Interactive Brokers OX - It’s Just How the System Works
Today I was clipped approximately $30K between two equities which I was assigned large, in the money, call positions which I didn’t have the available cash on hand to cover the new positions. Close to $2,000,000 of stock was assigned to me which I was forced to liquidate both positions within 10 minutes of the open. I even called IBKR 30min prior to the open to make sure I was really in the Twilight Zone. It’s hard for me to understand how an $880 market value option position at the close on Friday could be parlayed into $1,900,000 stock liability which I could not meet. This happened on EGO and you can see my 110K share position liquidated today at 11 min after the open.
I wasn’t aware this could happen in a non-marginable account. I have been down this road with two other brokers [OX potential assignment] more than 50 times and such a scenario in their risk management systems would never be possible, but this is “just how the system works” according to Interactive Brokers representatives whom I spoke to today. Other brokers would have forced the postions closed before OX on friday’s close and my account would have been credited for $880 in cash.
So, if this is “how the system works”, I’ve come up with a potential earnings play which, to the best of my knowledge, is totally possible that I would like to share for demonstration purposes with readers since this is just “how the system works.”
Lets take a stock that releases earnings Monday morning the first trading day after options expiration (OX). For example, Citi Trends (CTRN) reported earnings today and really popped: http://bit.ly/hsbgWK
For discussion purposes, let’s assume that CTRN was pinned near the 20 strike on OX last Friday. Let’s also assume it closed, like my situation, just a few pennies in the money at the close on Friday at $20.04.
So, near the close last Friday, it’s theoretically possible that we could have bought many thousand CTRN 20 call options for just pennies. The following day on Saturday, the stock would have been assigned to me — even though my non-marginable account didn’t have enough cash on hand to cover this purchase.
So let’s assume we had $10,000 (all cash) in the account. We decided to buy 150 CTRN 20 Nov call options for sake of discussion near the close on Friday for an average cost of $0.10/share- this would cost of $1,500 for the 150 CTRN Nov 20 calls [$0.10 x 100 sh/contract x 150]. 1 contract represents an option to purchase 100 shares of CTRN for $20/share.
Theoretically we could purchase 100,000 call options at this strike expiring Saturday with the $10K, but IB supposedly does have controls in place to make sure this doesn’t get totally out of hand. Specifically, your account deficit can not run more then 30x the liquidation value of the account ($10,000 x 30 = $300,000). It doesn’t really matter if we had bought 150 calls or 100,000 - either way the leverage is mind boggling, but we’ll go with the 150 calls for $1,500.
After OX on Saturday we would be assigned 150 calls x 100 shares/contract = 15,000 shares of Citi for a cost of $20/share or $300,000 in our non-marginable account with available cash on hand of $8,500. So the account would run a whopping margin deficit of $291,500!! [still under the 30x threshold & remember this is a non-margin account]
What this means is Interactive Brokers (IB) would force you to liquidate your new position within the first 10 mins on Monday. Monday, CTRN reports earnings and blows it out! The stock gaps up 12.5% to $22.50 from its closing price of $20.04 on Friday. We liquidate our position on the open and capture approximately $2.50/share or a nice $37,500 on our $1,500 position. Not bad!
The flip side of this is what happens if the stock is totally illiquid and you are forced to liquidate into a vacuum of no buyers. Or worse yet, CTRN blows it and the stock gaps down 10% on the open. What happens then? If CTRN had opened at $18/share (down 10%), the non-marginable account would have a loss of $30,000 on the $1,500 assigned call position. So you would need to come up with another $20,000 to cover your losses. This is how the system works as best as I can tell. Bear in mind I am NOT writing options — I purchased calls and should be limited to my principle outlay for the calls - in other words, the most you should be able to lose is $1500.
The example of was done using an IB account with modest balance of $10K. If you’re playing with a larger pot — let’s say $1M and you’re caught up in situation like this, you could stand to lose or gain an enormous amount of money. It may even bankrupt you for not knowing the “functionality” of their system. Bottom line is that I think this is TOTAL BULLSHIT and I’m pissed that it cost me nearly $30K to figure out how this functionality “works” as per two IB representatives so I’m exposing it in hopes others won’t fall unknowingly into this trap which should have never been allowed to happen in the first place.
Xiphos
