I have been buying Call options on individual stocks for approx 2 years and have been very successful. If I like a stock, instead of buying the stock I will buy CALLS on them. If the stock moves up as anticipated, I will sell the call to close out the position and take the profit. In most cases I sell (close out) my CALL that I purchased well before it expires. Recently I had 5 CALLS that were In The Money on a stock the Thursday before they expired. I planned to watch the stock on the next day (Friday) the day they expired to see if they would even go further in the money and then I was planning to sell (close out my position) by 4PM. But on Thursday I received email from my broker that I needed to notify them if I planned to close out my position by the next morning (Friday) due to "the event of an assignment or exercise on your expiring positions"......I had no idea what they meant but they said they might exercise or assign my in the money Call option the next day if I took no action.... So Friday morning, I sold my 5 Call options to close out my position instead of waiting till the end of the trading day on Friday...My question is I thought my buying CALLS gives me the RIGHT BUT NOT THE OBLIGATION to buy the underlying stock so why was the broker concerned about my CALL options?..And why couldn't I have waited until almost the end of the trading day Friday to sell (close out) my calls since the underlying stock did go higher during the day on Friday and I would have received even more money on the calls then I did?
Which calls where they? Options don't expire on Friday as you stated, they expire on Saturday. But some index options do expire on Friday.
Hey Star, Some brokerage houses, as policy, will automatically exercise long in the money options at expiration. The firm I used to work for had automatic exercise for equity options $0.25 in the money or greater. That's probably what your broker was getting at. Check with their customer service reps.
Umm. ok..thanks but if they will automatically exercise my in the money CALLS because it is in the money does that mean they automatically buy the stock at the strike price for me and use my money or if I don't have the money in my account to tell me I must come up with the money for the stock?....If I am understanding that correctly, then what about by buying a call option gives me the right but NOT The Obligation to buy the stock at the strike price if my call is above the strike price?? This is what I am having problem with..the fact that I thought I did not have the OBLIGATION to buy the stock???...If my CALL options are in the money and I don't close them out and take the profit before they expire because say I forgot about them, then it is my problem for forgetting I thought. Say, for example, it is Wednesday of option expiration week for a stock I have 5 calls on...and lets say they are all in the money by 10 points..and then I get in a car accident and am in a coma in the hospital and option expiration day comes and goes...of course, with me in the hospital, I don't sell to close out my calls so why would any broker exercise my in the money options on my behalf since the calls grant me the right BUT NOT THE OBLIGATION to buy the underlying stock...? I hope I am making some sense for you..thanks (and to the other person who replied, yes, I know options actually expire on Saturday but I said Friday only due to I was hoping to wait until like 3:45 pm on Friday before selling my calls (closing out) to take profits. thank you
When your call options are in the money and you have not sold your options till 2 minutes after 4PM EST on Friday of option expiry, you are OBLIGIGATED to buy the stock at the strike price if the strike price is 25 cents over the strike price. If it is between the strike price and strike price plus 25 cents you have the RIGHT to excercise your options and you have to notify your broker if you want to do that. Some brokers might go the way they like if you don't instruct them. So on Sunday night or Monday morning after the option expiry date you will see you are long the stocks and if you don't have the money for 3 days, you will get margin call or some brokers like IB will liquidate your shares at the market price on Monday. I think that broker's rep had nothing to do and called you. It has also happend to me in my Fidelity account. But good that he called you and now you know more. I hope I was a help.
If you haven't specifically instructed your broker NOT to exercise ITM options, then you ARE obligated to buy the stock. When you trade options it is understood that you have entered into a contract with the other party. And if you don't have enough money for the exercise, you will probably receive a margin call and be sold out Monday morning. Brokers with reasonably strong CS would probably try hard to contact you and make sure you knew about this. I recommend you read and understand, first, the OCC's "Characteristics and Risks of Standardized Options". This is the document you said you had read and understood when you applied for option trading. http://www.cboe.com/LearnCenter/workbench/pdfs/CharacteristicsandRisksofStandardizedOptions.pdf And get thru a basic option book like "Options as a Strategic Investment". Good luck and good trading. C
YES, you were a huge help...I now understand much better the OBLIGATION and RIGHT to buy the stock part which is where I was really hung up... I fully understand now..thank you and thank you to the others who replied as well.
On the subject of automatic exercise, read this horror story; http://www.elitetrader.com/vb/showthread.php?s=&threadid=51251&highlight=exercised+AND+IRA
Thanks for that. I read all the replies and the original poster seemed very nice the way he handled it. But I don't understand one thing and that is while GOOG went into the money by showing $280.30 at 4pm or right after, the 280 Calls only showed an Ask of $.05.....Why didn't they show $.30 cents??...Others said he should have closed out his position but lets say it was me and I had only 1 of those GOOG 280 Calls...If I saw that I would only get $.05 for it ($5.00) and that is a big maybe as that was the ask and I don't think they were any bids on his calls, but to close to get $5.00 would cost more in commission to close out the call....??????..So I probably would have said the heck with it but by saying the heck with it could leave me open to an automatic excercise!!....That entire google 280 calls story seems to me like someone somewhere was manipulating the price of Google at the close and a few minutes afterwards IMO. All in all, I do feel sorry for that poster who had that happen and I just will in the future sell to close out my calls BEFORE expiration day to avoid any problems.. Thanks again for directing me to that posting.