Consider I want to buy some american-style call options for a particular stock, and suppose this underlying stock 'XYZ' is valued at $100 a share.
Suppose I go long (buy) 10 option contracts for XYZ at a $100 strike, and the option itself is currently valued at $2.00
I'll spend $2,000 on the option contracts. The total value of the underlying stock 'XYZ' represented by contracts is $100,000.
Suppose I am willing to risk all $2,000 for the options contracts, but cannot get into a situation where I need to pay $100,000 to the broker, which would be outside my available margin/portfolio value.
Given this the above:
- Since I'm long the call options, I won't risk assignment. But I must avoid the options being exercised to avoid having to buy the underlying. If I do not exercise, I think the options can only be exercised if the options expire in-the-money. If I make sure to sell back the contracts before expiration, I can avoid buying the underlying. Or they can expire worthless. Is there a situation where I will not be able to sell back the contracts and be forced to buy the stock at the underlying value?
- Will the broker balk at practices like this?
- Is this a common situation that is practiced by individual investors, or do they always make sure they have enough available margin to cover their options if it they are excercised, even if they always long the option?