / IB Procedures

[Ordos 10]

Hey all,

I've been reading up on the various risks associated with the buying of calendars (selling front month, buying back month). Now for traditional expiry assignment risk: I realize the OCC will automatically assign ITM options even by a small margin. I simply don't hold through expiry to solve for this issue.

However I'm interested in the following scenario:

Assume current account at IB for $10,000. The current price of GOOG is about $636.00. I decide to buy a put calendar (1-lot) on it (sell front month @ 635 Sep25, buy back month Oct21 @ 635 ).
Now the margin requirement for this is zero, which makes sense since you are theoretically hedged. Ref: https://www.interactivebrokers.com/en/index.php?f=marginnew&p=opt#options-us-05

 

But I'm curious about that happens when one is assigned early on the front month (i.e., before the end of 25 Sep). Essentially this implies you must then purchase 1*100x635 = $63,500. Although you are protected by your long put which has probably gained in value and/or allows you to exercise / sell it back, you still need to hold a large debit at least until you exercise or IB liquidates it. This puts you into overdraft for 63,600-10,000=53,600 until that time.

 

Questions:

How exactly does IB deal with this? I can't imagine they'd be very happy with small accounts being 53K on margin. Do they liquidate everything including selling the option, or do they exercise, or do you get the chance to do anything? Other consequences? I imagine it makes no difference whether its a put or call calendar.

I realize that being assigned early on options that are not deep ITM is pretty rare but it's still possible and I like to evaluate all risk before manifests itself.

P.S. did read https://steadyoptions.com/articles/post/steadyoptions/can-options-assignment-cause-margin-call-r109, but it didn't cover this scenario entirely I think.

Thanks.

Edited September 17, 2015 by Ordos

[MichiganWater 11]

IB, at least in the US, gives you 10 minutes to get it taken care of after the market opens.  You can either exercise your long options against the stock position (and lose the time value), or close the stock position that you were assigned, and possibly sell the long options as well.  This happened to me a few weeks ago when I was assigned early on the short leg of a calendar with deep ITM options.

[Ordos 10]

Thanks for you response. I wonder, is this a standard policy of theirs, or did you have to call to beg and plead for the 10 minute window? Because if its default behavior that would be ideal. From what I've read on their knowledgebase its hack and slash liquidation until the margin is down. What concerns me about this is that they might also sell the hedging option leading to more exposure/risk. I'll also ask them directly, but I was curious as to actual experiences.

[erikp 1]

@Ordos

First they alert you in advance in the platform that your margin is getting lower. If it gets under, you have like 10 min to close positions yourself, otherwise it will automatically liquidate positions until margin requirements are met. You cant call and beg or do anything else, it is an automatic process. Which positions are liquidated is in their hands, unless you specify in the platform which positions you want to liquidate last.

[el_isma 0]

On 17/9/2015 at 9:13 AM, erikp said:

Which positions are liquidated is in their hands, unless you specify in the platform which positions you want to liquidate last.

How do you specify which positions you want to liquidate last?

Also, in this situation, would you make the far option the protected one, instead of anything else on your portfolio, so you could excercise it?