Cash proceeds from option writing

[cruisecontrol]

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 actually didn't conceptualize it as two separate questions, so thanks for explaining it like that.

I'm assuming your answers are correct for Wedbush since that's Lightspeed's clearing firm, right?

If you are correct that long/short options dollar offsets are standard everywhere including IB, then I suppose TheDawn was incorrect when he said the funds are not "available for trading" with IB.

I have read many stories about people using short SPX boxes as a form of margin loan, so this strongly suggests that those funds will also offset long stock positions.

 

[MarkBrown]

when you sell options the premium is to be put in your account right then, some people try and use the extra money in their account to over trade and blow up. others ignore the money and wait to actually earn it by waiting for it to expire worthless.

 

[cruisecontrol]

when you sell options the premium is to be put in your account right then, some people try and use the extra money in their account to over trade and blow up. others ignore the money and wait to actually earn it by waiting for it to expire worthless.

The question is about how the account works mechanically and what can or can't be done with the "extra money" (earning interest and/or offsetting interest on other long positions). Which broker are you with and do you know how they implement this?

 

[MarkBrown]

The question is about how the account works mechanically and what can or can't be done with the "extra money" (earning interest and/or offsetting interest on other long positions). Which broker are you with and do you know how they implement this?

i haven't sold options since the 90's but you could purchase t-bills and get the interest while using the t-bills as collateral - i was also able to use the collected premium to trade as margin. the only way you could withdraw was to liquidate the trades first. mostly i was always just selling and collecting or selling and rolling into the next month and collecting. it a great way to make money if you have the pockets to back your play.

 

[Bobby T]

@cruisecontrol

I use TD Ameritrade / ThinkorSwim.

When you sell an option, the cash feeds directly into your account's cash balance. But you have to post collateral / margin to keep the trade open. The broker will accept cash or securities to collateralize your short options trade (which is seamless and happens in the background). Your account's "option buying power" is the total available collateral at any given time.

You can use your cash balance however you want. You can let it sit as cash (and earn interest), purchase securities, T-Bills, or even withdraw that cash out of your account. As long as your cash balance remains positive then you won't be charged margin interest.

And most importantly is to maintain a large cushion of available buying power for if/when the trade moves against you and margin requirements go up.

 

[cruisecontrol]

@cruisecontrol

I use TD Ameritrade / ThinkorSwim.

When you sell an option, the cash feeds directly into your account's cash balance. But you have to post collateral / margin to keep the trade open. The broker will accept cash or securities to collateralize your short options trade (which is seamless and happens in the background). Your account's "option buying power" is the total available collateral at any given time.

You can use your cash balance however you want. You can let it sit as cash (and earn interest), purchase securities, T-Bills, or even withdraw that cash out of your account. As long as your cash balance remains positive then you won't be charged margin interest.

And most importantly is to maintain a large cushion of available buying power for if/when the trade moves against you and margin requirements go up.

Thanks Bobby, that's a great datapoint. Based on this thread so far it seems that this does indeed vary between brokers. Feeding directly into cash is the best way, so kudos to TD.

I have also asked IB and Wedbush about this directly, will post back here when I get their answers.

 

[cruisecontrol]

Have had the ticket open with IB for a week and still no answer. I chatted with a rep and at first they seemed confident that proceeds are added to cash, after digging deeper into examples they weren't really sure how it works. I'm surprised that this is apparently such esoteric knowledge.

 

[Bobby T]

Yeah, bizarre the rep isn't able to answer the question! Shouldn't be that complex...

You might just have to do a small trade and find out

 

[cruisecontrol]

Finally got an answer back from Wedbush, which was that proceeds from shorts are fully equal to real cash. e.g. can earn interest at the same rate as cash, or be used to finance long positions. Interesting that this is different from what @Robert Morse said earlier even though I thought Wedbush was Lightspeed's clearing broker. I guess these details can depend on the specific deal that you have with your clearing broker.

Still unable to get the answer from IB even after a few more attempts. The question is apparently too complicated for anyone doing support over there.

 

[traider]

Finally got an answer back from Wedbush, which was that proceeds from shorts are fully equal to real cash. e.g. can earn interest at the same rate as cash, or be used to finance long positions. Interesting that this is different from what @Robert Morse said earlier even though I thought Wedbush was Lightspeed's clearing broker. I guess these details can depend on the specific deal that you have with your clearing broker.

Still unable to get the answer from IB even after a few more attempts. The question is apparently too complicated for anyone doing support over there.

But what about the margins utilised by the short position?