spindr0 ... the typo was in your post. And it doesn't change my point on a Call Debt Spread having a much greater maximum risk than the initial debt. The OP wanted some examples of an option spread position that might carry greater risk than initial debit and the GOOG example is a good one that most people might over look.
sorry i am a newb when it comes to options, but i looked at the GOOG thread and why is it that he had long calls (with no stocks), when they expire otm my understanding is that they are worthless and if they expire itm like in the GOOG guys case they are worth something and can be sold, so why is it that his expired ITM and they got "automatically exercised" and then he owes 9.2K?? i don't understand how this happened. Four questions: So if you let options that you hold expire ITM they get exercised automatically? This can be avoided by selling the contracts the day before expiration? What do you do in his case if there is no bid for the option? If the expire OTM then there is absolutely no risk you will lose more than the premium you paid? (unless they do what happened to the goog guy) Thanks for answers.
his options were OTM and jumped into ITM at the very end of expiration Friday. So, Monday, he was exercised. A call is the right (not obligation) to buy stock at strike price. But there is the special rule of autoassignment working in the moment of expiration. Even just 1 cent or something like this can make a huge difference, becuase this particular cent divides OTM and ITM status and causes autoassignment. the guy mentioned that he uses IB account. As far as I know, IB provides very convenient mechanism to avoid autoassignment -- all you need to do is to check the proper checkbox somewhere in options menu to avoid it. The guy did not do this, because he was absolutely sure that his option will expire worthless, or did not know about this possibility. But volatility at the end of week could be severe. It's better to check the mentioned checkbox in IB to avoid this disaster.
\ what if i am not with IB, and as far as i know i don't have that autoassignment option, but i will check tonight what if the above happens (the option jumps from otm to itm ah) then what happens to the options if there is no autoassignment? What should you do if there is no bid for your long call option? i always thought this whole "lose more than premium you payed" only pertains to if you are like short puts or calls covered or naked.
staffpro .... In the GOOG case his options went $0.30 ITM on Friday - $0.05 over the threshold for auto exercise at that time - on a $280 stock that was sure bad luck. Then on Monday morning IB auto exercised the position and deposited 1600 shares of GOOG @ $280 into his account, $448,000 worth. He didn't have the funds to cover this so IB sold the 1600 shares a few hours later @ about $274.00 for a loss of about $10,000. A $6.00 move for GOOG is nothing and if GOOG went up he would have made a profit. This loss would be in addition to the premium he paid for the options. 16 contracts of GOOG options would have been a fair amount and I don't think he mentioned how much he paid for the options.
thankyou dagnyt and forex-forex for clearing those things up for me. that goog guy must have a huge account for $448,000 worth of stock to be bought and placed into his account lol...
That's whole point of options, you don't need that much money to control those 1600 shares, and that's why IB sold the shares, the guy didn't have a huge account and the 448K worth of stock caused a margin call and a forced liquidation.
so regardless of account size those shares were obviously bought on margin and his account could have been alot smaller. And when those shares were bought he was probably way over the 3:1 buying power at most brokers and hence the forced liquidation + margin call. i see... thankyou