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In case if I short sell ETF or stocks, brokerage can ask short seller to cover the position even if the user is paying interest and is within margin limit.

With this question, I want to know in case if options are shorted ( like selling uncovered/ naked put or uncovered call), can the brokerage force the short seller to buy back the option. I assume that brokerage can certainly assign the options at any time if it is "American option" . But I am wondering given the seller does not have the right, can brokerage ask the seller to buy back that option contract itself, or brokerages cannot do that.

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  • note: even American options are rarely exercised early because the option buyer would have more money if they would sell the option and then buy the stocks on the market.
    – user253751
    Mar 20 at 21:38
  • "Rarely" equals about 7%
    – Bob Baerker
    Mar 21 at 18:02

2 Answers 2

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You need to distinguish between a position being closed due to a margin call and an option being exercised by the holder.

Your broker has no incentive to close your position as long as you maintain sufficient margin. If it drops below the maintenance margin they can and will close your position (up to liquidating your account, if necessary)

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If you have insufficient margin in your account, brokers can and will close any security in your account in order to eliminate the deficiency.

In addition, some brokers will close short options on expiration day that will put you in a margin deficiency, pre-empting a margin call.

For example, Robinhood does this circa 3:30 PM EST. This isn't a good thing because they're not going to work the order, obtaining the best fill. They'll simply pay the ask price and this will cost you if the bid/ask spread is wide.

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  • Presumably this last part does not apply to cash-settled options?
    – user253751
    Mar 20 at 17:25
  • @user253751 why? You can still have pin risk and end up with a large liability if your positions end up ITM
    – 0xFEE1DEAD
    Mar 20 at 18:13
  • @0xFEE1DEAD a cash-settled option only settles for the difference. E.g. if you sold one call option with a strike price of $29, price at expiration $30, you pay $100 per contract - the same as if you would simply buy-to-close - rather than actually buying 100 shares for $3000 and selling them for $2900 possibly requiring $3000 of margin
    – user253751
    Mar 20 at 18:45
  • @user253751 right, so it might be less likely but it can't be ruled out as "does not apply".
    – 0xFEE1DEAD
    Mar 20 at 18:50
  • (Or I should say, rather than selling 100 shares you don't have for $2900, and then being short 100 shares worth $3000, requiring $3000 of margin, until you tell the broker to buy them back)
    – user253751
    Mar 20 at 18:54

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