Options request for The Big Dog

Big Dog,

Today I went and attempted to purchase November 19 options on Google. The order was rejected and upon exploration of the reason it was because I didn't have enough cash to exercise the options. Now, unless I'm missing something, I never have had the cash to exercise the options I buy because I'm trading options not buying them. I asked a customer service rep and he/she said it was because the margin department can't track the order if it's day of expiration. He also said industry regulations say ITM options have to be automatically exercised unless the client requests them to not be exercised by the broker.

Well as I stated, I have never had the cash to cover exercising options as I'm a cash trader and am trying to build my account up. However, I also plan on trading the options out, each time, before close. I can see the problem if you just don't trade them in time and the market closes but that can be covered by a pre-signed agreement that I describe below..

Since options are nothing more than a contract allowing the buyer the chance to buy stock at a certain price in the future, and you can drop that right with a phone call, can't you give us a form that says we never want to exercise our options? I mean I had to sign a contract that said I understood the risks of trading options. Could I have one that also said I give up all future rights to exercise the option unless stated otherwise?

I personally want to start trading options on the day of expiration when they have the largest intra-day returns and have no intention of ever exercising options as they are more valuable statistically speaking, before the close (prices drop most of the time before close). I'm happy to trade with TK but it's my money and I would like to trade with it on my terms, not yours.

Please have your legal department write up a new contract that forfeits right of the party, agreeing to it, to exercise their options unless otherwise stated. It would be a fairly simple and straightforward contract to write up and allow your customers more freedom with their accounts. This could easily just be an choice that you give on the same page as where you set your Options trading level.

Thanks,

The Hamster

Thanks OF, didn't think about that. Would it work though because the underlying problem is that the margin department won't let you buy any options you can't cover on exercising (on expiration day that is). Now that would work for buying the day before but that is only good if you know the direction and magnitude to underlying will go overnight. By definition doing that over night is VERY difficult not to mention time decay happens over night and to a fair extreme. You'd almost have to do a combination of a short and long strangle which would mean you knew the magnitude of movement but lacked knowledge of the direction. I would have to say guessing direction is a lot easier than magnitude. Otherwise you'd have limited profits (or possibly even a loss, even if the market moved but your high/low side spread wasn't wide enough to allow for enough gain to cover the loss on the opposite side) if you didn't pick your strike spreads correctly (that is if the market didn't go sideways and you get screwed).

The point is, I'd like to trade DAY OF and not just day before. I mean it is MY money to lose.

The rule of not letting me trade unless I have the cash to cover an exercise isn't a regulation rule it's a TK rule because there are no regulations that say WHEN you can or can't buy and sell something (excluding market hours and when they freeze trading). The auto-exercise rule is there to protect the buyer in the event they can't contact their broker to tell them to exercise them (which is why TK stresses you to take care of the options on your OWN before expiration time). I, however, never plan on exercising the options, as most people don't, and am simply asking for a form that says "don't ever exercise my options if you see any in my account that are ITM". It's a legal statement that covers me from having to call each week I have some ITM options in my account.

Again though, you are buying the RIGHT to exercise not the OBLIGATION to exercise. The regulatory rules in place are to protect the buyer. I'm saying I don't want the protection even in the event that I may one day need it because statically speaking it's not worth it. The point is that it is my choice to exercise or not and therefore should be my choice to buy on last day or not. Just like it's my right to own a gun in the USA but it's my CHOICE not to. Right doesn't equal obligation and I'm happy to sign something that says I forfeit that right in exchange for the freedom of options trading on expiration day.

AGAIN for the LAST and final time. I'm asking for the option to NEVER exercise my options. That autoexercise has to be implemented and handled BY a TK broker which is partly why they ASK you to take care of it on your own. I say this because there is NO law or regulation FORCING me to exercise an options contract if it's ITM. In fact there are reasons why you would NOT want it done anyways (such as the transaction costs being more than the revenue from the exercise) which is why you can CALL TK and tell them not to exercise your options. I'm asking to permanently keep a note on file for my account (and anyone else that wants it as well) that says "DON'T EXERCISE MY OPTIONS".

