Question 1: Say that I have sold a naked call that is ITM at expiration. How is that trade handled assuming that I don't manually close out the trade? Question 2: Say that I setup a bearish call spread (sold call at lower price and bought call at higher price, same expiration on both options). Assume that the call that I sold is ITM at expiration. How is the position handled assuming that I don't manually close out the trade? What if I have stock so that the option sold is covered, but I don't wish to lose my stock at expiration? If I entered the trade as a spread in IB, does that mean that the options will be cash-settled by default?
Q1 - Assuming you have the margin available, you will be short the underlying - that is...the short call is exercised and you are short from the strike price. If you do not have the margin to be short the underlying, IB will close out your naked call in the last hour. Q2 - Really the same question except now you already own the underlying. Since IB will short the underlying to exercise the short call, your shares will be taken - as you can't be long and short the same product simultaneously.
Thanks ktm. I have one more question though. It makes sense that the call would get exercised and I would be short the underlying. However, why at the strike price? The person on the other end of the trade receives the underlying. I don't have the underlying to give them so where does that underlying come from? It would seem to me that the broker or clearing house would have to acquire it by buying it at market price to give to the person receiving it. I would then be short the underlying at whatever cost that they had to pay to acquire it...which would be higher than the strike price since the option was ITM.
Since you had the shares you will not be short. You will be flat on that stock position in your account and your account will be credit the strike price of the call. If you don't have the shares, the broker will handle that. You do not need to worry about that. These issues are taken care of by the broker and clearing house. Yes you will be short at the strike price of the option that you sold.
Remember there is also a value to the short call that was in the money. The broker is shorting the underlying at market value then taking the difference in funds back to the strike price. For instance, if a stock is $87 and you shorted the 70 call - your call expired at -$17. The simplest way to explain it is that the broker shorts it at $87 and takes your $17 cash. Your BASIS would be at the strike price for this reason. You could look at it two ways, either you are flat the underlying at $87 and lost $17 on the short call - or - you are short the underlying from $70.