All. Major Problem with Options. Need some Help on this one.|
Here's the deal.
I have 200 contracts (covering 20,000 shares) of Qualcomm July 60 calls. These are American as opposed to European options. When I saw that the stock closed at 119 and 15/16s, I called my broker (E*Trade) and said I wanted to exercise the options. As I was light 1/16 X 20,000 shares, I reckoned I would just pony up the $625 and have all 20,000 shares exercised.
The math is as follows:
20,000 shares at $119.9375 = $2,398,750 (market value)
20,000 shares at $60 call price = $1,200,000 due seller of calls for stock
A market value of $2,398,750 will support a 50% margin loan = to $1,199,375. Since $1,200,000 is needed to pay off the option seller, I would need to come up with $625 in cash ($1,200,000 - $1,199,375 = $625). With E*Trade's margin loan of 50% equal to $1,199,375 of the market value of the 20,000 shares, and my $625, I should be home free.
Well, here's what happened. When I called the E*Trade broker he said, "Nope. You need to have the entire $1.2 million in your account to do this deal." I said, "Wait a minute, you automatically exercised my 3,000 May 70s last month when the market value was $100/share. The gross market value of that trade was $300,000; the cost of the trade was $70/sh. X 3,000 shares, or $210,000. You then advanced $210,000 to pay for that stock, because there was no cash in the account to do the trade, without my even asking, and then you gave me a margin call because the loan-to-value ratio was 70%. I then sold off 1,300 shares to be in compliance with your margin requirements, getting the loan-to-value ratio back into the 50% range. Now you're telling me you can't exercise this position because I don't have the $1.2 million in the account."
They checked around and came back and said I would be "free riding" if they were to do this, because the $1.2 million was not presently in my account to pay for the exercise. I explained that this wasn't free riding because the stock wasn't being sold to me for $120, but rather for $60, and that my equity was the spread between the two. I further explained that if I were to walk 20,000 shares of QCOM into my account free and clear of any encumbrances, then they would advance me $1.2 million. The result would be the same: $2.4 million in stock value, $1.2 million in my equity and $1.2 million in their margin loan. They agreed. They then said, however, that it was their policy to advance at expiration, but not before. I asked them for documentation of that policy. They said "Hang on a minute, and we'll get it for you." Ten minutes later they came back on the line and said they couldn't find any written policy, but they were a "cash up front" firm and they were sure they couldn't do business like that, unless the options were at expiration, and then they would do business like that automatically exercising my options and fronting the margin loan without my even asking.
I said, "Look, just give me the number of the CEO in Palo Alto. I call him and settle this up." Ten more minutes expired and then they came back on the line and said they'll have the local (Atlanta) head of their margin department get back to me in the morning before the market opens.
I might add, that all parties to these conversations agreed with the logic and economics of my position at all times.
Any suggestions for tomorrow, thread?