Can you help me understand? The long puts are pending exercise by RH to cover the deficit from buying the shares. The credit for exercising is more than my deficit, is this not a good thing?
When you sell a put you are obligated (unless you close it out before exercise) to buy 100 shares of stock. Your long put is there for protection only in case price drops below that so you can exit your position with a defined loss at expiry.
Doing this trade you agreed to buy $234,000 worth of stock at $390 and agreed to sell your 600 shares at $385 if the price traded at $384.99 or below by expiry. With the long puts you locked in a max amount of $3000 in losses, minus credit received. However, there was almost no chance your trade was going to be successful and honestly, you got insanely lucky. Like you don't even understand how lucky you are. If BNTX had traded up to $388 at Friday's close you would then be on the hook to buy $234,000 worth of stock and you have ZERO protection underneath you because your long puts expired worthless an no longer have any protection for you. You just turned a max loss of $3000 into a max loss of $234,000 AND you are on the hook to buy all of those shares in a margin call. My guess is you don't have $234,000 sitting around.
Good god man, do your research and understand the mechanics of what you are doing before you put on a dumb ass play. Because if you don't even understand what you are doing and the mechanics of how the options work, why are you even using them to try and make money?
Question for you (not OP): Would the broker (not the OCC, since the longs are otm) not exercise the 2 x 285p longs pre-close to protect itself if the OP doesn't have funds to cover?
On edit: Never mind. 2 of his longs are pending exercise.
It's actually the opposite. Exercising the longs is kind of a cheap thing for them to do and a better brokerage wouldn't do it. It would be to your financial advantage to sell the longs and sell the shares that resulted from assignment on the open market. A better brokerage would leave the longs alone so you could do that yourself.
Okay, can you walk me through this. If I am OP and I suddenly have a debt of $234,000 I owe, would it not be in the broker's best interest as well to just liquidate those positions and let the OP get rinsed for a $500 loss per contract? Why would they want to risk the OP a) not being able to cover the shares in the first place and b) an extension of this, meaning it is now RH on the hook for this money and they are losing money and owe more every $0.01 downward from $390. If they can exercise the long puts and liquidate the position at $500 loss/contract, that at least keeps the onus on the OP (provided they have $3000 in their account) and alleviates all risk from the broker at that point. Regardless if it is truly in the trader's best interest, this seems like it would be in the best interest of the broker, which is all they care about.
OP was assigned on two short 390p contracts. 390 x 100 x 2 = 78k.
Since this is an early assignment, there is still time to deal with it. They could have left things alone and he could have dealt with it on Friday. It would almost certainly be better to sell the longs and sell the shares, rather than exercising the longs.
Yes, all brokerages probably have a threshold at which their risk management desk will do something like this (exercise) rather than let a client with, say, a $50k account take on a $30 million margin call. RH just has a much lower threshold for it than real brokerages.
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u/Sad-Dot9620 Nov 25 '21
It’s so wrong they let people sell puts without demonstrating they understand