Personal Finance & Money Asked on June 1, 2021
Imagine this setup:
Sell put strike $10
Buy put strike $9
At expiration, the price is at 9.5 which should cause you to be assigned but your bought put won’t execute.
However, if you’re doing this on a margin account, the capital required for this setup likely won’t cover 100 shares, so what happens?
Real scenario:
Ticker: TSLA
Expiration: Feb 12th 2021
Sold Put: 800 for a 3.77 premium
Bought Put: 792.5 for a -3.14 premium
Total capital required was $750
If assigned, the total required capital would be $80,000 minus the premium for 100 shares (which I definitely don’t have in my account lol).
So what happens if the spot price is at $795 at expiration?
First, a couple of terminology corrections.
At expiration, the price is at 9.5 which should cause you to be assigned but your call won't execute.
This is a put spread. There is no call option involved. Perhaps 'your call' refers to lacking sufficient capital to buy the assigned stock? If so, it needs a better explanation.
If assigned, the total required capital would be $80,000 minus the premium for 100 shares (which I definitely don't have in my account lol).
The capital required would be the strike price of $80 less the premium received for selling the credit spread.
Ticker: TSLA, Total capital required was $750
Re the TSLA vertical, the credit is 63 cents so the capital required is the difference in the strikes less the premium received or $687.
OK, you are assigned and you lack the margin to support the purchase of the shares. How this is handled depends on your broker.
Some brokers buy to close your short put late in the day at expiration (3:30 PM EST). This isn't favorable because they'll indiscriminately buy at the ask price. Working the order might get you a better fill. In addition, by closing early, this eliminates the possibility that the underlying might reverse and your loss is eliminated.
Other brokers will accept the assignment (buy shares), immediately sell the stock and hit you with an account violation.
Correct answer by Bob Baerker on June 1, 2021
Get help from others!
Recent Questions
Recent Answers
© 2024 TransWikia.com. All rights reserved. Sites we Love: PCI Database, UKBizDB, Menu Kuliner, Sharing RPP