An In Depth Discussion About Margin

[TheBigShort]

Hello everyone, I have a few questions about margin. I am a bit embarrassed to ask such basic questions but not knowing will cost me down the road. Since I have started trading I have never run out of margin/excess liquidity but I am looking to deploy a new strategy that will need full understanding of how margin works.

I have a few follow up questions but I will start with this.

We have an account where base currency is CAD. Our broker is IB and we open up a 100k CAD margin account with them. We only want to trade US assets so we immediately purchase USD.CAD idealPro at the going exchange rate of 1.33. This gives us a total of 100K CAD/1.33 = 75,200 USD. At the same time we do not want currency risk so we decide to go long 1 CAD future contract which has a settlement of 100k CAD.

Our account on IB now says
USD.CAD ideadPro $75,200
CAD $0
CAD/USD future 1 contract.

The account does not have any currency risk and the margin requirement for the future contract is very small.

1) What is my total buying power for a long option contract?
2) Is my excess liquidity $75,200 USD?

Next I want to place a trade on ticker "CP". The 121 Call Butterfly June21 with strikes 210/230/250 is trading @ 13.80. IB tells me my margin requirement is 0. I end up buying 1 contract for a total of $1,380.

My account now looks like:

USD.CAD $75,200 idealPro of which $1,380 is in an option.
CAD $0
CAD/USD future 1 contract.

3)What is my current total buying power for a new long option contract?
4) What is my excess liquidity?

On interactive brokers, 121 flys have margin impact while single legs do not.

5)What is the reason for this?
6) If a FLY has margin impact, am I taking a hit from the debit payed for the fly + the margin on top?
7) How does margin impact affect excess liquidity?

Here is a photo of where my margin impact from a fly is over 1k while the price for a single leg is just the debit (0 margin impact).

Finally, and this might be more a currency question; I decide to buy 50k CAD worth of RBC from the Canadian exchange. RY.TO. Do I need to reduce my USD.CAD idealPro position until I have 50k CAD to buy the RBC shares? This is assuming I want to be FX neutral.

Thank you to those who chime in. It will be greatly appreciated even if you can just answer one of the questions.

 

[GRULSTMRNN]

If I can be blunt, you do it all wrong. With IB you don't have to convert anything, you don't have to buy any currency future. You fund your account and the available cash you have is determined by the aggregate cash across all currencies. So your available cash in USD is 75.2k in your example. You don't need to convert that even if you want to trade USD assets. You can buy EUR denominated assets as well. That's the beauty of a multi currency account with IB. You would obviously not be able to do such with a non margin, pure cash account.

Of course if you want to be currency hedged, particularly future profits, then you would need to trade the hedge.

Hello everyone, I have a few questions about margin. I am a bit embarrassed to ask such basic questions but not knowing will cost me down the road. Since I have started trading I have never run out of margin/excess liquidity but I am looking to deploy a new strategy that will need full understanding of how margin works.

I have a few follow up questions but I will start with this.

We have an account where base currency is CAD. Our broker is IB and we open up a 100k CAD margin account with them. We only want to trade US assets so we immediately purchase USD.CAD idealPro at the going exchange rate of 1.33. This gives us a total of 100K CAD/1.33 = 75,200 USD. At the same time we do not want currency risk so we decide to go long 1 CAD future contract which has a settlement of 100k CAD.

Our account on IB now says
USD.CAD ideadPro $75,200
CAD $0
CAD/USD future 1 contract.

The account does not have any currency risk and the margin requirement for the future contract is very small.

1) What is my total buying power for a long option contract?
2) Is my excess liquidity $75,200 USD?

Next I want to place a trade on ticker "CP". The 121 Call Butterfly June21 with strikes 210/230/250 is trading @ 13.80. IB tells me my margin requirement is 0. I end up buying 1 contract for a total of $1,380.

My account now looks like:

USD.CAD $75,200 idealPro of which $1,380 is in an option.
CAD $0
CAD/USD future 1 contract.

3)What is my current total buying power for a new long option contract?
4) What is my excess liquidity?

On interactive brokers, 121 flys have margin impact while single legs do not.

5)What is the reason for this?
6) If a FLY has margin impact, am I taking a hit from the debit payed for the fly + the margin on top?
7) How does margin impact affect excess liquidity?

Here is a photo of where my margin impact from a fly is over 1k while the price for a single leg is just the debit (0 margin impact).

View attachment 204116
View attachment 204117

Finally, and this might be more a currency question; I decide to buy 50k CAD worth of RBC from the Canadian exchange. RY.TO. Do I need to reduce my USD.CAD idealPro position until I have 50k CAD to buy the RBC shares? This is assuming I want to be FX neutral.

Thank you to those who chime in. It will be greatly appreciated even if you can just answer one of the questions.

