Do I need Margin?

Let's say I'm long call options with a strike of $5.

The underlying stock moves to $7.


If I want to exercise the calls, do I need to have any margin with the broker?

How can I buy the underlying for $5 and turn around an sell it for a profit without putting up margin?


uncleTom

 

why do all of that? just sell the calls back for profit.

 

Why not just sell the call you bought and skip the purchasing of stock by exercising you option?

 

If you don't want to use margin, you need cash. Buying 100 shares at $5 will require $500 in cash or equivalent margin.

But, the others are right, just sell the call if coming up with the cash is a problem.

 

To answer the original question, I think if you have enough cash in your account you don't need margin. If you have enough to cover half (or whatever your broker's requirements are) you do need margin. If neither then you would have to deposit cash before settlement of the stock. I'm pretty sure buying and exerecising calls is allowed in IRA (i.e. cash) accounts. Also, some brokers allow you to enter a sell order before settlement so you don't need to cover it with cash.

But like the previous posters replied, just sell the calls for the profit. You'll save a few commissions too.

 

Hey Uncle Tom. All these answers are right. Don't exercise & sell stock, just sell the call option.

If you exercise and sell the stock, even if the same day, you must post margin. You probably have it in your account but it will be segregated (and unusable by you for other positions) by your broker.

2 other items.
The call may still have time premium attached to it, so if you exercise you are throwing that $$ away.
Second, when you exercise (pay commission) and then sell the stock (pay commission) you pay twice what you would have if you just sold the option.

You're overthinking this one.

kny 3

 

What do brokers charge to exercise?

I think ThinkorSwim charges $15 flat fee, no matter if it's one contract or 1000.

 

IB charges nothing for an exercise.

 

Thanks. Yeah it makes sense to just sell the options.

I don't know what I was thinking.

 

Sometimes, with thinly-traded options that are near expiration, the bid is less than intrinsic value and you can't sell them for anything higher than that. For instance, I was trying to sell DJ 45 puts for $5.00 and didn't get filled until DJ was down to $39.86. In these cases, it makes sense to exercise, after buying or selling the underlying first so that you can lock in the desired price and the exercise will leave you flat.

As to your specific question: I've never knowingly exercised options when I didn't have enough money to cover the stock, but anecdotal evidence is that brokers that do not issue margin calls will simply liquidate the stock early the next morning to get your account compliant. This may result in a big loss if the stock gapped down at the open.