I quickly checked the OCC "Standardized Risk" pub, and I didn't see anywhere where they said you HAD to buy the freakin stock when you had no money: http://www.optionsclearing.com/publications/risks/riskstoc.pdf I'm thinking this is IB's screwup. They should never have let you buy that much stock with no money. It damn sure wouldn't happen if you clicked "Buy 1600 GOOG @ 280" with $800 in your account, and shouldn't happen EVER with $800. If it can, there is something very seriously wrong with IB's systems. From IB's Margin Requirements: Combination Type Margin Accounts Cash Accounts Initial Maintenance Initial and Maintenance Long Call and Put - None. Long option cost is subtracted from cash. Initial: None. Long option cost is subtracted from cash. Maintenance - None. That's why we buy options. No risk beyond the cost of them. Sounds like the advice somebody already gave is good. Get a securities lawyer. This situation sux...
He didn't "buy" it - it was assigned to him. Big difference really. When he bought the options, he entered a contract to buy 1600 shares of GOOG at 280 on the expiration date. Over the weekend, he was assigned the 1600 shares - but of course he didn't have enough in his account to pay for them - forcing a Reg T call. Obviously IB wasn't going to wait around for him to make a $448,000 deposit - so they liquidated his account. Unfortunately, they liquidated at something less than $280 - leaving a debt. I had this exact same thing happen to me about 4 years ago with some SUNW options. I had a boatload of in the money calls that for some reason (i.e. DUMB) I didn't sell before expiration. Monday morning I got an email from my broker - the subject was "Account XXXXXXXX - Margin Call $365,000". They didn't liquidate my account until they realized I wasn't going to be sending in any money - but when they did, I was in the same position as the original poster - I ended up losing about $2K instead of making $20K. What I never understood was why my broker let me hold those options past expiration. They should have checked the cash balance of my account - and if there was not enough in there to cover an assignment - they should have forced me to sell the options so I wouldn't have been assigned - forcing the Reg T call. Surely brokers computer systems could automatically check account on expiration day and catch margin situations like this. It was my screw up - and I think this is the orignals posters screw up too. I don't think it was the brokers fault at all - but I would think they'd like to protect themselves from this.
I'm with you quah. I do think the trader should have closed those bad boys being that close - I would have with almost $500K on the line! But here is where IB's "safety net" should have kicked in - to protect themselves and the trader, that exercise should have been DENIED. In fact, on the OptionsXpress site, they say: 1. Exercise and Hold To exercise an option and hold the resulting position you must have enough funds in your account to cover the trade.... I couldn't find a similar statement at the IB site (BTW IB is my broker and I like 'em, but I'm going to be damn careful from now on...). But this means to me, for manual AND auto-exercise, if I don't have the funds, I don't buy the stock. Sounds like a reasonable policy to me.
whoa whoa.... sorry....I'm missing something again...bear with me here.... HOW could he have "closed" out worthless options with a nil bid at opex? Are you saying that placing a market sell order at 3:59 Friday is enough to GUARANTEE you won't be assigned?? Otherwise, I know of no way to "close out" OTM options which have no bids for them. thanks
To exercise AND HOLD the resulting position.... hold being the key word there. I think it was up to him to either sell the calls - or tell IB that he didn't want to exercise them. I haven't messed with options for years - but I seem to remember that IB gives the user the option of "flagging" options positions to not exercise. It's a mess either way, and so was my situation back then. Again, I'd think that the broker would just want to avoid any potential problem by forcing a client to sell options are are in the money - for which they would not have the cash to cover and exercise - unless they are told otherwise. Sort of like how they force you to sell a futures contract to avoid taking delivery.
I don't think he needed to close them out - but I do think he could have told IB that he didn't want to exercise them. That would have prevented this situation. Of course closing them out would have also prevented the situation - if it was possible.
I remember last Friday well as I posted the following http://www.elitetrader.com/vb/showthread.php?s=&postid=771371#post771371 As you see in that post of mine, I purchased those 280 Calls for 5 cents and immediately put in order to close them out at 15 cents..I remember how Google started towards $280 and the options went crazy....Flew past my 15 cents and I believe they went as high as 20 or even 30 cents when Google touched $280.00 then of course all went downhill from there to a bid of 5 cents when it looked like Google wouldn't stay or break $280.00...As I also noted in my original post, I was surprised to see after the close Google being at $280.30 and I was watching it but yet the last bid were for only 5 cents yet it ended 30 cents in the money???? I sure wish the best to you in this messy situation your currently in..
Here is the blurb from the IB site on "contrary intentions" - "Expiration Friday Option Exercise Instructions Use the TWS Option Exercise window to either: (i) exercise an option prior to expiration, or (ii) deliver "contrary intentions" to the clearinghouse for the options held; e.g., The Options Clearing Corporation (âOCCâ) for options traded on U.S. options exchanges. You must also use the TWS Option Exercise window to instruct the clearinghouse to exercise an option contrary to the clearinghouseâs accepted policy) on an options Expiration day (e.g., Expiration Friday for US options). If you do not use the TWS Option Exercise window to manually manipulate options, the clearinghouse will handle the exercise automatically in the manner described below..." You can tell them not to exercise in the money options through that window.
sorry Quah...perhaps I didn't phrase my thoughts/questions clearly. Reading his original post, I don't think he -could- have sold them. That's what I'm getting at. And they were NOT in the money at the close. At the close, they were out of the money, and -nobody was bidding anything- for those options. On TWS, the "bid amount" column would've been blank. How does one sell in that situation ??? As far as I know, it's impossible. And I know of no other way to "close" an option position. Going from his post, goog went up -after hours-.... Whether there were any bids even then, I don't know. A side-question in this whole thing is why -afterhours- underlying price was being applied to an option expiration. I thought it was RTH close... I -wholeheartedly- agree with you that IB's -default- should be to NOT assign !! It's ridiculous to think that we have to send a special notification to the broker for every option that looks like it's expiring OTM....but might end up in the money 3 hours later! You or Choad mentioned something about being able to set a "don't assign" value... Is this something that can be done in TWS ? Or were you talking about some sort of special notification to IB ? If in TWS, is it a -global- variable that can be set, so that all option buys are set that way? thanks!