Cash proceeds from option writing

[cruisecontrol]

Having trouble finding this online.

I understand that in the case of equities margin accounts, short sale proceeds do not count as cash in hand. Instead they are held in a segregated account and the interest that cash earns is typically not passed on to the client, or if it passed on then the broker typically takes a spread first.

How does it work with proceeds (credits) from writing options? Is this cash just added to the account, free to earn interest at the full rate or to be used for funding additional long positions?

Does it depend on the broker?

Does it depend on whether an option spread is submitted as a single multi-leg order so that credits and debits get netted within the group?

Anyone know how IB or Wedbush handles this?

 

[Robert Morse]

In the background, there are three main account types. Type 1- Cash, Type 2-Margin, Type 3- Short. The Type 2 account is for Long Stock, Long Options and Short options. The Type 3 account is for Short stock. Type 2 and type 3 do not offset each other. The cash balance in type 3 is not your money. It is the collateral for the sale of stock you borrowed. Your clearing broker can Repo that. I'm not aware of customer accounts that share that but some might. If your positions are all long in type 2, and your balance is higher than your equity, you pay interest on the borrowed balance. If you have a net credit in that account from selling options, I'm not sure what broker would share any proceeds from repos on that credit balance. When I was a Market Maker, I shared in both, but I was a BD.

 

[cruisecontrol]

In the background, there are three main account types. Type 1- Cash, Type 2-Margin, Type 3- Short. The Type 2 account is for Long Stock, Long Options and Short options. The Type 3 account is for Short stock. Type 2 and type 3 do not offset each other. The cash balance in type 3 is not your money. It is the collateral for the sale of stock you borrowed. Your clearing broker can Repo that. I'm not aware of customer accounts that share that but some might. If your positions are all long in type 2, and your balance is higher than your equity, you pay interest on the borrowed balance. If you have a net credit in that account from selling options, I'm not sure what broker would share any proceeds from repos on that credit balance. When I was a Market Maker, I shared in both, but I was a BD.

Hi Robert, thanks so much for this reply! So much good info.

Based on the bolded part, long options and short options always offset eachother, correct?

For example, suppose I have the following position:
1MM cash
2MM short options
3MM long options

then I should pay 0 margin interest right?

 

[Robert Morse]

Correct. The net of $1mm in options is fully paid for with your cash. On a side note, options are not marginable. So if your net buy $1.1mm in option, you will get a margin call for the $100K.

 

[TheDawn]

Having trouble finding this online.

I understand that in the case of equities margin accounts, short sale proceeds do not count as cash in hand. Instead they are held in a segregated account and the interest that cash earns is typically not passed on to the client, or if it passed on then the broker typically takes a spread first.

How does it work with proceeds (credits) from writing options? Is this cash just added to the account, free to earn interest at the full rate or to be used for funding additional long positions?

Does it depend on the broker?

Does it depend on whether an option spread is submitted as a single multi-leg order so that credits and debits get netted within the group?

Anyone know how IB or Wedbush handles this?

The cash proceeds from your option writing is not available to be used for trading, nor available for withdrawal or earn interest. It's just money not available to be used but collateral for your short option position.

That's how IB does it.

 

[cruisecontrol]

The cash proceeds from your option writing is not available to be used for trading, nor available for withdrawal or earn interest. It's just money not available to be used but collateral for your short option position.

That's how IB does it.

So with IB, short and long option positions don't offset eachother, and my example scenario above would result in margin interest being charged on 2MM net debit?

 

[Robert Morse]

That is not what I said. Long and short options offset.

So with IB, short and long option positions don't offset eachother, and my example scenario above would result in margin interest being charged on 2MM net debit?

 

[TheDawn]

So with IB, short and long option positions don't offset eachother, and my example scenario above would result in margin interest being charged on 2MM net debit?

You won't earn interest at all on the short option positions. For long option positions, I am not sure, I have never longed big enough option positions that I would need to use margin. LOL You can take a look at IB's policy on margin with options trading here:

https://www.interactivebrokers.com/en/trading/margin-options.php

 

[cruisecontrol]

That is not what I said. Long and short options offset.

I understand, but TheDawn seems to be saying (if I understood him correctly) that IB does it differently. Is that possible or do all brokers have to implement this the same way?

 

[Robert Morse]

If you are asking about long/short options dollar offsets, that is standard. If you are asking about getting paid for option credit balances, that is not standard.

I understand, but TheDawn seems to be saying (if I understood him correctly) that IB does it differently. Is that possible or do all brokers have to implement this the same way?