Crazy margin requirement on warrant arbitrage

[ScroogeMcDuck]

I don't want to mention the ticker here.
Margin requirement to buy one warrant = X
Margin requirement to short one call at a higher strike = Y
Margin requirement to buy one warrant and short one call = X+Y, as if they don't hedge each other at all.

The warrant becomes exercisable over a year before the call expires too. The only way to lose money is if the underlying gets pumped enough to become hard to borrow, then the call gets early exercised, then I get rekt by stock borrow fees before the warrant/underlying spread comes back down.

Back when NKLA was getting pumped and dumped in June NKLAW would 100% offset a short position in NKLA, which was obviously also wrong. I could have put on a long NKLAW short NKLA arb in unlimited size so long as I added to each leg incrementally. My theory is that they overreacted to that flaw and swung the pendulum to the opposite extreme where warrants don't hedge anything at all.

To whoever is the margin requirement czar at IBKR: can we please have something in the middle like X/2 instead of 0 or X+Y?

 

[maxinger]

nothing much we can do.

try different brokers. different brokers have different margin requirement.

 

[ids]

Scrooge, do you have a portfolio margin account?

 

[Robert Morse]

ScroogeMcDuck-I left the trading floor back in 2010. I was a broker-dealer, Options market Maker, and cleared through SLK/GSEC. In addition to my MM trading, I looked for Warrants that were inactive that I could arb vs the options by bidding for large blocks below the market. At the time, Warrants were not marginable, were very hard to short, did not offset options or stock positions for risk. I'm not sure if that has changed. If you have a PMA, it is easy to check on the OCC website. If the symbol of the warrant pops up, it is PM eligible and would be part of risk-based margin. https://apps.theocc.com/pmc/pmc.do

I don't want to mention the ticker here.
Margin requirement to buy one warrant = X
Margin requirement to short one call at a higher strike = Y
Margin requirement to buy one warrant and short one call = X+Y, as if they don't hedge each other at all.

The warrant becomes exercisable over a year before the call expires too. The only way to lose money is if the underlying gets pumped enough to become hard to borrow, then the call gets early exercised, then I get rekt by stock borrow fees before the warrant/underlying spread comes back down.

Back when NKLA was getting pumped and dumped in June NKLAW would 100% offset a short position in NKLA, which was obviously also wrong. I could have put on a long NKLAW short NKLA arb in unlimited size so long as I added to each leg incrementally. My theory is that they overreacted to that flaw and swung the pendulum to the opposite extreme where warrants don't hedge anything at all.

To whoever is the margin requirement czar at IBKR: can we please have something in the middle like X/2 instead of 0 or X+Y?

 

[ScroogeMcDuck]

Yes, I have portfolio margin on ibkr.
It's a self-issued SPAC warrant. It doesn't show up on that OCC site, but NKLAW does. Maybe that's the problem. Were NKLA warrants marginable pre-merger?

 

[Robert Morse]

It is my understanding that all Warrants are like call options, not Marginable. The better question is, can it be used to offset short stock and short calls?

 

[adhana]

I have a similar problem. In my case its that a long position in AIG's Jan 16 calls don't offset a short in their outstanding TARP warrants with a slightly higher strike expiring on Jan 21.

Is this something worth contacting them about?

 

[def]

We don't offer margin offset between warrants and options in Reg T accounts which isn't going to change.

 

[ScroogeMcDuck]

We don't offer margin offset between warrants and options in Reg T accounts which isn't going to change.

What about portfolio margin accounts?

 

[def]

What about portfolio margin accounts?

That would depend on whether they are PM eligible. As Robert mentioned above, you can check there. For the underlying in question, only options are, not the warrants.