Don't forget that when you exercise options, you are converting unmarginable assets (options) to marginable assets (equity). Margin buying power is reduced in the transaction only if the debt-to-equity ratio is increased.
For instance, if you bought a 10 calls with a strike of $20, and the stock was trading at $30 when exercised, you'd have to come up with an additional $20,000 to own a $30,000 position. If the equity in your account, with a $10,000 margin balance, was valued at $100,000 prior to exercising, you'd have to draw down $20,000 in margin to increase your equity position to $130,000. Your debt to equity would go from 1:10 to 1:4.3. Your remaining buying power would increase by ~$15,000 from before (because of the additional equity).
However, let's say that the same equity was trading at $200, and you exercised at $20. You'd incur the same margin tap of $20,000, but you'd increase your equity to $300,000. Your debt to equity would stay at 1:10 ($30,000 margin:$300,000 in equity). Buying power would be increased by ~$100,000.
Now, we wish all of out options exercises were like #2...
LoD |
