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Recently I was assigned on a short deep in-the-money put. It created a huge margin call. I called the broker the following day to exercise my long put to flatten out the position. He did that and a month later I got a huge margin charge in my account.

They mentioned that the assignment caused a one day margin debt at 7.15%. Is this a legit charge from the broker or can I fight this?

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  • 7.15% per year, right? Not a 7% adder to your margin call. – JTP - Apologise to Monica♦ May 29 '19 at 19:43
  • Yes, 7.15% per year.. So to clarity my question, I did 100 Put Option on GOOG 1180 strike Puts Short and had the 1175 Put long.. They assign me the entire 100 Puts shorts which created a 11.8 mm call on my account... So this happen in a random weekday, I call them up the next day to clear that margin with my long side Put options. Month later I got hit with couple thousand dollar charges. Does other broker firms auto exercises what you get randomly assigned? – Danny Dee May 29 '19 at 20:00
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    Ouch! Never bite off more than you can swallow. What do you mean by broker firms doing auto exercise? If you didn't have the buying power to cover the share purchase, I'm surprised that you had any opportunity to close the trade yourself. With negative buying power, the broker usually closes the position ASAP in order to CYA (his, not yours).and this often executes poorly and at your expense. – Bob Baerker May 29 '19 at 22:02
  • So, this was a losing trade to begin with. Your original credit for selling the spread was something less than $50k, and to close the position you had to pay not $50k but about $52k. Just to put it in perspective -- the day's interest was likely not a dominant contribution to your loss. – nanoman May 30 '19 at 3:44
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    As I understand it, the OCC "wheel" process to determine assignment when early early exercise has occurred takes place after the market closes. Since notification doesn't occur until the next morning, one can't avail oneself of same day substitution. – Bob Baerker May 30 '19 at 5:08
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If you bought the underlying on margin and you held the position overnight then you owe the broker margin interest. This amount would be the borrow rate times the amount borrowed times the number of days held, divided by 365.

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  • Yes, I know about the Margin Debt, I thought if you got randomly assigned, the long side of your hedged option would also get exercised to cover the exposure. Can the broker back date these transactions so it doesn't cause the Margin debt? – Danny Dee May 29 '19 at 19:42
  • Exercise orders are sorted out and assigned after the market closes with assignment notification occurring the next morning. Therefore, you have owned the stock overnight. What you can do with the long put as well as what makes sense to do with it depends on whether it was ITM or OTM as well as if it had any time premium remaining. If you do not have the buying power to support the assignment and purchase of the underlying then you are at the mercy of the broker, regarding closing. And no, the broker cannot make up any date that you like and back date the transaction. – Bob Baerker May 29 '19 at 19:58
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You owe the money. Contrary to what most people think should happen, early exercise does happen for a variety of good reasons. I have done early exercise once I decided I would hold a position because I could change the tax status I was under by the exercise.

The broker actually had to cover your charge out of their pocket. They paid interest to a bank or to their customers for carrying deposit balances, you paid them. Unfortunately, assignment settles after hours, but before the open. It happens by random assignment from the options clearinghouse.

There is a process the broker-dealer goes through to determine if you are eligible to trade in options and they send you a painful to read document that is the rules for the contracts. I personally do not like this process because they provide you rules without much context. If you lack experience you could read a rule but not recognize its significance. Nonetheless, under U.S. law that is not an excuse or grounds for recovery. Federal securities laws are buyer beware laws. The duty is to disclose the terms and conditions, not to explain them.

What I would do, if I were you, is imagine that you are going camping in an area with absolutely no cell phone service or computer access. Then look at your positions. Consider what could happen under a variety of scenarios, such as the flash crash or the '87 crash. Remember, you can be in a car wreck. What would have happened if that position had been held open a week?

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Could you not just close your position with one trade?

Before you get assigned, you have 1 long put 1 short put.

After you get assigned, you have 1 long put 100 shares of stock.

You close this position by placing one single "covered put" (short stock short put) trade.

As far as I know you are not allowed to have negative buying power in your account even if the positions are defined risk.

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