Basic question about sell to cover

Discussion in 'Options' started by NasiWarrior, Mar 26, 2010.

  1. I've bought out the money calls on a stock but I would not have enough margin to exercise all the options at the strike price.

    My position is speculative - I don't own the underlying.

    I've just realised that if I sold these (hopefully) "in the money calls" before they expired to realise the profit; I'd be liable to deliver to the buyer at the strike ...but I can't afford to buy the underlying.....

    How can I realise the profit of the options in this situation?

    Is there anyway to avert this potential margin call by hedging?

    btw: my broker is IB.

    PS; this is my first post to the board and my first time trading options. so yes.... I'm a newbie!!!
  2. Nasi,

    Unless I am misunderstanding something from your post, you are long calls and now they have profits and you can sell them?

    There is no reason then that you would be liable to deliver anything to the buyer when you sell your calls. You just sell your calls on the market and get the money for selling the calls and now you have no position.

    You are liable for delivering shares if you sold to open options and then were exercised on the options.

  3. Thanks for your reply... Now I understand that I'll just be selling the option and not writing a call to sell.

    I also understand that it must be possible to short a call....

    But what are the rules for borrowing an option?
  4. You don't really "borrow" an option, but instead its a "sell to open." I see what you're saying, though.

    My broker used to be OptionsXpress. You needed something like $10k equity to do a straight naked sell to open. If you're selling covered calls, there are no requirements so long as you keep the underlying stock.

    If you're selling one option to open, while buying another option to hedge against it (like spreads) then you just need enough cash to cover the difference between the two (i.e. your maximum liability)

    Now I'm with Thinkorswim, but I haven't really figured out their requirements yet. Probably similar.
  5. Blue_Bull pretty much answers you good above. In general, if you are not an advanced options trader, you don't want to be selling calls without also owning the stock (100 shares per call) or owning another call. The margin requirements can vary and also some brokers may not allow it at all or may require you have a large account (100K+).

    For most traders, it is more normal to sell uncovered puts, where if the stock falls below the strike price, the stock may get "put" to them, but since stocks can't go below 0, the risk is predetermined (although often large). Usually (maybe always) you need a margin account to sell puts and there is a cost to your spending power for puts sold.

  6. SELL TO OPEN = means you are selling short the option and creating a new opening transaction. (This is the one you are thinking of when you were concerned about delivering securities)

    SELL TO CLOSE = is the one you want to do if you want to sell your long option position and realize your gain. it is a closing transaction on your side so you closed out your position and received the cash and you are done.

    Also on expiration friday(third fridays), if you have a long out of the money call position you need to give explicit instructions over the phone to your broker a "Do not exercise" instruction.

    Otherwise if somehow at the last second that option is 1 penny in the money, you will have a equity position in your account and you could be forced to liquidate if it exceeds your margin requirements on monday.
  7. tampung


    thanks this posting make me clear too

  8. Thanks, KINGOFSHORTS.

    The explaination is clear and your additional advice is also very helpful.