Options assignments and limited account funds?

Question

What happens if you write an option that is or becomes in the money and assigned, but you do not have the funds to cover it?

For example, say you write one naked call on AAPL striking 175 (hypothetically, I don't remember what AAPL is right now), but you only have $10,000 in your account (delivery of 100 shares would cost 17,500+)? Would the broker not allow the underwriting in the first place, or would you be required to pay the broker this amount of money? Or, if the stock was only at 176, would you only be deducted $100?

Would this be any different for puts, which of course are settled in cash?

Answer 1

yes, the broker won't allow it.

Answer 2

You're Broker-Dealer wouldn't allow you to make such a transaction as you hadn't met the minimum requirements for trading naked options.  That aside in order to do naked options you MUST BE ON MARGIN.  Having said that you'd be borrowing the additional $7500 from the broker dealer carrying a 75% ddeficit in the account w/$2500 equity...That may/might put you into a maintenance call for an additional 10% or $1750 to bring you up to that level depending on the firms policy and any temporary Fed requirements pertaining to maintenance.  Hope you understand this...!

Answer 3

<<<What happens if you write an option that is or becomes in the money and assigned, but you do not have the funds to cover it?>>>

In the example you gave, you would sell 100 shares of APPL for $17,500 if assigned. Your account would then have $27,500 in cash and would be short 100 shares of AAPL. You would, at some time in the future, have to buy 100 shares of AAPL stock to cover your short stock position. As long as

AAPL was below $275 per share you would have enough funds to buy the stock and cover your short position.

Unless the share price of AAPL had a large gap up in price, you would receive a margin call well before the price of the stock went to $275. When you received the margin call you would either have to deposit more assets (usually cash or marginable stock) into your account or you would have to close the short option position to reduce the amount of margin you are using. If you failed to to either, the brokerage would close the short option position even without any instructions from you to close it.

If there was a large gap up in the price of AAPL stock to more than $275 per share you will receive a margin call immediately and if you do not add assets to your account quicly the brokerage will cover the call option. If you do not have enough money in your account to pay for the option, the brokerage would loan you the difference which you would be responsible for paying off, just as you would if you had taken a loan out from a bank.

<<<Would this be any different for puts, which of course are settled in cash?>>>

Put options on stocks are NOT cash settled options.

A cash settled option is, for example, an option on a stock index. There is no underlying security to deliver upon assignment; instead cash representing the difference between the strike price and the index value is paid upon assignment.

If you are assigned a stock put option that you have written you buy the stock at the strike price. If you do not have enough cash to cover the purchase price the broker will loan you the rest, creating a margin debt in your account.

If your account shrinks to the point that it's value is approaching the value of the debt, you will receive a margin call. You will need to reduce the debt either by selling some assets in your account of depositing more assets into your account.

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Most online brokers have a web page detailing their margin requirments. For example, you an find the page for tradestation at

http://www.tradestation.com/brokerage/re...

Answer 4

When you write uncovered options, the brokerage firm will require you to have sufficient funds in your account to cover the writing of the option

Unless a call is covered, the brokerage firm will require you to write the call in a margin account and as such you must have equity in the account of at least 25%, most firms will require equity of 30-35%.

Answer 5

Your broker wouldn't allow you to write such an option without having the funds in your account.

Unless, of course, you have an exceptional understanding with your broker, one that knows your good for funds outside your account.