Please do not make the mistake of believing that this stuff is so easy to understand that you can satisfy your eagerness to get started trading options. A solid background will make the entire options-education process much more efficient. And more importantly, it will also make it more profitable.
When you sell call options without buying any other call options your losses are theoretically unlimited because the price of the underlying stock has no upper limit. You own one option: XYZ Feb 16 '15 75 call. The option expires when the market closes for trading on Feb 16, XYZ is the underlying asset. This transaction is made automatically once the option is exercised. The next business day your account will show that you now own shares of the underlying asset, and that the cash to pay for those shares has been removed.
You cannot be assigned an exercise notice unless your account is short i. If you are assigned on an option that you are short, you must honor the conditions of the option contract. If you are assigned on a call option , you must sell shares even if you do not own the shares of the underlying asset at the strike price.
If you are assigned on a put option , you must buy shares at the strike price. When you buy or sell any option s , do you have to be concerned about the person on the other side of the trade?
Do not be concerned because the option contract is guaranteed i. All options work exactly the same way, regardless of whether the underlying asset is a stock, ETF, or Index? There are two distinct kinds of options. Options on individual stocks are American style options while some broad-based index options are European Style. They are very different. Is that ok with you? When you enter a limit order to buy options, you cannot pay more than the limit price.
Call the broker and tell them that they made a mistake. At the end of the day, your broker tells you that you bought the April calls but that he was unable to sell the March calls. Your position is now long 3 IBM April calls. When you enter a spread order , you must be filled on all or none of the options that are part of the spread. Note the whole order does not have to be filled. When expiration arrives, you are still short those puts i.
What, if anything, do you expect to happen? When you see your account on Monday, the transaction will have already taken place. This is a much less common situation. Do you know the rules? You call the broker one minute after the market closes on expiration Friday, and he tells you that there is nothing you can do -- they cannot be sold because the options stopped trading when the closing bell rang -- and that these options according to the option-trading rules will be exercised automatically for you.
This is not what you want. Was your broker correct when telling you that there is nothing that can be done to prevent this automatic exercise? Your broker made a mistake. There is a very short time window for taking this action. Call immediately after the close - or even before the close of trading - to exercise your right to make this decision.
Ask your broker what their cutoff time is for submitting this notice. Updated November 18, It is important to know the correct answers for questions 1 throughMore...