Just starting visiting this forum, I thinks its great, seems to be a lot of real world traders out there and I got great tips. Been trading for about 10 years, 50/50 equities / options and thought I understood most of little hidden secrets that brokerages, the market in general burns the retail investor with untill recently... Was testing an advanced SPY iron condor that uses selling fairly deep ITM puts to offset moderately ITM calls and covering with same long strikes. Most of you I'm sure notice that SPY ITM put premium falls off faster than the OTM call premium. Anyway, as the market moved on this setup, the ITM puts moved deeper ITM and of course I got assigned, several times... I was using 50 contracts. So as you know, this means my brokerage (Tradeking) puts up about $800,000 to buy the 5000 shares (160 put) and happily deposits them in my account as a debit because I only have about 100K buying power in my account. Now of course I have to liquidate these shares the same day I receive them (day after assignment), or TK will do it anyway at the end of the day. Now don't think they are being nice by putting up the cash to meet my assignment obligation. Here's how it really works. Suppose I am assigned on Monday, my account shows the shares and TK debit after 9:00 am on Tuesday from the Monday assignment. I sell the shares immediately on Tuesday in the open market. Seems ok right, brought and sold same day, TK policy is if shares brought on margin and sold same day, there is no margin charged. WRONG in the case of option assignment. The shares were actually brought Monday nite. Equities trades settle as T+3 (trade date + 3days). Even though I sold on Tuesday, the trade actually is one day old. The Monday assignment trade settles on Thursday, my liquidation trade settles on Friday. I get charged one full day of margin on 800K no matter what. The fun really starts when you get assigned on Tuesday, and are charged margin on the debit over the weekend! No matter if I sold the shares back on Wednesday. The Tuesday assignment settles Friday, my sold back shares trade settles on....you guessed it.. Monday. Yep I get clocked for two days margin on 800K. The same is true for holidays etc. It can get ugly. The bad thing is you can do nothing about it exept to have enough buying power to cover the assignment or of course not sell or hold ITM puts with no time premium or only trade european style (indexes). Certainly it seemed with SPY, institutions were happy to sell me their SPY shares time and time again. And I swear, even though the assignments are supposed to be allocated randomly, every week during this month, I got assigned on Tuesday! Suffice to say....this lesson cost me $1100 in margin that month!! BTW, I abandoned that strategy, at least for american style options! So watch out for those early assignments from a margin perspective !!!!! BTW ,my calls to TK to explain the margin process were met with "this is industry standard procedure" curious if other brokerages handle margin the same way on assignment... Thanks for reading and hope I helped someone else avoid a nasty surprise at the end of the month !
TK treated you fairly. It is 100% wrong to sell such DITM puts. Stop doing it. As an alternative, instead of trading 50 SPY, you can trade 5 SPX. Then you save on commissions. It is right for holders of DITM puts to exercise - and thus, it is wrong for you to sell them. Pretty simple stuff. What I cannot understand how you allowed this to happen more than once. Mark
I'm surprised that carrying 800K of stock with 100K isn't a pattern day trading violation which allows 4:1 intraday. I also wonder why you were only charged one day of margin since I was under the impression that the margin was from trade until settlement (from previous whackings of my own), despite how ridiculous that sounds.
You must know how to manage the potential risk of trading near-ITM options very well! Otherwise: I would consider anyone who is constantly playing options around ITM however without ever getting any early assignments to be a very Lucky person indeed! http://www.elitetrader.com/vb/showthread.php?s=&postid=1211881&highlight=itm#post1211881 http://www.elitetrader.com/vb/showthread.php?s=&postid=1222722&highlight=itm#post1222722 http://www.elitetrader.com/vb/showthread.php?s=&postid=1264517&highlight=itm#post1264517
Hi Mark, I've been a follower of your blog for some time, and I just ordered your book from Amazon. I'm anxious to receive it. I'm in the Chicago-land area. Do you ever do any teaching or seminars around here? Best regards, James
Yes (I live in Evanston), but this is not the proper forum to discuss. Send e-mail or private message and I'll provide more details. mark at mdwoptions dot com Thanks Mark
penngator, Mark is right. SPX is the way to go. The commissions savings are substantial. If you pay $0.75 per option ( a decent and fairly competitive rate), then 50 options cost you 37.50 in and out for $75 in commissions total; 5 SPX will cost you $3.75 both ways or $7.50 in total saving you $67.50 in commissions. In addition, and just as importantly, SPX options are European style meaning they can only be exercised/assigned at the end AND they are cash settled meaning that you get or pay cash based on the options you wrote or bought. For most people, this process is totally automatic and requires no action on their part. If the options are OTM, nothing happens. If they are ITM, cash moves from one account to another. For example, let's assume you wrote 1 Sept 1000 call. Next Friday AM, the SET is 1055 (just guessing here of course). Then your broker will take cash out of your account (100*55----55 is the difference between the SET and the call strike--) and send it to the OCC which passes it on to the lucky owner of the 1000 calls and he smiles while you cry. [The above was slightly simplified for clarity] If you write spreads that are ITM on both sides, the actions will go both ways. In the end you wind up receiving or paying the net difference between the strikes times 100. No margin interest will be involved--just cold hard cash.
You sure do spend a lot of time here tracking posts, providing links and sniping at people over nitpicking details!