Question about exercising options

Discussion in 'Options' started by silent_tunes, Sep 28, 2010.

  1. Let's say I have $50K in my account. Also, I am long 100 contracts of a 95/100 bull call spread with the underlying at 105 at expiration.

    Obviously, both the long and short legs of the spread will be automatically exercised. However, my account balance or even my day trading buying power is not enough to cover the cost of buying 10,000 shares of the underlying at $95.

    My question is this: does my account balance matter here since the buy and sell will only be paper transactions and I should be credited with the $50K (5*100*100) after the calls are exercised?

    Or will the broker loan me the amount to buy the underlying at $95 (even though my $50K is not enough margin for such a huge loan) and then charge me interest on nearly $900K?

  2. Personally, I would exit this spread. No later than Wednesday before expiration. The biggest reason is that you are tying up margin capital that can be used for another trade. Two, if the underlying drops, you lose, so why take the chance. You have a profitable trade--why mess it up over a couple of points. The most you make is five points minus your costs (debit spread of course). At 105 near expiration, you long call may be worth 14 and your short call may be worth 9. Right there is your five. If the spread is worth more than five (sometimes it can be believe me), it is worth getting out. You gotta pay commisions on the exercise and assignment anyway.