How to protect your personal assets from margin debit balance?

ironchef · Nov 22, 2018

JSOP said:
Ok is this Jan 26 2018 expiration? So it's already expired? Ok well in that case, you did the right thing by holding onto the positions then. It was cutting it really close but AMZN closed at 1401.19 on that day, still below your short call so you would've pocketed the entire premium from holding onto that credit spread to its expiration. If you had been exercised against, then you might've been in a bit of trouble since the brokerage usually won't settle your account until Monday so you wouldn't be short until Monday, Jan. 29 and on Jan. 29, AMZN shot up to 141X and with you being short at 1402.5, your losses would've been (1402.5 -1410) X 1000 = $7.5K with commissions. But it would still NOT be $1.4 Million in debit for you because you would NOT have been buying the stock for $1.4M if you got assigned, you would've been SHORT the stock IF you didn't already own the stock at the time when your short calls were exercised against you. When you short a call and somebody exercise that call against you when the call is ITM and you don't own the stock, you would be SHORTING the stock not buying the stock; the person who exercised the long call would be buying the stock from you, the call seller. Your account would've been $1.4 million in credit because you shorted the stock. It's just that you would be slightly short-squeezed on Monday because the market price of AMZN on Monday went up.

Now assuming that AMZN went up further on Jan. 26 and really past your short call strike of 1402.5, then you would've had to close out that short call to avoid being assigned and potentially being short-squeezed should you be assigned and at the same time hope that your long call goes up higher to recover some of your losses.

I would recommend you to study a bit more about the basics of options regarding exercising and etc. in addition to technical analysis. Option trading is more about optimizing trading outcomes more than anything else I find.
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Thank you for explaining. Make sense to me.

prash · Nov 24, 2018

JSOP said:
Now assuming that AMZN went up further on Jan. 26 and really past your short call strike of 1402.5, then you would've had to close out that short call to avoid being assigned and potentially being short-squeezed should you be assigned and at the same time hope that your long call goes up higher to recover some of your losses.
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Thanks for the explanation.
1.)But pls. note that my long call expired on same Friday. So, if AMZN shooted higher on Monday, and I was shorted on Monday, the long call would NOT have helped anyways.
2.)My concern was if AMZN shot up 10% on Monday, I would have been clearly $140K in margin debit. My calculation is as below.
Difference of 1402.5*10% = 140.25
140.25*100*10 = $140,250 = $140K
Thank you for your time. It was a big lesson learnt for me, to close the options before expiry, specially when it hovers around the strike price....(PIN RISK)

JSOP · Nov 24, 2018

prash said:
Thanks for the explanation.
1.)But pls. note that my long call expired on same Friday. So, if AMZN shooted higher on Monday, and I was shorted on Monday, the long call would NOT have helped anyways.
2.)My concern was if AMZN shot up 10% on Monday, I would have been clearly $140K in margin debit. My calculation is as below.
Difference of 1402.5*10% = 140.25
140.25*100*10 = $140,250 = $140K
Thank you for your time. It was a big lesson learnt for me, to close the options before expiry, specially when it hovers around the strike price....(PIN RISK)
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1) Yes the long call would've still helped you on Friday. You could've still closeed out your long calls as well to take profit on Friday and the appreciation of the long call would have at least helped you recover some of your losses from shorting the call.

2) if AMZN shot up on Monday, it wouldn't be your problem if you already closed out your short call or your short call expired worthless on Friday. As long as the short call expired worthless on Friday, you are in the clear. If you got assigned then if AMZN shot up by 10% on Monday, then yes you've got a problem. So the key is NEVER get assigned unless you already have the underlying to cover it.

ironchef · Nov 24, 2018

prash said:
Thanks for the explanation.
1.)But pls. note that my long call expired on same Friday. So, if AMZN shooted higher on Monday, and I was shorted on Monday, the long call would NOT have helped anyways.
2.)My concern was if AMZN shot up 10% on Monday, I would have been clearly $140K in margin debit. My calculation is as below.
Difference of 1402.5*10% = 140.25
140.25*100*10 = $140,250 = $140K
Thank you for your time. It was a big lesson learnt for me, to close the options before expiry, specially when it hovers around the strike price....(PIN RISK)
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That is a lot less than saying you had a risk of $1M.

prash · Nov 25, 2018

ironchef said:
That is a lot less than saying you had a risk of $1M.
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Agree, first time potential about-to-be SHORT experience, hence scared the hell out of me, thinking AMZN would go to $0 on coming Monday .

prash · Nov 25, 2018

JSOP said:
1) Yes the long call would've still helped you on Friday. You could've still closeed out your long calls as well to take profit on Friday and the appreciation of the long call would have at least helped you recover some of your losses from shorting the call.

2) if AMZN shot up on Monday, it wouldn't be your problem if you already closed out your short call or your short call expired worthless on Friday. As long as the short call expired worthless on Friday, you are in the clear. If you got assigned then if AMZN shot up by 10% on Monday, then yes you've got a problem. So the key is NEVER get assigned unless you already have the underlying to cover it.
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Hi JSOP, I was good till 1PM PST on Friday. However, the TDAmeritrade broker called me at around 2 PM, and said you may be on the hook for assignment/short with $1.4M AMZN short. I was surprised, however, he told me long option holders have more time to call brokers and exercise, and that may take 15 minutes- 1 hour to settle post market close. What it means, is even though @ 1 PM Friday, i m good, the afterMarket AMZN stockPrice, may influence my short Call option, and I am still get assigned.

prash · Nov 25, 2018

@JSOP, Could you explain in detail, how does after-market price, affect short option holders, after the expiry day, May be that would be the key, to understand the overall risk, I kept on the table, by not managing the options.

JSOP · Nov 25, 2018

prash said:
@JSOP, Could you explain in detail, how does after-market price, affect short option holders, after the expiry day, May be that would be the key, to understand the overall risk, I kept on the table, by not managing the options.
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You should read these FAQ answers on the OIC website: https://www.optionseducation.org/referencelibrary/faq/options-exercise. It answers a lot of questions about exercise procedures. Check with your broker also to confirm what's the option exercise cutoff time. That will help you in managing your risk too.