legal advice about broker and margins need help

[himmel]

heres the situation:

i have an account with a brokerage, i started off with 7,000 in the accout with a margin so the total avliable is 14,000. now I placed a normal order for options for a total of 4,000 leaving another 3,000 and 6,000 or margin( they explained to me that margin only works by avliable funds not by total value of securities.) Now I placed an order to purchase 100options contracts at market, which at the time was asking .30-.40c each per contract for a total of 3,000-4,000 each the confirmation page giving a estimated total reflecting that amount and not exceeding the total amount of around 7,000.this did not exceed my avliable funds, because it gave me an alert saying the order cannot be placed because there is not enough funds avliable in the account. after the order was placed my avliable margin was reduced to 0 because no cash was left and everything had been used or orders placed.

Now come the next day i found out the stock i was investing in agreed to a merger, the price jumped from 46.00 to 60.50 at the start of the market the next day. as soon as the market opned my brokerage then purchased 100 contracts at 5.40 totaling a value of $54,000. When I called they told me it was purchased in margin debit, and they basiclly hung up. now later that day the stock droped, and the value of contracts droped signficantly. The broker calls the next day and says they are liqudating everything in the account unless i can come up with 54,000. Obviously there was no way that was possible, so they liquidated and now say that i owe 34,000( the differnce between the value and the loss) and they want me to pay.

My question is, is it legal for them to purchase beyond my margin limit even with a market order? and Do i have any legal options?

 

[efflandt]

Purchased options figure differently towards margin than equities, because options can expire completely worthless, whereas, it would be unusual for a stock to lose all its value (although, it can happen).

So when you were warned that there was only $3000 cash in your account and the purchase would drop your margin to 0, you went ahead and placed it anyway. Your broker accepted the order with the understanding that you would cover any shortage.

A "market" buy order fills at whatever the ask is at that instant. Were you aware that if the ask was 0.40, you would have had to add $1000 cash (plus commission) to your account on margin call by the following business day? How much free cash could you have gotten to that account immediately if your order had been filled at 0.70 or 1.50? You should have used a "limit" buy order low enough below 0.30 to stay within your available cash after commissions.

I am guessing you entered your "market" order to buy while the markets were closed, for execution the following day, then failed to check the morning news or pre-market price on that stock, so you could have cancelled your option order before the markets opened. If you didn't want to set your alarm clock early, a simple "limit" order could have saved you a ton of money by not executing above your set limit.

While I have no suggestions to get out of your unwise order entry, hopefully it will be a lesson to others. Before considering margin (which magnifies gains or losses), make sure you can "profitably" trade stocks, so you have a handle on how stocks move, order types, and controlling your losses. Options are more complicated and more risky since they magnify stock movements. Not using a "limit" order to buy when your funds were limited is inexcusable. Sorry you skipped the first step and learned the hard way.