The long weekend that included Martin Luther King Day, think-or-swim (TOS) upgraded its platform. As is typical of such upgrades, a few snafus resulted. That weekend and Tuesday morning, I checked the various chat rooms on TOS to determine if anyone else was having similar problems and, if so, if they'd already alerted the technical support staff.
What I learned scared me, although I'm not referring to anything to do with the think-or-swim platform.
One trader who described himself as a newbie had sold puts on several companies that he wanted to buy, he said. The previous week had been expiration week, and he somehow hadn't noticed that those puts were expiring in the money. Saturday, he'd received notice that the stocks had been put to him.
No problem, right, since he'd sold puts only on stocks that he wanted to own? Well, there was the little problem of the margin call he was getting. He didn't have enough money in his account to cover the stocks that he'd wanted to buy, he confessed to the more experienced traders on the chat. Moreover, he didn't have any idea how one manages such a circumstance. He asked the more experienced traders how long he had to get a loan or otherwise juggle money so that he could hold those stocks he wanted to own.
That probably wasn't going to be a huge problem, the more experienced traders assured him, barring a big gap down at the open on Tuesday. He just needed to sell at the open. He didn't much want to do that, but the more experienced traders told him he needed to clear his account as soon as possible, since brokerages did not want to either assume his risk or call the wrath of FINRA down on them if they were being lax on margin calls.
The experienced traders offered other warnings. No brokerage was likely to be happy if there was even a hint that a trader might be either knowingly setting up this situation to allow for more time to gather the funds needed to own the stocks or else stringing along the brokerage to gather funds. In the past, some traders had found their accounts frozen when such suspicions were aroused. Experienced traders warned this trader that TOS has the right to take matters into their own hands and sell the stock, perhaps disadvantageously, and perhaps without even consulting the trader first. TOS certainly would not know which of the three stocks was his favorite, the one he most wanted to own, and hold onto that one and sell the other two.
Yikes. Where do I start?
Always know when your options expire. Always. Sure, we're human and we make mistakes, but I've seen traders willingly hop into trades without first verifying when their options expired. A trade composed of options that expire in two days behaves differently and must be managed much differently than a trade composed of options that expire in 30 days.
Since we know we're human, verify how your brokerage handles margin issues. Usually you have three days until the stock transaction is completed, but since I have never come close to having a margin call, I can't verify how TOS or any other brokerage handles this issue. Experienced traders said that some brokerages would start selling by the afternoon of the day after a margin call if no arrangements were made to meet the margin call. If you're going to be selling naked options, ask before you need to know!
On Tuesday morning, another newbie trader wrote that he'd placed an order to sell mutual funds, and the order hadn't filled. He asked the experienced traders how long it typically took for such orders to fill. Such orders do not work like orders for stocks and options, the experienced traders told him. The price for a fund is set once a day, with all buy and sell orders executing at that share price. It's called a net asset value (NAV), and it's calculated after the close. That can be an important difference in selling a stock and a mutual fund.
Whenever trading an unfamiliar vehicle--options, options on volatility indices, ETFs, mutual funds, futures, etc.--always investigate their differences. For example, many new options traders are not aware that SPY (a SPDR fund ETF based on the SPX) owners collect dividends. Someone who holds a complex SPY-related options trade that includes sold calls may be caught flat-footed when unaware of the ex-dividend date. The sold calls may be exercised, and the person who sold those calls as part of a butterfly or iron condor or other trade may suddenly owe someone dividends in addition to stock. In addition, that person has to deal with the remains of the butterfly.
In another instance, several of the experienced traders were chatting about their trades that Tuesday. One of the newbies decided to follow one experienced trader and put in an order, too, without telling anyone what he was doing. After that order filled, the newbie asked when to take profit.
Never, ever enter a trade unless you know what you're risking, how the trade will make profit, and how long it might take for that profit to accrue. It doesn't matter how experienced a trader might sound: don't follow someone else's trade unless you've tested it for yourself and at the least, understand what you're risking. The trade that works well in the hands of another trader might not be right for your temperament, your time frame, or the size of your trading account. You may freak when the trade loses 3 percent the day of entry or you find you'll likely have to hold it 15-30 days before the planned profit accrues, while the experienced trader takes that in stride.
I'm not picking on these particular traders. Instead, I'm worried on their behalf. We've all been newbie traders. Options are great vehicles for trading, but they can bring traders to their ruin, too, if risk is too high for the trader's abilities, emotional makeup or funds. Ask questions. Ask them before you enter a trade.