Options Theoretical Question

Discussion in 'Options' started by squarepush3r, Oct 24, 2007.

  1. ok peoples, I have a questions that I wasn't able to get answered elsewhere, so ill give it a shot here.

    Say I have 10,000 CALLS for NOV 100, and the stock price is 150 at expiry (third Friday).

    I stand to make 10,000 x 50 = 500,000 (minus say the small CALL fees say i paid .50 cents each and commissions).

    So, if I can't find a buyer on expiry for a good price, these options will automatically be exercised at expiry in November since they are in the money by .05 cents.

    Now, heres my question. Say my account only has 50k cash position, I stand to profit ~500,000 for the 10,000 shares at 50 bucks below price, but how will the options exchange handle this exactly? I mean, to actually purchase 10,000 shares at 150, that will cost me 1,500,000, then I can sell them immediately, but how will my account and broker handle this?

    Ok, thanks if anyone knows how this situation works! So, in summary you let options expire that are in the money and are automatically exercised, but your account doesn't have funds to pay for actual shares totaling.
  2. I assume this is actually 100 contracts, not 10,000?
  3. 10,000 shares so yes 100 contracts
  4. I would think it would be easy to sell those 100 contracts over a few days before expiry. Which stock do you have in mind for this theoretical question?
  5. You didn't answer his question, which was, what if he didn't have enough money in his account to buy the shares.

    You can try shorting some or all of the shares, but I think that might have margin requirements also. You also have the slight possibility that the calls are exercised at Friday's price and for some reason they fall at the open on Monday.

    If this was a real situation I would probably call my broker for help.
  6. Gustaf


    Like what Eliot said above, also there was some trader here having bought alot of very cheap GOOG calls, they got excercised and then his account went into margin call immediately, unfortunately the GOOG had dropped a few dollar so he realized a very huge loss.
  7. You have to sell the options...they're not european options where you settle in cash.
  8. MTE


    The best way to handle this is to either sell the calls in the market on expiration Friday or to contact your broker and ask whether you can short the shares against your calls just prior to expiry to cover the exercise.

    Carrying weekend risk is not the best way to handle this.
  9. Offer the options at 10 cents below intrinsic. Someone will buy them for sure.

    You won't have to own a single share.
  10. I would go $1.00 below on a $50.00 option. $490,000 from $5,000 is OK with me for a quick sale.:)
    #10     Oct 24, 2007