Closing out an in-the-money equity option spreadtrade

Question

I put on a debit weekly diagonal ITM put spread trade on stock A selling at $45 : I Buy back week put strike 55 sell front week put strike 50.  I am assigned overnight and have to purchase 100 shares of Stock A for $50 ($5000 debit that creates a money due in my account).  The next morning, my broker pre-empts me from exercising my put to sell the stock at $55, by selling the stock in my account for $42, creating a loss of $800.  Is that legal ?  The broker negated my spread trade!

Bob Baerker · Answer

If you did not have the margin requirement (cash or marginable securities) to buy the stock then the broker had every right to liquidate your newly purchased long stock.

On face value, it's not a disaster unless after closing the stock position, the stock rose and you gave back paper gains on your long put.

What broker was this?

nanoman · Answer

Was $42 the fair market value of the stock when the broker sold it? If so, then you didn't really lose anything significant. At that point you were free to sell your long put in the market and end up about the same as if you had exercised it instead. Better, in fact, if there was any time value remaining. The broker certainly didn't cost you the difference between $42 and $55, because they left you still owning a long put worth at least $13.

Answered by nanoman on November 22, 2020

Closing out an in-the-money equity option spreadtrade

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