 

[TheBigShort]

If I can be blunt, you do it all wrong. With IB you don't have to convert anything, you don't have to buy any currency future. You fund your account and the available cash you have is determined by the aggregate cash across all currencies. So your available cash in USD is 75.2k in your example. You don't need to convert that even if you want to trade USD assets. You can buy EUR denominated assets as well. That's the beauty of a multi currency account with IB. You would obviously not be able to do such with a non margin, pure cash account.

Of course if you want to be currency hedged, particularly future profits, then you would need to trade the hedge.

Interresting! When I funded my account over a year ago they said I needed it! I have never changed it since. I have been rolling MCD (mini CAD futures) contracts every 3 months! I'll have to double check with them tommorrow

 

[TheBigShort]

If I can be blunt, you do it all wrong. With IB you don't have to convert anything, you don't have to buy any currency future. You fund your account and the available cash you have is determined by the aggregate cash across all currencies. So your available cash in USD is 75.2k in your example. You don't need to convert that even if you want to trade USD assets. You can buy EUR denominated assets as well. That's the beauty of a multi currency account with IB. You would obviously not be able to do such with a non margin, pure cash account.

Of course if you want to be currency hedged, particularly future profits, then you would need to trade the hedge.

I just got off the phone with IB. If I do not do the conversion. I end up paying interrest on the USD borrowed to trade. If I am mostly trading us equities, it makes sense to do the conversion

 

[Stockolio]

I just got off the phone with IB. If I do not do the conversion. I end up paying interrest on the USD borrowed to trade. If I am mostly trading us equities, it makes sense to do the conversion

Yea it doesn't make sense to pay interest on your main trading currency... Please explain this, I wanna understand your thought process on this :

At the same time we do not want currency risk so we decide to go long 1 CAD future contract which has a settlement of 100k CAD.

 

[TheBigShort]

Yea it doesn't make sense to pay interest on your main trading currency... Please explain this, I wanna understand your thought process on this :

At the same time we do not want currency risk so we decide to go long 1 CAD future contract which has a settlement of 100k CAD.

This got me thinking. Maybe I am already paying the interest rate on the futures contract and I am no better off.

USDCAD Future = Spot* (1+(R quote *(d/360))/(1+(R base *(d/360))

 

[GRULSTMRNN]

You can change the base currency in your account to USD if you primarily trade USD denominated assets. But for short term trades (intraday) you will not be assessed any usd borrow rates. So, it depends on your avg holding periods.

I just got off the phone with IB. If I do not do the conversion. I end up paying interrest on the USD borrowed to trade. If I am mostly trading us equities, it makes sense to do the conversion

 

[GRULSTMRNN]

It is built into the futures price and depends on the differential between your long rate and short rate. If your long rate is larger than the short rate you are essentially borrowing money currency adjusted and you can work out via replication how the futures contract should converge with the underlying by expiration.

This got me thinking. Maybe I am already paying the interest rate on the futures contract and I am no better off.

USDCAD Future = Spot* (1+(R quote *(d/360))/(1+(R base *(d/360))

 

[guru]

In terms of margin on options, I’ve seen discussions in a Facebook options group about IB miscalculating margin on some combos like flys and unbalanced flys. Some people emailed IB with specific examples, and were not happy with IB not being able to explain why the used margin is higher than maximum loss.
I’ve also noticed that margin on flys can be different depending on strikes, DTE, or who knows what. You may basically buy the same exact fly widths but at different strikes, and each one may have different margin.
However, I believe IB does have some reasoning in calculating margin the way they do, as they calculate overall risk exposure based on things like the market moving 10% down vs 20% down. This way I’m able to trade ratio spreads on SPX with very little margin, even when I may be short 200 SPX puts, for example - as long as I own 100 higher strike puts, and a market drop of 20% would first make me money on the puts I own, before dropping more and potentially losing money on the puts I’m short. I just have to juggle around the right strikes to see how they affect my margin. This could translate to other option combos since IB looks at swings in portfolio value and estimated options pricing based on specific levels of market moves.
Personally I can’t even estimate the margin to +/-100% (sic!) as IB recalculates it every night and I often wake up looking at completely different number than seen previous night. And a few times my margin went from +$50k to negative -$30k overnight - due to trading ratio spreads that may use up lots more margin when the market drops by couple percent - even when I can actually get out with profit at that time, or just buy couple $0.15 puts to get, say $30k of margin back.
Basically such crazy stuff is going on with IB margin that I’ve learned to deal with it or avoid certain trades. Though in regular trading where margin use can and should be estimated, I’d still expect some small swings and calculations that may be difficult to explain.

 

[cruisecontrol]

This got me thinking. Maybe I am already paying the interest rate on the futures contract and I am no better off.

USDCAD Future = Spot* (1+(R quote *(d/360))/(1+(R base *(d/360))

You have to do the math, but generally futures will have better implied interest rates than what a broker will give you, even IB. The question is, is it worth the extra risk/complexity/effort of rolling contracts, the extra margin use, etc. When I last evaluated this question, the answer for me personally was no.