As a follow up to my other question, I would like to know whether the following is possible:
- I have $20,000 in my brokerage account
- The price of the $300 call is $5.00 (1 contract = 100 shares)
- I buy 20 of the $300 calls (cost is $10,000)
- The price of the underlying goes up, making my option in-the-money
I decide to exercise my options.
Exercising my calls means that I have the right to buy 20*100 = 2,000 shares of the underlying. However, I only have $10,000 left in my brokerage account and therefore, I am unable to pay for the shares (2,000 * 300 = $600,000).
What now? How does this work in reality? Do brokers recognise that my position is profitable and buy and sell the underlying for me as soon as I exercise my calls?
In other words, do I need to worry about being able to pay for the shares of the underlying if I decide to exercise my options? Can I just take my profit without bothering with the shares at all?