TD Ameritrade Sued by Customer Over Failure To Exercise In-The-Money Options

In a Financial Industry Regulatory Authority ( “ FINRA ” ) Arbitration Statement of Claim filed in July 2011, public customer Claimant McCarthy, appearing pro se, sought $ 2,250 in damages. The decision does not indicate whether Respondent TD Ameritrade denied the allegations and/or asserted affirmative defenses, although such is probable. In the count of the FINRA Arbitration Between Daniel J. McCarthy, Claimant, vs. TD Ameritrade, Inc., Respondent ( FINRA Arbitration 11-02896, February 24, 2012 ) .

The exclusive FINRA Arbitrator hearing this dispute dismissed Claimant ’ second claim in its entirety .

Ready, Fire, Aim?

Hey, what can I tell you ? This is how the Decision presented this case to us. McCarthy came, he saw, and he was conquered. As to how he got there and why he lost, it was n’t set forth up to the point where we ‘re told the Claimant lost. For whatever reason, after dismissing the claims, the Arbitrator then added a section to the Decision titled : “ Arbitrator’s Report. ” not the way I would have done it but, queerly enough, notwithstanding the irregular order of things, the subsequent explanation was quite enlighten and compelling :

Claimant contends that he should have received a call before his in-the-money choice position was sold at market and that there were several strategies Respondent should have taken to maximize his return. He asks for damages in the measure of $ 2,250.00. respondent contends that Claimant ‘s in-the-money put was required by standard industry policy to be mechanically exercised before exhalation, and that because Claimant ‘s margin score did not have the ask buy power to cover purchase of the fundamental shares. Respondent was forced to liquidate the position. Claimant correctly points to steps he himself could have taken to improve his return, but he took none of them, despite having been notified by electronic mail three times in the days before this transaction occurred that his in-the-money position would be automatically exercised lacking instructions, and that it was his duty to ensure that his account had the necessity funds to cover that transaction. Respondent had no province to trade this autonomous history on its own enterprise to maximize return in this situation, and in fact is forbidden to do indeed. Respondent had authority to take the carry through it did ; Claimant had been notified of impending action ; and Respondent was not required additionally to call him before taking that action .

Bill Singer’s Comment

Like I said, the Arbitrator gives us a compendious render of the facts and his rationale for dismissing the claim, albeit in an unorthodox cart-before-the-horse fashion. Although I ‘m not crazy about that editorial decision, I do applaud the cogency of the content in the report .
sol — what ‘s going on here ? well, there are a draw of folks who trade options. For some it ‘s a leverage dally whereby a smaller sum of dollars gains more vulnerability than the cost of buying the actual implicit in shares. For others, options are a way to control portfolio risk through hedge or reducing the net cost of a position .

An options condense is quoted per partake but your actual purchase is for 100 shares, so you should always remember that you need to multiply the quoted price by 100. similarly, keep in beware that although you can buy a individual share of stock, the distinctive round-lot is for 100 shares. consequently, when you look at your trade screen, you may see a quotation of $ 550 for one partake of Apple but for $ 11 you can purchase an Apple $ 550 Call contract for near-term termination ( remember : that ’ s actually $ 1,100 per the 100 shares covered in each options narrow ). One-hundred shares of the switch over traded fund S & P 500 Index will run you about $ 13,700 but one sign for that same index could be about $ 50 per 100 shares covered for a few days ’ of remaining play. Of course, the risks of options are considerable and the cheaper price does not necessarily mean that you ’ re getting in at a relatively lower price — quite the contrary .
One of the problems with options is that unlike shares of stock, they have a ledge life — they expire. A very common source of clash between options players and their brokerage firm is what happens when an option expires in-the-money. On that charming consequence when your 550 Apple Call is tied to a shutting price of the stock at, say, 551, now what ? You may have paid $ 20 per share for the option when you first gear bought the call — the stock would have needed to go to $ 570 for you to break flush on your side. On the other hand, failing to have sold the Call before it expired, you’re now sitting with the right to force person to sell to you 100 shares of Apple at $ 550 when the shares closed at $ 551 — and who knows, possibly some huge news is scheduled to come out before the market ‘s open on Monday ; or possibly you ‘d good deoxyadenosine monophosphate soon realize a loss on the option but immediately own the 100 shares .
You would n’t think that an expiring choice scantily in the money would cause a distribute of customer litigation but you ‘d be incorrect. The garbage that you took a bath on as of Friday ‘s conclude could be worth a fortune Monday or by the end of the following workweek. similarly, you may not have had the bucks final calendar month to buy 500 shares of XYZ but your 5 Calls were set to expire and you figured that, what the hell, I ‘d like to own the stock and may a well exercise my right to call the shares .
Except there ‘s often this one trouble .
On Friday, when you need to make the decision to exercise, you had left work early or the shares were submerged about an hour before the close and you stopped watching them — not realizing that they made a impregnable move higher on some rumors. unfortunately, there just was n’t sufficient funds in your account to permit you to buy the shares pursuant to the drill of your margin call. now, sure, that deficit may have been a icky couple of hundred bucks that you could have easilty and quickly come up with but for the fact that no one from the brokerage firm called you. then of course, possibly they did call you but you did n’t listen to your voice mail until Monday dawn. If the stocks drops the next week, no big deal. On the other bridge player, if the damn shares rocket, oh male child, are you gon na blow a gasket .
I went online and found TD Ameritrade ‘s “ Margin Handbook, ” and read page 14 : “ OPTIONS EXERCISE AND ASSIGNMENT. ” honestly, it ‘s pretty straightforward and clear but for the fact that few, if any, customers bother to read such disclaimers until they learn that the in-the-money options were n’t exercised because of insufficient cash or margin. My hypnotism is that you make it a degree to read TD Ameritrade ‘s disavowal below and to besides make sure that you have a transcript of your fast ‘s like policy. You ‘ll see that it ‘s reasonably much the same rules at E*TRADE, Schwab, and the rest of the industry .

TD Ameritrade Margin Handbook
On options exhalation day ( the Saturday immediately following the third base Friday of each calendar month ), it is our firm ’ second policy to automatically exercise all long equity options contracts that are at least $ 0.01 in-the-money, and all long index options contracts that are at least $ 0.01 in-the-money. 33 To exercise options outside of these parameters, or to decline the automatic rifle exercise of options within these parameters, options owners must notify a Client Services spokesperson of their instructions. This presentment must occur by 4:30 p.m. ET on the last trade day for the options contracts. It is the responsibility of the investor to have sufficient buying ability in the history to exercise a long call options compress, and to have the stock in the bill to exercise long arrange options. TD Ameritrade Inc. reserves the correct to close out options positions that pose risk if exercised or assigned if you do not have sufficient buy world power to cover any potential drill or assignments, please deposit funds or close out your positions before the close of market on the Friday prior to expiration. Please contact a broker or refer to your bill ’ s status page to confirm options assignments for your account .
TD Ameritrade, Inc. receives assignment instructions from the Options Clearing Corporation ( OCC ) and uses a lottery system to randomly assign individual brokerage house accounts that are short the options positions. A more detail description of the random allocation procedure is available on request or online in the Help Center .
33 If trade in an implicit in security has been halted and trading does not resume before passing, the choice may not be mechanically exercised. Exercise liquidation values for index options are determined in a kind of ways. The settlement respect may be determined by the close prices of the index securities on the end trading day before passing or by the open prices of the index securities on termination sidereal day. Please contact a Client Services example for more information .

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