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If you wrote a call option, and the underlying spiked up creating a margin call - which was not filled, can your broker make it appear that they executed a 'buy to cover' to close your position but in actual fact just take on your short position?

I am lead to believe the latter because the open interest on this option was only 1 when the call option was written, and remains at 1 after the supposed 'buy to cover' trade was executed.

The option has since gone back well into the money and I am left with a massive hit to the cash balance that was being held in the account.

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If you wrote a call option, and the underlying spiked up creating a margin call - which was not filled, can your broker make it appear that they executed a 'buy to cover' to close your position but in actual fact just take on your short position?

What does which was not filled mean? Are you saying that you did not meet the margin call by adding additional funds to your account?

If you violate the Minimum Margin Maintenance Requirement and you get a margin call, most brokers automatically close the position. That's the corrective action to fix the margin violation and that's the only issue here. The massive hit to the cash balance in your account is because you messed up via a bad trade.

When brokers buy to cover to close your position they are doing just that. If by some stretch of the imagination the broker took on your position, they would become short the call at the current market price. So if you're implying some sort of conspiracy that benefits the broker, there is none.

I am led to believe the latter because the open interest on this option was only 1 when the call option was written, and remains at 1 after the supposed 'buy to cover' trade was executed.

Open interest is a lagging indicator. The correct amount is tallied at the end of the day. Furthermore, when options are bought and sold, there are 4 possibilities that affect Open Interest. If the other side of your trade was Sell To Close then Open Interest would decline by one. If the other side of your trade was Sell To Open then Open Interest would be unchanged because the short call has changed hands and is now in someone else's account.

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  • Thank you Bob. Yes when I said "was not filled" I meant that I did not meet the margin call in time (I was actually on a flight when this call was initiated and accelerated to the point that my position was closed - all in a matter of 1 trading session) I don't know that I would call it a conspiracy, but I certainly feel hard done now that the position is well in the money. Although your explanation of the other side being a 'Sell to Open' is likely what may have happened.
    – Mash
    Apr 15, 2020 at 18:36
  • @Mash - For future reference, if you're going to chase fat option premium by selling naked options, consider spreads instead so that you have a protective leg in place. It won't prevent losses but it will limit them sharply. IMO, the only exception to that would be the investor who wants to own the stock at a lower price. Otherwise, Spread Em Danno! :->) Apr 15, 2020 at 18:52

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