Deep ITM Futures options closing/expiration

[242trader]

Hi all,

Brand new here and have a question I can't seem to find the answer to in the interwebs.

My previous experience has been in cash settled options like spx, but I'm making the move to futures world have some confusion.

Let's say I am long a GC call and the price goes way up and I find myself holding deep in the money calls near expiration. With a cash settled option I would let it expire and receive payment.

What If I do not want or do not have the cash to take the futures contract? What will happen at expiration? Will the broker sell the option in the last minutes?

I ask because I noticed that the deep ITM options do not typically have a bid (I assume because if you are going that deep you might as well just trade the future). If you want to sell the option do you have to present an arbitrage opportunity and take a haircut on the gain? Is there a more efficient way of liquidating deep in the money futures options?

I assume you could short the futures contract prior to exercise but what if you don't have the funds for that?

Thanks for the help, looking forward to getting into the discussions.

Todd

 

[Windlesham1]

I hate futures and stick to options only. If you are deep ITM there is no value going to expiry as the amount of people trading that option will be very few, so yes you will take a haircut but if you bought it for pennies and you are selling for pounds,it doesn't matter-go fishing and see if there are any takers. You do not want to make the call on the underlying I guess and your option is trading like a future but they are different animals-you have to be right all the time with futures-you can be wrong with an option and still do ok.

 

[Warren534]

Hi all,

Brand new here and have a question I can't seem to find the answer to in the interwebs.

My previous experience has been in cash settled options like spx, but I'm making the move to futures world have some confusion.

Let's say I am long a GC call and the price goes way up and I find myself holding deep in the money calls near expiration. With a cash settled option I would let it expire and receive payment.

What If I do not want or do not have the cash to take the futures contract? What will happen at expiration? Will the broker sell the option in the last minutes?

I ask because I noticed that the deep ITM options do not typically have a bid (I assume because if you are going that deep you might as well just trade the future). If you want to sell the option do you have to present an arbitrage opportunity and take a haircut on the gain? Is there a more efficient way of liquidating deep in the money futures options?

I assume you could short the futures contract prior to exercise but what if you don't have the funds for that?

Thanks for the help, looking forward to getting into the discussions.

Todd

Check the price of the put at the same strike. The deep ITM call should trade for the intrinsic value, plus the value of the put. If you offer the call at a couple of ticks less than that, you will almost certainly get filled.

Otherwise, you should be able to sell futures for virtually no margin requirement, as the long call secures it, and you have no upside risk.

 

[242trader]

Check the price of the put at the same strike. The deep ITM call should trade for the intrinsic value, plus the value of the put. If you offer the call at a couple of ticks less than that, you will almost certainly get filled.

Otherwise, you should be able to sell futures for virtually no margin requirement, as the long call secures it, and you have no upside risk.

Awesome, thank you.

I forgot about span margin. Do you know if a broker like IB offers span margining even if you don't qualify for portfolio margin? In other words, do all futures trade on span margin regardless of account level? (assuming you have a margin account)

 

[Warren534]

I would think so. I use Optionsxpress and Thinkorswim, and this is a complete non-issue. ITM options will be automatically exercised at expiration, so if you are still holding a ITM call, you can just sell the futures contract on expiration day, and the positions will offset each other.