Extremely High Margin Requirements on Back Months - Interactive Brokers

[pfranz]

I don't know if there are hidden reasons behind this decision,but the liquidity problem is a real problem for a broker if he wants to take care of emergency situations.
In 1929 and 1987 crashes, all of a sudden there was noone to sell to. "Sell,sell,sell!!!" "To whom?" was the talk between clients and brokers.
So you don't have to consider how the liquidity is now, but how it will become if and when there is a crash which after all is the moment for which all the security measures are in place.
With no liquidity, price is out of control.
And since noone can predict when it happens,security measures must always be in place.

 

[rallymode]

Quote from jones247:

Does anyone know how to get around this dilemma???? I don't want to open up another account with some other Broker; however, if I have no choice then that's what I will do, unless all Brokers have this ridiculous policy of assessing a margin requirement that's 5 times greater than the potential max loss for back months with 6 to 7 month til expiration...

Thanks for any feedback & help you can provide...

Walt

I feel your pain. Being forced into keeping more funds than what the exchange has set is burdensome and in this case unsubstantiated. It's not like their auto liq algo will have a problem dumping your back month ES position. I could go into further details but it wouldnt do anything but risk turning this into a rant.

If you are simply a futures guy you get around this dilemma by leaving IB. There are several firms out there who are solid and will appreciate your business much more than IB does and in your case charge you exchange margins only. I speak from experience, after 10 years with IB i recently severed my relationship with them for various reasons, unacceptable margin policies being one of them. There is a certain simplicity about their universal account but once you get to a certain size they are probably the worst broker out there.

 

[comintel]

Quote from pfranz:

I don't know if there are hidden reasons behind this decision,but the liquidity problem is a real problem for a broker if he wants to take care of emergency situations.
In 1929 and 1987 crashes, all of a sudden there was noone to sell to. "Sell,sell,sell!!!" "To whom?" was the talk between clients and brokers.
So you don't have to consider how the liquidity is now, but how it will become if and when there is a crash which after all is the moment for which all the security measures are in place.
With no liquidity, price is out of control.
And since noone can predict when it happens,security measures must always be in place.

Liquidity of the futures is fine. What IB is worried about is the liquidity of the options in far out months, where the bid ask spreads are wide or even non-existent in a few cases.

IB wants to be able to do instantaneous automated liquidations using market orders on each leg all at once if the overall account becomes under-margined (not necessarily because of this position) at any moment. Needless to say, these market orders on options in distant months would get terrible fills.

So even though the overall position may logically have a small limited maximum loss, the actual loss can be enormous if all of the legs are liquidated using market orders. That is why they need large margins to apply to distant-month options - so that the account will be able to bear the loss if they want to liquidate all legs at market.

 

[jones247]

Comintel & Pfranz,

Your perspective is appreciated; however, the big difference is that I'm not talking about naked positions. If I was trying to enter a naked option position, or a net short, option position, then your points are 100% correct.

My point is that my positions are completely hedged, the absolute max loss is quantifiable - No Matter What Happens. In other words, even if the bid/ask spread where to become the widest EVER, or even if there are no buyers for the positions I would have, it simply doesn't matter. As I mentioned at the beginning, I referring to an Iron Butterfly, which happens to be six months out. Also, I would be willing to accept a margin requirement that is equal to my max loss. However, knowing that the maximum mathematical loss is "x" and being forced to have margin that's 5 times "x" is really more than ridiculous... it's bordering on unethical...

Quote from comintel:

Liquidity of the futures is fine. What IB is worried about is the liquidity of the options in far out months, where the bid ask spreads are wide or even non-existent in a few cases.

IB wants to be able to do instantaneous automated liquidations using market orders on each leg all at once if the overall account becomes under-margined (not necessarily because of this position) at any moment. Needless to say, these market orders on options in distant months would get terrible fills.

So even though the overall position may logically have a small limited maximum loss, the actual loss can be enormous if all of the legs are liquidated using market orders. That is why they need large margins to apply to distant-month options - so that the account will be able to bear the loss if they want to liquidate all legs at market.

 

[atticus]

They're compensating for the possibility of you legging-out of the position. Obviously it's a debit spread.

 

[Rearden Metal]

Quote from atticus:

They're compensating for the possibility of you legging-out of the position. Obviously it's a debit spread.

He kind of has a point though, because IB could also set a lock on his combo position so that orders to leg out would not be accepted by TWS. Then the max risk is truly the max risk and no more. Alternatively, they could warn him up front that legging out would trigger a margin call, so there probably are more logical ways for IB to accommodate this client. Of course every business has the right to NOT give the customer what he wants...

 

[comintel]

Quote from jones247:

.....
My point is that my positions are completely hedged, the absolute max loss is quantifiable - No Matter What Happens. In other words, even if the bid/ask spread where to become the widest EVER, or even if there are no buyers for the positions I would have, it simply doesn't matter......

That only applies so long as the long leg is maintained.

They might have to leg out on your behalf, as atticus mentions, if losses in *other unrelated positions* forced them to liquidate all positions in your account.

 

[atticus]

Quote from Rearden Metal:

He kind of has a point though, because IB could also set a lock on his combo position so that orders to leg out would not be accepted by TWS. Then the max risk is truly the max risk and no more.

No native iron condor orders on futures with IB, and even if there were, you will often not see a market quoted on the complex spread. Very common in the ES options. Natural flies (puts or calls) are rarely quoted at all in ES, but they are available to trade.

If the OP wanted/needed to close it would have to be legged.

 

[Rearden Metal]

Quote from atticus:

No native iron condor orders on comms with IB, and even if there were, you will often not see a market quoted on the complex spread. Very common in the ES options. Natural flies (puts or calls) are rarely quoted at all in ES.

As you may have guessed, I've never used an iron condor in my life.

 

[jones247]

I'm sorry guys, but I just don't buy it... since when did any broker, particularly IB, start looking to protect the customer from losing money, or even blowing out their account???.... If that's the case, then I guess we can all assume that our respective brokers will always be there to keep us out of risky trades that can wipe us out.. "Yeah Right"... again, I'm not buying the "we are saving you from yourselves" argument as a justification for the disallowance. Otherwise, there are several other instances where the broker should have stepped in and saved the trader from devastating losses!!!