If youâre in a vertical spread, and the short option gets assigned early --- and you donât have enough capital in the account to cover the margin on being short the stock --- will the long option be auto exercised early to cover it? Or basically, how bad could I be screwed by a situation like this?
They will unload the stock, and if you are still short the cash sell out your option position. Also, expect an angry phone call from your broker, probably some kind of fee. Its generally a really bad idea to allow something like that to happen. http://www.option911.com
Before you even start a position you need to have all contingencies planned in advanced. If you aint got the capacity to buy and be prepared to deliver shares or close out a position at a loss you should not take it.
Yep, if the net result is a margin requirement, they will unload everything to satisfy it. An angry phone call is not going to be your biggest problem. If your account equity is less than the Reg T initial margin requirement, your account will be restricted. That means that you will not be able to make further transactions.
The only way to know FOR CERTAIN is to ask YOUR broker how they handle such a situation. There is no universal rule here. My guess is they will blow out the stock and inform you that closing a position is not the proper way to meet a margin call. You may get away with it once, but not more than that. Mark
That's very good advice Mark, I had a support request pending with my broker in parallel with this question, time was getting tight... turns out my assumption was correct, with a vertical spread, I can just exercise the long call in the event the short call is assigned early, it will negate the short, and I retain the pnl from the spread.
Actually, um, this happened to me last month..in a major way. It was in my ameritrade account (I have a few brokerage accounts just for security and those days when you cant even log into ameritrade...) Anyways, I had a bunch of credit spreads on and didnt realize a dividend was coming on a bunch of them. To be specific, I was short 50 of the SPY calls, 40 of the DIA calls , and 38 of the QQQQ calls going into expiration friday... The short calls were all exercised Thursday evening cause of the dividend...I woke up friday to find myself long 5000 SPY, 4000 DIA, and 3800 QQQQ. Not a pleasant morning... I couldn't sell out the position. Had to call ameritrade customer support. they couldnt even sell out the position.. they had to get margin on the phone, who finally gave the OK to clear out the position. My account wasnt restricted at all, but it was a learning experience.. I always check for upcoming dividends when putting on credit spreads, but I missed this one for some reason (it didnt show up on my screener)..
I tried to enter a sell order, it said "opening orders are not being accepted at this time", or something like that...use ameritrade for awhile, and you will see the wierdest messages pop up.,...even if you have cash in the account and even if there is no restriction.... Heck, even my Lightspeed account has to be reset once or twice a month.... If i sell a security, it doesnt give me the buying power/daytrading buying power sometimes....u gotta call and ask them to reset it.. The thing with ameritrade that really pisses me off is when u have plenty cash in the account, try to enter a credit spread order on a stock like AIG or something very volatile...THEY SHOW THE ORDER AS PENDING for a few minutes till a guy there clears it and OK's it...I have missed plenty good opportunities cause of that...Supposedly its for "our own safety"...uh huh, right.