Uh... doesn't look good for this guy... https://www.interactivebrokers.com/...le=registration_1/ira_customer_agreement.html B. POTENTIAL FOR ADVERSE TAX CONSEQUENCES: CUSTOMER UNDERSTANDS THAT TRADING REQUIRING MARGIN (INCLUDING FUTURES TRADING AND SHORT OPTION TRADING) MAY REQUIRE DEPOSIT OF ADDITIONAL FUNDS TO CUSTOMERâS ACCOUNT TO MAINTAIN SUFFICIENT MARGIN. CUSTOMER UNDERSTANDS THAT PROVISIONS OF THE INTERNAL REVENUE CODE PLACE LIMITS ON THE AMOUNT OF FUNDS THAT CAN BE DEPOSITED TO AN IRA ACCOUNT, AND THAT DEPOSITS TO THE ACCOUNT IN EXCESS OF SUCH LIMITS MAY CAUSE ADVERSE TAX CONSEQUENCES TO CUSTOMER, INCLUDING BUT NOT LIMITED TO FORFEITURE OF TAX-ADVANTAGED STATUS OF THE IRA ACCOUNT AND/OR PENALTIES. CUSTOMER IS SOLELY RESPONSIBLE FOR CONDUCTING CUSTOMERâS TRADING TO AVOID EXCESS DEPOSITS AND RESULTING ADVERSE TAX CONSEQUENCES. AS DESCRIBED BELOW, IB WILL LIQUIDATE POSITIONS IN CUSTOMERâS ACCOUNT IN THE EVENT THAT CUSTOMER CANNOT OR DOES NOT DEPOSIT SUFFICIENT FUNDS TO SATISFY MARGIN REQUIREMENTS. CUSTOMER IS SOLELY RESPONSIBLE FOR CONDUCTING ITS TRADING CONSISTENT WITH IRS REGULATIONS AND FOR DETERMINING THE TAX CONSEQUENCES OF ANY TRANSACTION IN THE IRA ACCOUNT. IB DOES NOT PROVIDE ANY TRADING OR TAX ADVICE AND IS NOT RESPONSIBLE OR LIABLE FOR JUDGING THE TAX CONSEQUENCES OF ANY TRANSACTION OR FOR AVOIDING PENALTIES OR OTHER ADVERSE TAX CONSEQUENCES IN THE ACCOUNT. IB WILL NOT EXTEND CREDIT FOR TRANSACTIONS IN INDIVIDUAL RETIREMENT ACCOUNTS. F. Customer understands that OCC assigns exercises to clearing firms such as IB and Customer acknowledges that it has read and understands the description of the OCC assignment procedures set forth in Chapter XI of the OCC Document. Customer acknowledges that, upon assignment, Customer shall be required: (1) in the case of an equity option, to deliver or accept the required number of shares of the underlying security, or (2) in the case of an equity index option, to pay or receive the settlement price, in cash. Customer understands that it may not receive notice of an assignment from IB until one or more days following the date of the initial assignment by OCC to IB and that the lack of such notice creates a special risk for uncovered writers of physical delivery call stock options. Customer acknowledges that it has read and understands this risk as described in Chapters VIII and X of the OCC Document. H. If, prior to expiration of an option contract, Customer does not have sufficient equity to meet the initial margin requirement for the purchase or sale of the underlying security, then IB: (1) shall have no obligation to purchase or sell such underlying security or (2) upon exercise may immediately liquidate the underlying security position which results from the exercise of the option contract and Customer shall be liable for resulting losses and costs.
Well, here is the lesson to learn from this: If you are holding options that "look" to be out of the money and you want to be absolutely certain you are not assigned if they end up being in the money come Saturday morning - you MUST send notification to the OCC via your broker that you do NOT want them exercised. For IB, you can do this via TWS. Just extra insurance in case something happens after hours that force your options in the money.
