Loss due to option liquidation
By - fantasist2012
It sucks and happened to me for a loss of $1k. They have an obligation to give your a fair fill. If you can prove they filled you at an unfair premium at that exact moment in time then you might have a case. But you can't fight the fact that they closed you out, I tried. They will just agree with themselves and their risk management policy.
How can they not give a fair fill? They set a market price because it's the only price that a fill is guaranteed.
Op is saying their contracts were in the money by 3 dollars near expiration, that means the contracts should have been at least $3.00 each. IB can't in good faith close someone out at 0.60 when they are at least 3.00. also in low liquidity situations the spreads can be huge, even 100% of the cost in some cases, so IB can't in good faith market you out at the bid when it would be much more reasonable to get out near midpoint. Can they get away with acting in their favor and not yours, yes. But a case can be made if they were not acting fairly and some brokers do listen to their customers and make exceptions. Especially if it's something as clear cut as in the money by 3 bucks.
I understand that, first I'm wondering why IB Risk Management felt the need to close your long calls. OP is not obligated to buy the shares upon expiry. Second, why didn’t OP just close the trade earlier? Every minute that goes by will be a drop in extrinsic value, as well as uncertainty over the closing price. The stock ended up closing $1 ITM.
Risk Management has to use market price because it's the only fair and neutral price that doesn't include bias and requires no patience. If it's not market price, then Risk Management has to manually set a limit price and will have to wait to ensure it gets filled at that price. They don't have the patience for that, so the closer the price is to the bid, the more likely a fill will occur. Market price guarantees it. And if mid-price is at 1.8, what if they chose a limit of 1.4 to make the fill more likely? I would have greater cause to complain for them intentionally being unfair because they intentionally and manually set a lower price than mid-point.
I don't have the answers but I'm genuinely curious. In July, my vertical credit put spread was closed about an hour before close and the short strike was over 1% (approximately $5+) OTM. So my charges were:
1) $11 commission to close the spread
2) Bought back at a market price of $0.11
3) Was charged an additional $45 by my broker for them making the trade on my behalf
It's unfair but there's nothing that can be done. Risk Management's task is not to secure maximum profits, it's to protect the company.
I'm curious why they liquidated you?
Same question. Was this on margin or something?
Not enough money to buy the shares
You should always expect options to be liquidated in the last hour of trading on expiration day if you don’t have sufficient margin to accept the exercise.
I believe you can get around this if you choose the option to let the options lapse, but of course you lose the value if you don’t liquidate them before close
So, if you don't have the money to buy the shares, you're going to get liquidated. Next time make sure you're flat by the deadline IB imposes.
So, it sounds like I won’t buy shares without having the cash in the account.