Beneficial Margin Treatment for Cash-Settled Index Options
- Thread starter ajacobson
- Start date
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Beneficial Margin Treatment for Cash-Settled Index Options
March 20, 2024
Cash-settled index options are now eligible for margin relief. While Cboe® proposed and advocated for the rule change, the benefits are available to all index options products used for overwriting strategies.
Put simply, under the rule, cash-settled index options written or sold in a margin account against an exchange traded fund (ETF) that is based on the same index now qualify for margin relief. This treatment is likely familiar because it’s the same concept as an investor writing an equity call option while holding a long position in the underlying security, in other words, a “covered” call.
[text has some further important info --> see original text at link in the OP]
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This is very interesting...
But the CBOE has allowed this type of covered call treatment since 2015.
See the attached documents.
The press release suggests that something has changed, but it's not clear what.
The regulatory guidance published in 2015 allows brokers to treat short index calls as covered by a long position in an ETF that tracks the same index; it does not require brokers to do so.
Maybe this new policy is intended to push or even force brokers to allow this treatment in most or all retail accounts.
We have been selling $XSP calls as a hedge against SPY for quite some time. Schwab does not treat them as covered calls. For margin purposes, they are treated as naked short calls. This has not been a problem for us. Our account is approved for naked short calls, and we have sufficient equity to support the position.
Our account does not have portfolio margin. We have not had a need for it.
It would be a significant shift if most brokers began to recognize these positions as covered calls in an ordinary retail account that is not approved for naked short calls.
As the memo notes, it's not just SPY and XSP.
We also sell $XND options against QQQM. Those are not recognized as covered, either. And there are many other examples.
Edited at 19:32 to add the attachments.
But the CBOE has allowed this type of covered call treatment since 2015.
See the attached documents.
The press release suggests that something has changed, but it's not clear what.
The regulatory guidance published in 2015 allows brokers to treat short index calls as covered by a long position in an ETF that tracks the same index; it does not require brokers to do so.
Maybe this new policy is intended to push or even force brokers to allow this treatment in most or all retail accounts.
We have been selling $XSP calls as a hedge against SPY for quite some time. Schwab does not treat them as covered calls. For margin purposes, they are treated as naked short calls. This has not been a problem for us. Our account is approved for naked short calls, and we have sufficient equity to support the position.
Our account does not have portfolio margin. We have not had a need for it.
It would be a significant shift if most brokers began to recognize these positions as covered calls in an ordinary retail account that is not approved for naked short calls.
As the memo notes, it's not just SPY and XSP.
We also sell $XND options against QQQM. Those are not recognized as covered, either. And there are many other examples.
Edited at 19:32 to add the attachments.
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Be nice if brokers treated VIX long calls (on the Font Month) against short Front month VX Futures. (1/10th size of course).
I would really like to understand what has changed with the recent announcement LOL
The CBOE regulatory document from 2015 is very clear. The first paragraph says:
On November 18, 2015, the Securities and Exchange Commission approved a customer strategy based margin rule proposal by the Chicago Board Options Exchange, Inc. (“CBOE” or “Exchange”) that allows a short position in a cash-settled-index option that is established and carried in a margin account to receive covered margin treatment, if the short option position is offset in the same account by an equivalent position in an index tracking Exchange Traded Fund (“ETF”) that is based on the same index that underlies the short option(s).
What does the current announcement say that is new or different?
The CBOE regulatory document from 2015 is very clear. The first paragraph says:
On November 18, 2015, the Securities and Exchange Commission approved a customer strategy based margin rule proposal by the Chicago Board Options Exchange, Inc. (“CBOE” or “Exchange”) that allows a short position in a cash-settled-index option that is established and carried in a margin account to receive covered margin treatment, if the short option position is offset in the same account by an equivalent position in an index tracking Exchange Traded Fund (“ETF”) that is based on the same index that underlies the short option(s).
What does the current announcement say that is new or different?