Since the assigned long shares are forced by the legal contract of the short put to allow the long put holder on the other side who forced the exercise to sell at that strike price, the broker can't even do anything about it if they wanted to, until the next trading day when the market opens. If the broker was really worried about margin and never gave time for the trader to make a decision, which they should unless their dealing with dunces, they'd just sell the shares in the open market first chance in the morning next day. If the long shares incurred a loss, then they'd sell the long put too, which would more than make up for it since it would have increased in value due to the drop in value of the long shares, and also given the extra time premium value in the long put since it's sold before expiration, you would get more profit than you expected from the spread. From what I've read and posted above from my broker, you have time to exercise if you want, but if your long put has time premium, it wouldn't make sense to do that, just sell it. If your long put was trading at a discount or at bogus levels, then exercising it is the best route and will offset any margin requirements going forward. Sit down and write out the math yourself, you'll see that you're wrong, I've already given you the three possible scenarios after early expiration for american physicals above, and even if they're liquidated automatically the next morning, they all result in maximum profit. Again, early assignment for debit spreads in equity options is a good thing, get that through your head. It means that you get maximum profit before expiration and can move on to other trades. Have you ever even traded an option in your life?
You're wrong. A resurgence back so that ITM puts become worthless is a good thing. Because now his long position is worth much more! This is in case OP op long 119 put and short 114 puts. The 119 gives right to sell at 119.. if this put becomes OTM then he can just sell the stock at 120+ and make more money. Wow I just started trading options and already smarter then most I agree when options go from OTM to ITM you have to watch out when having written option. However now I think IB is wrong for liquidating in case he had funds of 11400 per option. Why, because as you say exercises happen after hours and the market crash happened during RTH, not after hours so he could have closed the position manually when it normalized. And if he had 11400 then he could have just let the option assigned, then the day after exercise his own put, wait 24 hours and make the 500$ back. Okay, what if the market crashed to limit down. Well if OP had 11400 per option no problemo!
Impossible Stefan..I said earlier this guy is the biggest IB apologist on the boards. EVEN IB SAID THAT AUTO LIQUIDATION DID NOT FUNCTION "OPTIMALLY" ...they needed to "tweak" the system.... so give it up...you ARE talking to a wall. No one who trades options gives a flying F what the guy thinks.
yes, your broker can exercise the long option if need be. If you read over your options agreement & margin agreement you're required to sign to trade these I'm sure it's in there. If you had a long put to offset your assigned long position and the broker was to liquidate at a price below the put's strike that's a slam dunk arbitration win for you. Yes there is a margin requirement to exercise a long option if the end result is a new opening position. In the scenario you provided the position resulting from being assigned on the short leg had already been liquidated. It would make no sense to exercise the option anymore and most likely you could not do it because you'd put yourself into a margin call. I believe in the scenario you provided you didn't have sufficient margin to maintain the assigned long position which was liquidated at a loss so there would be no way you'd have sufficient margin to take on the new position. The only thing that would make sense would be to sell the option, especially if you were concerned the market would reverse after you gave exercise instuctions. I'd say your reaching quite a bit by bringing up the 9/11 reference. Thats happened how many times in the history of the market's existence? And if the market was closed you would not be able to exercise your long position also. The only way you should be getting less than intrinsic value would be if you were foolish enough to place a market order to close out your position during a time when spreads were huge. You could place a limit order or do same day substitution. If your broker was to liquidate your options and you received less than intrinsic value, I'd say you have an arbitration case there as well. You're way overthinking all this. You should go back and re-read Stefan 777's posts, he is correct.
Quote from jimrockhead: My nightmare scenarios... nightmare scenarios... a nightmare scenario... nightmare... ...excellent 666....
If it doesn't get resolved within a couple of weeks, I would take it to arbitration. You do not want to lose your chance of arbitration due to delays. Please do post your final outcome... Good luck!
Yeah I generally agree with the options you have presented. IB mean well but their whole corporate dogma goes against reform in this situation. The fact is, we've found a situation which no computer can handle and only a human can make the right call. That is the achilles heel for an all-electronic broker. The choices are i) expose yourself to grey swans ii) don't use margin or shorts with IB iii) don't use IB until they recognise this problem and fix it.
You are missing the point. Trading at a rational broker does not expose you to the risk of an instant portfolio-wide margin liquidation just because someone high-ticked 1 share of one of your short positions at 100 times the last traded price. It never has done and it doesn't now - except possibly at IB. Hence, the rational way to mitigate that risk is to stop using margin, hedging, and short-sales at IB. In any case, being a total risk puritan is silly when the death rate is 1% per annum. Pretty much every professional trader has been short, or long on margin, at least once in their career and has thus run these risks. The odds of it busting you out in some crazy market 100 times worse than Oct 1987 are far lower than the odds of of being run over by a bus, getting your wealth confiscated by the government or capricious lawsuit, going insane, or other unhedgeable risks. So your position makes no sense.