3

I'd like to understand how the following scenario is handled. I'm using Interactive Brokers and its cash account and I'm talking about US stock options. I don't take into account transaction fees and taxation in this hypothetical scenario, I want to understand the dynamics of the options only.

I buy to open a put option with a strike price that is currently OTM. I sit back and wait till expiration at which point the put option ends up ITM. I know I can, in this scenario, sell to close this position and realise some profit thanks to a higher premium I receive by selling to close. But I'm specifically interested in knowing how this is handled when I let it expire and I don't have the underlying asset in my account:

  1. Will the asset be bought and immediately sold thanks to my ITM put? If so, what price will the asset be bought for? The current market price? The closing price for the day when the option expired?

    a. What will happen in case I don't have enough cash in my account to buy the underlying asset? Will some sort of liquidation happen? Or will I realise a profit because buying the asset for a lower price than selling it (thanks to the ITM put option) results in profit?

  2. Will the broker do nothing because I don't own the asset so there is nothing to sell? I don't think this is likely to happen because ITM options are exercised after expiration unless I specifically instruct OCC via my broker not to do it.

  3. Will I end up with the proceeds from selling the asset (thanks to the ITM put) as well as with a short asset position? I think this is likely to happen based on what other similar threads I've found on this topic. But I'm asking anyway in the context of Interactive Brokers and its cash account if that plays a role.

    a. Is this even possible in a cash account? A cash account (at least with Interactive Brokers) does not allow short-selling. Does it than mean I cannot buy to open such a position unless I own the asset in my account?

    b. If this happens, I see there's potentially unlimited risk because the asset can pump above my put strike price till the next market day.

Thank you

1 Answer 1

2

At expiration, the Option Clearing Corporation (OCC) exercises most options that are $0.01 in-the-money. An owner of an in-the-money (ITM) long option can avoid this by submitting a Do Not Exercise (DNE) order.

In a cash account, if you exercise a long option, you must deliver the shares or cash. If you do not own the shares and you exercise your long put (or the OCC exercised it), this would result in a short position, which is a violation.

Brokers typically close out ITM options on the day of expiration, before 4 PM EST. You don't want brokers closing your position because fills may be inferior.

The appropriate thing to do is to contact Intereactive Brokers and find out how they handle such situations.

2
  • Thank you. I sent them the question(s), I'll update this thread if I get an answer. Their customer support is typically of little help, so my hopes are rather low here.
    – pavelsaman
    Mar 9 at 19:35
  • 1
    I've dealt with their support for 25 years. It was abysmal back then. It's much, much better now. Platform and actual trading issues are handled well but things issues such as you have presented can be iffy. You might also try their Help Index though that too can be frustrating. Mar 9 at 19:42

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .