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Ok, so here is my plan. I wanted to buy put options which will sell Tesla stock at Strike price 900 Euro in June, 2021. The price for an option is 2.3 Euro and I will buy 1000 options (total cost to buy 2300 Euro). I'm using TradeRepublic broker.

If I'm right, in June, Tesla stock price will be at 400 Euro, and I hold the options until that date. It means, I have the right to sell 1000 Tesla stocks at 900 Euro. However, suppose I only have 1000 Euro left in the account and I don't have 1000 * 400 = 400 000 Euro to buy 1000 stocks and sell all with 900 * 100 = 900 000 Euro.

What will happen in this case?

  • Will the broker automatically buy 1000 stocks at 400 Euro and sell them at 900 Euro and just give the money gain (900 000 - 400 000 - some fee) to my account (+500 000 Euro)?
  • Or my options are voided as I don't have money to buy stocks to sells when the options expire, and I'm lost all the money (2300 Euro) which I used to buy options?
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    Make sure your subscription ratio isn't e.g. 0.01 (making it 0.01 shares of tesla per put, e.g. you would invest 2300€ to optionally sell 10 shares of tesla at 900€, not 1000 shares). – Solarflare Mar 19 at 11:48
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    This is a really important point. As far as I can see the 900$ options at Trade Republic are all 0,01 – Manziel Mar 19 at 12:40
  • @Solarflare you are right. I didn't see the ratio before. It was 0.01, so actually I need 230 Euro to cover 1 share :)). – Bằng Rikimaru Mar 19 at 14:00
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US centric answer. Find out if any of this applies to you in Germany:

Long options can be sold to close on the option exchange. In most cases, that makes more sense because you don't throw away time premium (if any remains) and you don't need a bucket of money to exercise and then close the underlying (for cash or marginable securities).

Early assignment can create account violations if you don't have the available margin. Brokers will not just credit you the difference.

The broker Robinhood is a different beast. If you don’t have enough buying power to exercise your in-the-money option, they’ll sell it about 1 hour before it expires. Since ITM options tend to have wide bid/ask spreads, that never works in your favor since they trade at the market. It's a rip.

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  • Thanks. However, in my example, it makes much more sense to not sell the options before expiration. Because, I could earn huge money to buy 1000 stocks at 400 Euro for each and then sell 900 Euro for each. It seems, no broker allows me to do that? Instead he sells my options 1 hour before expiration because I don't have enough buying power in my account. – Bằng Rikimaru Mar 19 at 5:42
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Most brokers will simply give you the cash difference ("cash settlement") when the options expire in the money.

Also in most cases, you don't need to exercise the options to cash in. You can just sell them at any time. This is true whether the options are in the money or not. They'll have some market value, that may be higher or lower than the premium you originally paid for them. Basically, you can trade options just like stock.

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  • Thanks, of course I know, I can sell the options before the expiration. However, I'd like to confirm, what happens, when I don't sell them. If the broker just gives me the cash difference (Strike price 900 - stock price 400) * 1000 options, then I'm happy. Is that correct? – Bằng Rikimaru Mar 19 at 5:40
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As others explained, you should sell the options on the last day (or earlier) and cash out. You would get more than from an exercise, and take away all risk.

The consequences of you lacking margin / cash to exercise the options can have different effects, and they depend on your brokerage:

  • they could exercise them anyway, leaving you with a lot of shares short, and a matching huge cash balance in our account. Then they will contact you and urge you to either provide more margin, or close your shorted shares, as soon as possible (maybe within a day). Happened to me before, pretty nerve-wracking the first time, but worked out ok.
  • they could force-sell your options before expiry - no big difference to you selling them, expect you probably get a worse price, blowing several percent of your money away.
  • they could simply not exercise them, and they go in the trash. You obviously don't want to end up that way!

Again, selling them before expiry is clearly the best for you, but if you insist on waiting out the deadline (because you like losing money?), make very sure you don't end up with the last option - talk to them early enough to make sure you like the result

Edit: maybe that is not clear to you, but an in-the-money option will aways trade for more than the amount it is in-the-money - so a put for 900 strike will trade for more than 500 if the shares are at 400. Selling the in-the-money option always gives you more that exercising it and closing the share position right away.

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    They could simply not exercise them, and they go in the trash. In the US, that's not possible since we have auto exercise of ITM options. Kinda crappy if a broker elsewhere trashes them. – Bob Baerker Mar 19 at 3:30
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    Auto-exercise happens only when you don't explicitly ask to not exercise. Some brokers will do that - after warning you - if you are not able to pay for the exercising. That is part of their terms and contract with you. – Aganju Mar 19 at 4:07
  • Ok, so, the answer is, no broker will buy 1000 stocks at 400 Euro and sell them at 900 Euro for me when the options expire because I don't have enough money to buy 1000 stocks. Instead, the worst case is, they sell my options 1 hour before expiration at some prices. "Again, selling them before expiry is clearly the best for you, but if you insist on waiting out the deadline (because you like losing money?)" No, If I'm right about the stock price will be decreased to the price I expected, then why I should sell the options. I can buy 1000 stocks with the right instead and sell them. – Bằng Rikimaru Mar 19 at 5:47
  • You're arguing both sides of the coin. In your answer, you stated that they could simply not exercise them, and they go in the trash. You obviously don't want to end up that way! If you don't want to end up that way then why would you explicitly ask [your broker] to not exercise? (your comment). You don't provide Do Not Exercise instructions when you want to realize the profit on the ITM options. – Bob Baerker Mar 19 at 10:14
  • @Bằng Rikimaru - If you are right about the direction of the stock and your long puts become profitable, sell them on the option exchange, especially if they have time premium remaining. It's one less transaction which saves on commissions (if you're still paying them) and slippage. It only makes sense to exercise an ITM option if the bid is less than the intrinsic value. – Bob Baerker Mar 19 at 10:19

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