A question about options

[beckham.is.619]

Hi, I was thinking about a hypothetical case on options trading and what will possibly happen?

Consider a case where I purchase a large (in proportion to my account size) call option for a large number of stocks. On the day of expiry, the calls are in profit. However, my account doesn't have sufficient balance to exercise the option, think 10000 of Berkshire Hathaway Shares, or FX options, where the lotsize exceeds the margin/leverage provided by the broker, or something similar etc.

1. Will the broker let the option expire without exercising it?
2. Should I consider selling the option before the date of expiry?
2a. if the size of the number of lots is too large, is it possible to break it up and sell it partially, or should I consider purchasing Put options with the same expiration date?

 

[Martinghoul]

It's simple, although, obviously, everything depends on the broker...

Generally, options will be exercised and you'll get a margin call. If you don't have enough funds the broker will liquidate your position in the underlying at the first available opportunity. As to whether it will be done partially or fully, that would depend on the broker's policies. And yes, if you want to avoid this, you could always just sell some or all of your options before expiry.

 

[cameadows]

I agree. You would just want to sell the contract before the expiration. If you capture a profit, which is very hard to do on long options (because of volatility), you would be better served by selling the long calls to capture the profit without the risk of exercise, margin calls or liquidation. This solution works regardless of your broker, too!

 

[thenmmm]

Hi, I was thinking about a hypothetical case on options trading and what will possibly happen?

Consider a case where I purchase a large (in proportion to my account size) call option for a large number of stocks. On the day of expiry, the calls are in profit. However, my account doesn't have sufficient balance to exercise the option, think 10000 of Berkshire Hathaway Shares, or FX options, where the lotsize exceeds the margin/leverage provided by the broker, or something similar etc.

1. Will the broker let the option expire without exercising it?
2. Should I consider selling the option before the date of expiry?
2a. if the size of the number of lots is too large, is it possible to break it up and sell it partially, or should I consider purchasing Put options with the same expiration date?

well...it's no secret that waiting till expiry is almost never optimal, just sell the options (don't even have to buy the underlying...). And yes - it depends on the broker, but it has never happened to me, so i can't say out of experience.