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A vertical call debit spread triggers a margin call. Does that shound right?
- Thread starter jayre
- Start date
I have seen all sorts of odd things occur in the markets so almost anything could happen. Usually the first response of the help desk is prove it. I have taken to capturing pictures with word and emailing them in.
I was watching SPY Sept 110 options all this week and was trading naked short as the FED made their announcement. I witnessed my montage feed show a spread on the options of something like 50 cents briefly instead of the usual 1 or 2 cents. I have never seen them that wide before.
There have been several data feed issues for me on the Nexa (?) platform lately, especially around very high volume situations, like last Friday's 25 million share pulse on the 5 minute chart.
Option market makers use volatility to control their own risk and when they get scared or don't know what will happen, they will ramp the prices to protect themselves. We sign away almost every right possible, but a reasoned approach can sometimes get relief without admitting fault.
Some other issues I have personally seen are crossed bid/ask quotes, partial stops get executed when the price was never even close, trades reversed when they made an error etc. (I phoned that one in and they argued with me, until I asked to see the time and sales data).
It it were me, I would ask for a detailed time and price explanation from my broker.
I was watching SPY Sept 110 options all this week and was trading naked short as the FED made their announcement. I witnessed my montage feed show a spread on the options of something like 50 cents briefly instead of the usual 1 or 2 cents. I have never seen them that wide before.
There have been several data feed issues for me on the Nexa (?) platform lately, especially around very high volume situations, like last Friday's 25 million share pulse on the 5 minute chart.
Option market makers use volatility to control their own risk and when they get scared or don't know what will happen, they will ramp the prices to protect themselves. We sign away almost every right possible, but a reasoned approach can sometimes get relief without admitting fault.
Some other issues I have personally seen are crossed bid/ask quotes, partial stops get executed when the price was never even close, trades reversed when they made an error etc. (I phoned that one in and they argued with me, until I asked to see the time and sales data).
It it were me, I would ask for a detailed time and price explanation from my broker.
Even though the OP does not want to mention the broker's name, I think it is obvious to most folks here who the broker is...
Quote from jayre:
All the options where fully covered with zero margin requirment and zero risk besides the debit paid, however the volatile market just skewed the pricing. What's wrong with that sitiuation?
I realize that that position shouldn't have required any margin at all, but still if you'd had a modest amount of cash in your account after buying the vertical spread there should have been enough money to cover the anomalous pricing and there wouldn't have been a margin call.
The short answer is that any time you have a short-leg in an American-style option, you have open-ended risk due to the possibility of early exercise and overnight gap risk. You could theoretically lose more than your account value, and your broker would be on the hook.
The lesson is to know your broker's margin call and liquidation policy before, not after you start trading. And to realise that any time you short an American-style option, even if it's part of a spread, you have open-ended risk.
Was this IB, by any chance? Anyway, try arbitration if the amount was big enough.
The lesson is to know your broker's margin call and liquidation policy before, not after you start trading. And to realise that any time you short an American-style option, even if it's part of a spread, you have open-ended risk.
Was this IB, by any chance? Anyway, try arbitration if the amount was big enough.
Since it does not sound reasonable that a liquidation will occur because of a margin violation in a debit spread (which has no margin requirement except for the debit paid, as you stated), you should also check if your broker impose other limitations which may trigger liquidation, which are not necessarily related to the regulatory REG-T margin rules.
For example, IB has a limitaion of Gross Position Value to Net Liq. Value, which may cause an automatic liquidation of your account if this ratio exceeds certain amount (see my previous message in this subject). Also, there could be margin haircuts for currencies, as well as other ratios and limitations. Again, it depends on your broker, and you should check also these issues with them.
For example, IB has a limitaion of Gross Position Value to Net Liq. Value, which may cause an automatic liquidation of your account if this ratio exceeds certain amount (see my previous message in this subject). Also, there could be margin haircuts for currencies, as well as other ratios and limitations. Again, it depends on your broker, and you should check also these issues with them.
Quote from Eliot Hosewater:
Who is the broker?
Was just reading elsewhere someone who has some DOTM short puts said that TD Ameritrade just noted a drop in account balance while Interactive Brokers gave a margin call. They guy added cash but IB still liquidated some positions.
LOL, IB does not surprise me. I hear so many horror stories of the IB skynet liquidating positions.
Quote from Ghost of Cutten:
The short answer is that any time you have a short-leg in an American-style option, you have open-ended risk due to the possibility of early exercise and overnight gap risk. You could theoretically lose more than your account value, and your broker would be on the hook.
The lesson is to know your broker's margin call and liquidation policy before, not after you start trading. And to realise that any time you short an American-style option, even if it's part of a spread, you have open-ended risk.
Was this IB, by any chance? Anyway, try arbitration if the amount was big enough.
HuH?
How is there any risk? If the OP is assigned on his short call leg (call vertical), he will have short stock against his long call. If he is assigned on short put leg (long put spread) he will be long stock against his long put. In either postion he will be synthetically long either a put or call upon assignement.
Now, there is another question on whether he has enough money to cover the margin required on the assigned stock postion.
Note that the OEX would have risk in this situation, a cash settled american style option.
IB only lets you trade with the balance above $2000.00, so I figure the OP was very close to the $2000.00 threshold after he entered the trade and the increased value of the short 75 calls lowered available funds below $2000.00. Then the margin call kicks in.
Quote from FSU:
HuH?
How is there any risk? If the OP is assigned on his short call leg (call vertical), he will have short stock against his long call. If he is assigned on short put leg (long put spread) he will be long stock against his long put. In either postion he will be synthetically long either a put or call upon assignement.
Now, there is another question on whether he has enough money to cover the margin required on the assigned stock postion.
Note that the OEX would have risk in this situation, a cash settled american style option.
There was no assignment risk, because both options where far out of the money. So there was zero for the broker & for the account.