I agree with what you said. Does your broker?
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A vertical call debit spread triggers a margin call. Does that shound right?
- Thread starter jayre
- Start date
Quote from jayre:
This is what I mean when I say distorted market. A $75 real value can't possibly be lower then $65 real value. Can the market be distorted for a few minutes "and not have the correct price"? (your quote) yes. Does it mean that the account or the broker is at risk of loosing more then the debit. NO.
By the way I quoted the OCC saying that the max risk is the debit paid. The only reason I can see the broker liquidating is if "they" where on other side of the trade getting arbitrage
Here's how it can happen. You are long an oex 500 put and short the 495 put. (This is a single listed product so easier to happen)
The 500 put market on the close is .10 -.30. The market on the 495 put is 0 - 5.00 (the market makers have pulled their standard quotes at the end of the day to avoid getting picked off. They make the widest possible market) Your long gets marked at .20 and your short gets marked at 2.5 (the midpoint of the last quoted market.)
Your long spread is marked at a 2.30 credit.
Ok, but that dosent mean that there is any risk for the account or for the broker. The spread can either be hold thru expiration since you are fully coverd, or you can sell your debit spread for atleast 0 in any normal functioning market.Quote from FSU:
Here's how it can happen. You are long an oex 500 put and short the 495 put. (This is a single listed product so easier to happen)
The 500 put market on the close is .10 -.30. The market on the 495 put is 0 - 5.00 (the market makers have pulled their standard quotes at the end of the day to avoid getting picked off. They make the widest possible market) Your long gets marked at .20 and your short gets marked at 2.5 (the midpoint of the last quoted market.)
Your long spread is marked at a 2.30 credit.
Quote from jayre:
Ok, but that dosent mean that there is any risk for the account or for the broker. The spread can either be hold thru expiration since you are fully coverd, or you can sell your debit spread for atleast 0 in any normal functioning market.
Absolutely agree, but the broker may have a policy of auto liquidation if the account has negative equity. One would hope there would be a manual review of the positions involved.
As a hypothetical, let's say OP decided to leg-out of the spread by selling the long-call but didn't have the margin for the short call. Would the broker reject the sell order or would they fill it and issue a margin call \ liquidate the short @ the offer?
If it's the latter, the account could theoretically have realized negative equity, and what the broker did makes plenty of sense. Maybe they are just trying not to underestimate the stupidity of their clients?
If it's the latter, the account could theoretically have realized negative equity, and what the broker did makes plenty of sense. Maybe they are just trying not to underestimate the stupidity of their clients?
The order would have been rejected is the answer. Can't see any reason, unless the broker benefited in some way from the liquidaton.Quote from joneog:
As a hypothetical, let's say OP decided to leg-out of the spread by selling the long-call but didn't have the margin for the short call. Would the broker reject the sell order or would they fill it and issue a margin call \ liquidate the short @ the offer?
If it's the latter, the account could theoretically have realized negative equity, and what the broker did makes plenty of sense. Maybe they are just trying not to underestimate the stupidity of their clients?