Options Theoretical Question

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

  1. (1) The calls would be exercised at the strike price, $100, not the market price of $150. (2) Since the trade is highly profitable, your clearing firm could take the trade into it's own account and charge you processing/borrowing fees for completing the trade. (3) More than likely, they'll tell you to offset the calls before expiration if your account is underfunded.
    #11     Oct 24, 2007
  2. Good catch, you are the only one that noticed such a huge error in the original post.
    #12     Oct 24, 2007
  3. HOBO


    If you can’t get a good price for 100 calls, you can try selling calls and/or buying puts at other strikes that expire in the same month and have more liquidity. If you create market at multiple strikes, the chances of being hit are higher. You can use any contract or combination of contracts that have good chance to expire ITM.
    I would go small first, before understanding how your broker calculates margin.
    Also check how much your broker charges for exercises and assignments. Some brokers might charge extra commissions, even when the exercises and assignments cancel each other.
    #13     Oct 24, 2007
  4. This is quite the conundrum though. You buy 100 call options at $0.50 and at expiry they are worth $50.00 - $5000 to $500,000 - and you don't have the cash to buy the shares so what do you do?
    #14     Oct 24, 2007
  5. I wonder if you exercise and enter a sell order for the shares at the same time if your broker would waive any margin requirements? You would essentially be shorting the shares, but you have 3 days to settle.
    #15     Oct 24, 2007
  6. Your margin requirements should be somewhat relaxed anyway, shorting against calls.

    Still, it's far simpler to just sell the options.
    #16     Oct 24, 2007
  7. i was fortunate enough to be in this situation a while back at the start of the internet hey day.

    my broker at the time was fidelity but i'm sure its the same with any broker. since your acct has appreciated so much the equity in acct is enough to cover the margin requirement for the stock.

    in this example, to purchase $1,000,000 in stock, u only need $500,000 in equity.
    the option position is worth $500,000 so u plenty of buying power.
    #17     Oct 24, 2007
  8. I don't think that's exactly what you meant. Options don't give you any "buying power", no matter how much they're worth.

    What might happen, though, is that the options are DITM enough that they let you buy the shares at such a deep discount the excess value of the shares covers your margin.

    Suppose your requirement is 50%, as you say. After exercise you'd have $1.5M in stock, which supports $750k in debt. Problem is, you have to lay out $1M to exercise the options, so you're still offside by a quarter mil in the maintenance department.
    #18     Oct 24, 2007
  9. If you ask them to, TOS will short the shares and exercise on the same day for you , regardless of margin requirements. I know this for sure.
    #19     Oct 24, 2007
  10. I was just going by the OP's premise - he couldn't sell the calls. Of course is real life he SHOULD be able to. It's the job of the market maker to make a market. He can always short the shares if needed (and he probably would until he unloaded the calls).
    #20     Oct 24, 2007