Options exercise always takes place overnight. ITM options are excercised automatically by the OCC on expiration and the only time where early exercise ever is a rational decision is ahead of the underlying going ex-dividend. I think there's a lot of areas where development energy could be put to much better use.
I would disagree. Often I have an ITM option that I would like to sell, but I don't want to pay the spread. Its often more profitable to buy/sell the underlying stock and then exercise the option against your current position.
You are wrong about this being a waste of time. Some stocks cannot be shorted at all. If you are long an in the money option, there is no way of liquidating the option position without being ripped off by the option market maker. In addition, if you have a spread on and the short side gets executed, you may want to exercise the long option to flatten out the position. Unfortunately, since the current method is an overnight method, valuable margin is tied up during the day. This may not be that important for stock or future daytraders, but for option traders, this is totally important and valuable.
I can see your point in the case of options that are so illiquid or close to expiration that slippage in terms of spread exceeds the remaining intrinsic value. Now this is irrational unless the point raised above applies. I also don't see how this would make a difference in terms of margin requirements as exercise will take place after the close regardless of the way you communicate your desire to do so to IB. And assignment of one leg of a spread does not change the risk profile of the overall position anyway.
freehouse, according to the text books, it does not make sense to exercise a call before expiration unless the underlying goes ex-div. However, you are correct to say that that you need to consider your costs and other factors - particularly stock loan - into the equation. One thing you mention: deep in the money calls have wide spreads. If you want out of a stock but the spread on the option is too wide, think about selling a call closer to the money then exercising both at expiration. Nevertheless, exercise/assignment are not real time. Even if you elect to exercise a call before the open, the clearing house will not execute the transaction until after the close. While it would be easier for clients to exercise an option via the TWS, I don't think it carries any priority at this time - particularly because it is not a real time event. However, down the line, I believe exercising options will be made easier and automtated via the account pages on the web site or the TWS.
You are absolutely correct about exercising in the money calls is not optimal under ordinary circumstances. The problem we face, though, is the retail margin requirements. For example, if we do a 10 lot 95-100 bull put spread, and we deposit $5,000 to cover the margin requirements. Let's say that we get put the stock. Although we have the 95 puts to protect us, Reg T makes us put 50% margin for the initial buy. So this blows margin up from $5,000 to $50,000 to cover the purchase of the stock. Now retail margin rules does not give us favorable margin treatment even though we have the 95 puts and our maximum risk is only $5,000. Three things can happen: (1) IB margining system kicks in and sells out the position. (2) You have enough margin but cannot do anything for the whole day because you are waiting for the position to clear during the next day (you have exercised your put option) (3) You try to leg out the position (of course, you will take on risk here because you have a deep in the money put option and the spreads are very wide). If you had the ability to exercise options through the TWS, you could exercise the 95 puts and clean up the position. The TWS will just adjust your cash position and remove all other positions. I know that options exercise occurs at the end of the day. I am not disputing that. However, this shouldn't be a problem because once when you exercise an option, it becomes irrevocable.
Datek allows for automatic exercise online and places the stock immediately in your account, even though the actual transaction takes place after the close. I think this is a great service that brokerages should provide.
if an option exercise is made irrevovable this could work and would be a nice service. I will make the recommendation. I don't think it will get a high priority but, perhaps it could be the impetus needed to fully automate options exercises.
Def, Is there any way to have IB include commissions in our next year's 1099's so that they are netted out instead of reporting the transactions on a gross basis? IB is the only firm that I know of that does this, and it's most inconvenient to have to calculate the commissions for the sales and net them out and provide an explanation as to why the 1099 amount doesn't match the net amount we calculate. This was an issue last year as well, although last year the 1099's were also incorrectly labeled so that it read as if commissions were already netted out. Thanks, 99
I am not sure of the reasoning behind omitting the commissions. If you download to quicken or ms money each day/week/month or use a program like tradelog, i don' think this is that big an issue. Nevertheless, I'll make the request.