Quah; agreed, that's the only smart way to handle it. in re; that IB agreement... (2) upon exercise may immediately liquidate the underlying security position which results from the exercise of the option contract and Customer shall be liable for resulting losses and costs. One wonder what "immediately" means to IB.... ?? Wouldn't that be, like, "right away" ? Sounds like they made the assignment on Friday or Saturday but did NOT immediately liquidate. They waited til Monday...
Keyword: "may", as in "may immediately liquidate". But the "customer agreement" is no more than IB just covering it's azz. Customer agreement is what it is, a customer agreement. Doesn't mean it is binding when viewed thru the lense of legal precedent or regulatory trends. Net-net; the guy should probably close his account with IB and refuse any additional contact with the company. Let IB decide if it is worth the company's time to go after him.
Yeah, doesn't look good. What a nut-buster... This is from the Fidelity brokerage. Not IB, but probably typical: Under the new policy, using the same scenario, the account would show a purchase of 500 shares of XYZ at the strike price but no corresponding sell order. The account would be long 500 shares of XYZ. Please note that, as is the case under the current policy, if the automatic exercise occurs in a cash account, Regulation T requires payment for the shares in full. If the position is liquidated prior to settlement and the account does not have sufficient cash to cover the exercise, the account will be restricted for 90 days. Similarly, if the position is liquidated prior to settlement but cash is deposited in the account, after trade date but before settlement, this is considered a "Good Faith Violation" under Reg T. If the account has three good faith violations in a 12-month period, the account will be restricted for 90 days. This policy change will mean option customers who are automatically exercised will need to take action following expiration if they do not want to maintain the long or short positions in their accounts. There are certain situations that would not be allowed (e.g. short stock in a retirement account) in which action will be taken to liquidate or cover
I think "may", in the legal sense, would be construed as whether or not they were going to "immediately liquidate". I don't think it would be construed as "may do it immediately, but may wait a few days instead". If I were a securities-attorney, instead of just playing one on ET , that's the clause I'd go after. It's not right to execute one half of the transaction at one price (determining that the option is ITM based on stock-price at time-X), and then execute the other half of the same transaction at some undefined future time-Y based on a -different- stock price! Well, I found the place in TWS... It's in the "View" pull-down, and called "option exercise"....and it looks like you have to do it -individually- for every position. What a pain in the ass. Why can't they put a "global" default-instruction setting there? sigh...
d9d - As you know, the stock market isn't open on Saturday - when the shares are assigned. The first possible chance to liquidate is monday morning at the open. Unfortunately, the stock assigned may or may not open above the price at which is was assigned - as in this case where is opened below the 280 assignment price. If GOOG opened at 300, we wouldn't be having this conversation now, would we? There would be a simply REG T call, the account might have been frozen for 90 days, but there wouldn't have been any losses involved.
no, I suppose he'd be a happy camper in that case Quah... Well, as has been said, the only safe way is to use that TWS window on every unsellable (OTM) position on Friday afternoon. I'm sorry for the man's trouble, but I'm very glad this subject ended up posted here.
This has been an issue forever. OCC (not IB) implemented this auto-ex policy to keep people from losing money by forgetting, or in some other way failing, to issue exercise instructions for in-the-money options. I doubt any other online broker would have done anything different. I suppose if you were using a full-service broker who was paying attention, he might remind you about it if it looked like an option position was going to pin.
I think you guys are missing the main point by focusing on options mechanics. It's definitely a good idea to use IB's interface to stop exercise if the option is slightly in the money. However, would you stop exercise if GOOG closed at 281? What about 282? The original poster spent his entire account on options premiums so that he got 45x leverage on a highly volatile stock (ATR about 2%). Obviously he's trying to gamble big and strike it rich. Through very unfortunate circumstances he was forced to hold over the weekend and blew out at the open. I have only a little more sympathy with him as with someone who used 45x leverage overnight and blew out next day. Whether he won big or not, gambling that way leads to blow out, options mechanic or googlydoo...