selling call options in illiquid options market

I have a number of call options in a stock which I expect to go up in coming weeks.

Expiry is in a couple of months.

My intention is to eventually sell some of the call options - and use that cash to "exercise" the rest so I have some long term holdings of the stock as well.

I have figured out what the price points will be to finally have X number of shares of the stock - at various stock prices (even if call options sell for just the "intrinsic value").

I am concerned however, that if the stock rises fast, the call options bid prices may not move as fast that day (or the market makers may simply refuse to buy at even "intrinsic value" type prices).

For this reason, I thought that as a last resort I could always SHORT the stock whenever I see the stock price go high (locking in the high price).

Then the equivalent call option could be "exercised" (paying strike price) to cover the short.


The stock price minus the strike price would ensure that the "intrinsic value" can always be extracted - at the point where I feel the stock is highest (for example).



My question is, how do I get my broker to allow me to short the stock - can I offer the call option as collateral to show the broker that what I am doing is "safe".

That is, when I borrow to sell the stock at higher-than-strike-price it is a safe short.




I am currently using etrade - hoping to get back from them on this - but if they do not allow this, do people know of brokers who WOULD allow this type of arrangement - Schwab, or Interactive Brokers ?

I could then move the options over to the new broker who does support such a strategy.

Or is it pretty easy to get at least the "intrinsic value" when selling options - or can it happen that market makers stay away with nobody willing to buy even at "intrinsic value" even ?

In order to be able to short the stock you need to have a marginable account. That's something you would have had to already set up. As for getting out of your options, market makers are basically required to show a price. If it's a thinly traded option the bid/ask spread might be very wide such that the bid falls a bit below intrinsic value, but not by all that much.

Yes, I have a margin account on etrade. But that alone will not suffice.

Have heard back from etrade.

It seems on etrade they offer a "Portfolio Margin" account where you COULD do such things - basically reduced margin requirements. Minimum equity of $100,000 to be maintained at all times.

From that bit of info, it now seems others offer similar features - Interactive Brokers, Schwab etc. - and maybe they have lesser minimum equity requirements.


It is good to know that just selling the option should still be possible (if one is willing to sell at "intrinsic value" or just a bit below that even).

However, I will monitor the bid/ask and block sizes (on level 2 for the option) to gain some confidence on the behaviour of the bid vs. the stock price etc.

Thanks for your help.

Turned out, with etrade you can do this with a regular account.

That is, don't need to get the Portfolio Margin account.


You need to discuss this with the etrade Options Desk/Derivatives Desk - and they will do the whole transaction for you.

I have not done it yet, but that is what I have been told by etrade will be possible for normal account.

In the event that the call option bid prices are yielding you below "intrinsic value" - then rather than doing the whole process yourself i.e. selling the shares short and then exercising the call options you own to cover the shares sold short - is something the Options Desk would do for you.