Similar situation:
You buy insurance against your house getting robbed. A week later your house gets robbed. Now you DO have insurance which will replace what was robbed but there is no law or regulation on the books that says you HAVE to call your insurance company, file a report, and get a check for what was stolen. It is ENTIRELY your choice to forfeit the insurance money.

I'm asking TK to give me an agreement that forfeits those rights to exercise for any future options I buy in exchange for the right to trade on the day of expiration (this would entirely be internal as TK would have a signed statement saying I wished to not have any ITM contracts, left in my account on expiration, be exercised. If you THINK about it for more than 2 seconds, you realize NOBODY loses and everybody wins as it doesn't break auto-exercise unless otherwise stated regulations. Also just to state this again, I TRADE OFF ALL OPTIONS THAT ARE WORTH ANYTHING BEFORE CLOSE ON THE EXPIRATION DAY.

Look at the price graphs for NTM options on high leverage options and tell me you can't do better on last day (in the past 4 weeks I've seen exponential graphs for options on multiple stocks on the last day of expiration and consistently). The time you (the long buyer) can do the BEST on ANY option is actually when you can obtain the highest del delta (first derivative of the delta) with the lowest theta. This occurs when there ISN'T any time value left and options are worth EXACTLY their distance from the strike. The you just pick a stock with the minimum distance between the closest strike and it's underlying which then you ride unidirectional movements and obtain the highest return. Intraday moves on the day of expiration are in the >200% range for near the money options with high underlying/(call/put price) ratios. Most stocks don't have a close-close change of very much but intra-day ranges on said stocks are usually in the 1-3% range at current times which a 3% swing is a LOT of cash on something like Apple options.

Take into consideration that ~15% of all options are exercised. This means that 85% are worth nothing/less than the price of commissions at the time of expiration. This means that in the long term a long buyer has an expected payout of $0.15 if you were to assume that all ITM calls exercised were worth more than exercised than the cost of buying them, which is FAR from true. Anyway, that means that the long buyer in the long run loses 85% of his money in a perfect world. This means that the short seller has the odds in his favor. Well why would the short seller have the odds in his favor, you may ask? It's because options are priced in with added time value thanks to the pricing models (primarily Black-Scholes). If you remove time value from the equation, then only ITM options would be worth anything and they would be worth their exact distance from the between the price of the strike and the underlying. This would then put the odds at an even 50/50 for the parties involved (with no information from the outside world). However, because we have information from the outside world which is what directs the price, it tips the balance in favor of the long buyer. This occurrence happens on the day of expiration when the price models become much more simplified. With the high volatility of the current market it creates a multiplier for intraday movement adding to the price swings on the leveraged derivatives.

Therefore it creates MASSIVE opportunities to make a LOT more money (for the long buyer) on the day of expiration. Also there are fundamental events that occur and can be counted on which increase your odds of making a lot of money (the 11-12 and 3-4 sell offs/buy ups).

Options favor the short only because of the price model. If you can throw the price model out the window, it at least evens the field if not tips it in favor of the long and as most of us are long it is good for us. This means that we are being restricted from trading on the best day of buying out there.

I have also been playing options on the weekly SPY that is set to expire and have been boxing in using deep ITM calls and puts.  I am relying on MurphyMath Indicator as well as a d9Particle and have made some good returns.

I too don't exercise and cash out everyday and never hold overnight.  I am averaging about 200.00 a day except for my fools play outside of my bot yesterday... taking a $1,300 loss.  I was sure as rain that SPY was going to drop at the close... So I held my puts and played this manually... scraping my rules and shutting down my bot...

Fools gold play...

But I do see a point of never exercising.  But I was not blocked from buying because of the Margin and Value of my account so the risk to the broker was not there.

Sometimes... it is necessary to build a war chest the hard way to be able to play the way you want to.  This is the sad part of life..

Once your account is in the money... you will have more options to play the way you want!

Hey David, are you still very happy with that beautiful very pretty wife?  Did I say Pretty....

He.... He.....

No just being silly willy and nil...eeeeeeeeeeeeeeeeeeeee

Smart E Pant EEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEE's

He sure has pretty teef... and it looks like he has all of them!!!!   Bye...