Let's say I requested to exercise a call option on Friday 345pm EST, would I obtain the stock and be able to sell it in seconds? Or does the process of receiving the stock take minutes, hours, days? And if I'm the one on the other side of the equation, and I sold a call that is assigned early. Do I have the chance to buy the stock and close the trade before the weekend, or does my broker put me in a short sale and charge interest over the weekend?
I mostly trade futures, but also good amount of stk options, some indiv, but more SPY. I often use SPY puts, considerably in-the-money, esp over week-ends. It only some-what lowers risk, but long or shot, the loss is still limited to the cost of the options; makes sleeping a bit easier. Of course generally lowers margin, but again, not that much vs ES / MES futures, as my SPY are considerably in-the-money. I trade with IB, and from 4 am - 8 pm, Mon - Fri, I can exercise my long put/call options, & immediately am put long or short the underlying. Typically, I may buy SPY cash, at 4 am (or offset with ES / MES futures when SPY cash not yet open) and for each 100 shares of SPY bot, I then immediately exercise 1 SPY put. That is done immediately. Generally, the premium I may be giving up at that time is minor, maybe $20 - $50 per lot, because when option trading starts at 9:30, an SPY call/put that is maybe 5 - 12 points in the money, virtually trades with the SPY. In fact, the bid / offer for the option is usually just below / above value. I am only short puts/calls via option spreads, typically with 1-3 months 'til expiration,& still fair premiums, so have never had assignments.
I don't think I have ever been assigned shares from a short call or put in the middle of the day. It's possible and maybe I just have not noticed it. I usually notice it after the weekend it expired or if it was exercised early, I get an e-mail saying that I have been assigned and notice the change in shares after the market has closed.
The option exercise process doesn't happen intraday. The OCC deadline for exercising is 530pm et. Results are then tabulated, and member firms are notified some time before 1159pm. So you generally won't find out if you were assigned or not until early morning the following day, too late to avoid any short stock charges. When you exercise a call, your broker may give you the "benefit" of the exercise immediately. So if you exercise a call, you may be able to sell the stock as "long stock" right away without finding a locate for short stock.
Thanks FSU. If this all happens after the close of the trading day, what price am I borrowing the stock for? Does the brokerage charge me the closing price (plus the interest)? Do they charge me the price at 3:45 (when the owner summited request to exercise them)? If it's hard to borrow and not shortable, when is the first opportunity I would have to sell my shares obtained from exercising the call? I'm trying to understand the risk of price movement after my decision to exercise early.
Even if you get exercised and you trade out of it right away, I bet you will be hit with the borrow through settlement. I am basing this on what I think happend to me with some NKLA options a few years ago with an account at E*TRADE.
if it's hard to borrow and not shortable, when is the first opportunity I would have to sell my shares obtained from exercising the call? I'm trying to understand the risk of price movement after my decision to exercise early. This will depend on the broker. Your broker may allow you to sell immediately after an exercise or may make you wait until the following day. In the past it was immediate for me, but recently, with Apex, they made me wait until the following day. If this all happens after the close of the trading day, what price am I borrowing the stock for? Does the brokerage charge me the closing price (plus the interest)? Do they charge me the price at 3:45 (when the owner summited request to exercise them)? Can't answer this one. I would assume it is the closing price that interest is based on, but I don't know. Perhaps @Robert Morse would know the answers here.
Yep, this is the case if you are assigned. You will have to pay at least 1 day of interest, as you won't know of your assignment until the following day. So if you then trade out of the position, you still would have been short stock at least for 1 day.
Pure naked short calls have become fairly uncommon. Decent possibly OCC would have done anything possible to avoid a reg sho violation for the member firm. Many firms, including clearing houses have gotten pretty anal over naked shorting. Very few firms wouldn't have been bought in with an extended naked short and many simply prohibit the call sale on a HTB. If it's the firm's first time - maybe, but doubtful. The SEC now pretty much beheads you with fines. OCC now does a fairly robust stock loan business. Keep in mind not every HTB starts out that way.