Option scam

Discussion in 'Strategy Development' started by linrom, Feb 20, 2007.

  1. linrom


    I have a theoretical question that involves option call buying. Suppose that I only have $1000 in my IRA brokerage account and decide to buy 100 calls of stock with strike price of $100 on Friday option expiration day at $0.10. At the end of the day the underlying security trades at $100.10 and I fail to close out the option call position.

    On Monday morning I would find that my account has a market value of $100,000 as the brokerage firm has exercised my calls and assigned the stock to me and also put my IRA account in $100,000 margin.

    I had posed this question to my broker because I had failed to excercise bunch of calls on Friday and found out that my account today on Monday has the underlying security in my account that exceeds the market value of my purchasing power.

    When I called my broker, he told me that I would be subject to cash margin call and that all exercised stocks in my account would be sold. I told him great as you had just allowed me to speculate for one day with theoretical margin of more than a 100:1 in an IRA account.

    I had also asked him, what would you do when the underlying stock had opened down $10 leaving a shortfall of $10,000 in my IRA account that had original market value of $1000.

    "Thats how options work he replied." I asked why didn't you close out those options for me, he said that he couldn't do that?:confused:
  2. lar


    Linrom says,

    Point 1 - You didn't fail to exercize your options, you failed to offset (sell) your long option. If you had offset, you would have had a small positive balance from this trade. Exercizing them would have got you in the same predicament you are in now.

    Point 2 - You owned those options. It was your responsibility to manage them and be aware around expiry day. If they expired OOM you would have just ended up flat. If they are ITM upon expiry they have some value and it is not the brokers place to give away your equity unless you are in a margin call or something similar.

    Just my two cents.

    Peace and gtty,

  3. You wouldn't have been able to buy 100 contracts. You didn't consider commission costs in the trade. The overall damage wouldn't have been as bad. Again, it's YOUR responsibility to actively monitor and manage YOUR account.
  4. You just discovered the magic of the 'free post-exercise days." Every novice options trader is always amazed when he forgets to exercise or sell a position and winds up with a few free days of float in the underlying.

    You will pay fees to close out those underlying positions at the end of the three days, but it is a low-cost way to have a few days of speculation on a large position.
  5. So, did you make any money?
  6. Options are automatically exercised if they are 5 cents or more in the money on expiration day.

    It's all in the OCC's bylaws.

    If you don't know the rules, and you trade options, any loss is YOUR problem.

    Anytime someone tells me they want to trade options, first thing I ask them is, what happens on expiration day? If they don't know, I tell them don't trade options, you WILL GET SCREWED!
  7. Not at a broker like IB.

    They have real-time margin compliance algos that close you out in a hurry.

    They work well, too. I've been over the "overnight" limit a couple times (just stock trades) and when it got close to 4:00, things happened fast!

    Worked out well tho, all the positions were entered that day and sold out with profits. :cool:

    Good trading to all.
  8. I would never let the broker close me out, I'd do it myself before it happens, otherwise god knows what will get liquidated and at market price!
  9. I feel the same way, unfortunately it was a "bug" in my auto-trading program that let margin risk get too high. I was at work and didn't know until after the close. I have portfolio limit algos, but some orders didn't get canceled.

    But the cool thing was, for once, I actually made money on the deal (not like the 999 other times where I lost my ass when I screwed up). But one of these dayz...

    #10     Apr 1, 2007