At the moment the the ES (e-mini S&P 500) is trading at 2355. Suppose you sell 1 ES naked Put @ 2340 with a $5.75 credit. That's a Delta 30 trade at 1SD. Suppose soon after you make the trade a news event takes place that is not a happy one. The Fed raises rates more than expected, a new war breaks out, or something else. The the markets tank. A black swan event. The ES, YM, NQ, etc. all hit the skids. The S&P and ES decline 105 points very quickly, so quick that you had no opportunity or the ability to get out. Say the ES declined 105 points. What was ATM 2355 suddenly becomes 2250. Now you find your naked 2340 Put 90 points ITM. The buyer of your Put exercises his right and you're obligated to make good. In the ES world 90 points equals $4500.00 (1 point= $50.00 x 90 points = $4500.00.) That's why naked Puts and Calls have high margin. Of course you would subtract the $5.75 credit from that but you still owe a bundle. And that's the logic behind the CME's SPAN system. It knows that if you're naked there's a chance you could end up owing a lot of money to cover your short. Hence the high margins for naked Puts and Calls.
Think the market can't tank 100 points in just minutes? On Sept 29, 2008 (for example) the S&P 500 declined 106 points in just a couple of hours, the Dow saw a 777 point decline at the same time. Just last year, June 24th (the Brexit vote), the S&P declined 76 points ($3800) in one day. It happens and the exchanges don't want to be left holding the bag.
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This discussion is not about what the market can or cannot do. This disussion is about whether it is logical for naked short futures options to require more margin for carrying it, than a similarly directionally positioned underlying futures contract.
Does it make sense that being long 1 ES requires 5K margin but short 1 OTM ES put requires 10K? And if so what is the 'logic'.
You're arguing something unrelated to the topic of discussion. Of course the market can drop 100+ points peak to trough. Nobody is arguing that it can't happen. But your argument is irrelevant to this discussion though. It does not explain significant maintenance margin discrepancy between FOP and underlying futures.
Your arguments only lend to suggesting margin should be higher as a whole for futures products, as your angle is essentially that leverage can hurt. But your argument does not explain why FOP and the underlying are treated so differently in margin requirement.
Is selling an OTM put naked so much more dangerous than long 1 ES contract? Not in theory. Once you are ITM, you are both screwed around equally in the event the market tanks. Maybe less so for the put seller actually, if they held both positions to expiration because of [at the time] OTM strike and premium collected.
But my argument is that maybe what IB did makes sense in terms of liquidity risk, hence why FOP is treated worse because of execution risk in auto liquidating your futures options trades with wide spreads versus the tighter spreads in the futures market.
My '100 point' argument, does not relate to whether the market can move 100 points, but it concerns the spread between bid/ask and how far away from intrinsic value of the contract (bid ask 200 point spread). That specific number relates back to the fact the difference in maintenance margin between short FOP and ES is 5K (FOP = 10K versus ES = 5K margin). $5K with 50 multiplier is 100 points per contract. So, if it is based on liquidity risk, it means they pad 100 points execution risk of wide spreads away from intrinsic value of options, in the event the spreads are that wide. But then my other point is, it shouldn't make sense that nobody will make the market for you to panic close your position at better than 100 point spreads from intrinsic value in the options market. Somebody should do it even when all the algos are turned off in a screwy market. But maybe IB does a market order and just takes whatever the bid/ask is to close you out. In that case, yes, probably spreads can be very wide. But I'm just not sure it's 100 points wide.
Take for instance right now ES @ 2355.75. April 7 2390 ITM put (which is close to expiration for all intents and purpose and has negligible extrinsic value) has ask at 46.75. But intrinsic value of contract = 34.25. That's 12.5 points off intrinsic value. Makes panic closing with market orders pretty bad for you when the algo margin clerk cracks the whip to auto liquidate. But the spreads in the underlying futures market is 0.25. So is the 5K more margin for FOP, IB saying maybe the spreads can widen so much to 100 points or so? Probably their way of risk management to account for frictional issues with auto liquidations in illiquid markets.
