Hi, If I have bought a LEAPS call that is in the money near expiration, am I able to sell 100 shares of the underlying without actually exercising the contract first? For example, say I bought a LEAPS call at a strike of $15, and very near expiration the stock is at $25. I would need $1500 in my account to exercise the option and buy 100 shares. If instead I have $0 in my account, can I just "sell" 100 shares of the underlying before expiration? The intention is to exercise my call option and also sell the 100 shares in 1 transaction, without having to actually "buy" 100 shares with cash, then just keep the difference between my $1500 call and the $2500 sell price. If anyone has tried this before, I would be grateful for any advice. I'm using Robinhood, in case the answer differs depending on brokerage. Thanks!
If you have a ZERO cash balance, how are you going to sell something you don't own? Depending on the number of contracts you have, you could STC a few to obtain the cash and then exercise the amount that are cash covered and then own the shares to sell. ????, Obviously that would take more than 1 transaction. Not sure of the reasoning behind your strategy.
Thanks for the reply. My hope was that, since I own the LEAPS contract, the brokerage would just exercise that option as I try to sell the shares all in one go. I think that is what happens in a poor man's covered call - if a call you sell against a LEAPS gets assigned, they just exercise the option you bought and the option you sold in one go, and you keep the difference in strike prices X 100. Was just wondering if they do the same if you just flat out try to sell 100 shares.
If an option still has time premium, it makes more sense to sell it to close because exercising it throws away the time premium. When an option is deep in-the-money, the bid is often less than the intrinsic value so they're taking some of your profit if you sell at that price. The buyer will do a discount arbitrage to capture that difference. In your case, in order to capture the full amount of the intrinsic value, you'd short the stock and then exercise your long call (short the stock first to avoid slippage if share price changes). To do this, you'd need a margin account and the appropriate amount of margin to support shorting the stock. The Reg T margin requirement is 50% of the value of the stock unless the broker has a higher margin requirement, it's a leveraged ETF, or it's a special situation like Gamestop where margin was raised to 100%. I can't tell you how Robinhood handles this because they have some quirky rules that differ from mainstream brokers.
^^^^^^ Fully agree with this post. Options are very complex and have many angles. In the original posters question, tha answer is a definite NO. In the case of a simple play, the BTO is much better to simply use a STC to realize the profit. It carries risk as expected, but can give a higher leverage with less capital used.
If I had it all to do over again (30 years ago), I'd have bought high delta, low IV two year call LEAPs on quality large cap stocks. Hold 12-15 months and then roll out to two years in order to avoid the increasing theta decay of the final year. If they appreciated, roll them up in order to lower cost basis. And on some, write some OTM calls to recover time premium paid (often called The Poor Man's Covered Call, aka a diagonal spread). If used on a 1:1 substitution basis for long equity, much lower risk and reasonable close to the same upside potential. But alas, I do not possess Mr. Peabody's WABAC machine.
