How does margin work in realtime for a VXX call option

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optiontrader123

Hello!

I have a question when it comes to hedge with options. I will take an example.

1. We sell short the VXX with 100 shares at price: 10.00
2. At the same time we buy 1 Call option at strike price 10.00 for a price of 2 dollar.

Now this will happen:
1. Price will go up to 40 in a 10 minutes period(Just for the example to understand this hedge)
2. The price of the buy option can now be sold for let us say 17 dollar.

Without an option we would have a margin call for sure when price hits 20.00 as this is 100% loss.

However what I wonder here. How does this hedge work in a real account. Because if just look at the realtime value at this time:
Loss on VXX shares: 100 shares * 30 dollar loss = -3000 dollar loss
Profit on Option: 1700 dollar - 1000 dollar = +700 dollar

Profit in realtime: 700 - 3000 = -2300 dollar Loss
.................................................................................................

What I reall wonder here now is this. As I have the right to buy the option at strike 10.00 and can exercise the option at the current price: 40 dollar. Wouldn't the calculation be like this?:

Loss on VXX shares: 100 shares * 30 dollar loss = -3000 dollar loss
Profit if exercising the Option: 4000 dollar - 1000 dollar = +3000 dollar

Profit in realtime: 3000 - 3000 = -0 dollar Loss
.................................................................................................

Which one of those are true in real time as it seems that I have a -2300 loss in realtime but at the same time I can exercise the option 1 second later and actually have a ZERO loss on the account and should not get a margin call and everything is okay?

Thank you!
 
optiontrader123 said:
Hello!

I have a question when it comes to hedge with options. I will take an example.

1. We sell short the VXX with 100 shares at price: 10.00
2. At the same time we buy 1 Call option at strike price 10.00 for a price of 2 dollar.

Now this will happen:
1. Price will go up to 40 in a 10 minutes period(Just for the example to understand this hedge)
2. The price of the buy option can now be sold for let us say 17 dollar.

Without an option we would have a margin call for sure when price hits 20.00 as this is 100% loss.

However what I wonder here. How does this hedge work in a real account. Because if just look at the realtime value at this time:
Loss on VXX shares: 100 shares * 30 dollar loss = -3000 dollar loss
Profit on Option: 1700 dollar - 1000 dollar = +700 dollar

Profit in realtime: 700 - 3000 = -2300 dollar Loss
.................................................................................................

What I reall wonder here now is this. As I have the right to buy the option at strike 10.00 and can exercise the option at the current price: 40 dollar. Wouldn't the calculation be like this?:

Loss on VXX shares: 100 shares * 30 dollar loss = -3000 dollar loss
Profit if exercising the Option: 4000 dollar - 1000 dollar = +3000 dollar

Profit in realtime: 3000 - 3000 = -0 dollar Loss
.................................................................................................

Which one of those are true in real time as it seems that I have a -2300 loss in realtime but at the same time I can exercise the option 1 second later and actually have a ZERO loss on the account and should not get a margin call and everything is okay?

Thank you!
More...

You're long the synthetic 10 put. The req is the debit, $200 on the combo. Your ET handle is a bit disingenuous.
 
Yes okay thanks that great to know, this is then called a synthetic put. So I need $200 as margin req for this trade as I understand when I initially enter the trade. So with that in mind I think it is possible to understand my question?

As it is a perfect hedge if exercising the option and I shouldn't get a margin call. It is another story if looking at what the short VXX shares position is worth and what the call option is worth in actual realtime. I think my question describes this question?

Or is it as you say that this combo. only requires 200$ in free capital on the account even if VXX goes up to 40? It is simply a 200$ FIXED margin requirement for this combo. Perheps it is that simple?
 
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optiontrader123 said:
Yes okay thanks that great to know, this is then called a synthetic put. So I need $200 as margin req for this trade as I understand when I initially enter the trade. So with that in mind I think it is possible to understand my question?

As it is a perfect hedge if exercising the option and I shouldn't get a margin call. It is another story if looking at what the short VXX shares position is worth and what the call option is worth in actual realtime. I think my question describes this question?

Or is it as you say that this combo. only requires 200$ in free capital on the account even if VXX goes up to 40? It is simply a 200$ FIXED margin requirement for this combo. Perheps it is that simple?
More...


Yes.

You can just buy the $10 put. The problems are 1) You're looking for a terminal 8 on VXX when VXX hasn't broken 13 in years. 2) No 10-strike puts are approaching $2, unfortunately (for sellers).

Share/option combos (1:1) are always synthetics of a call or put. It's best-practice to trade the actual put or call then delve into synthetics when there is no need to do so.
 
Then I understand, thanks. I think that was my main concern so the margin requirement is static during the trade. That is good anyway.
Yes, that is true, just buying a PUT would be an alternative here too. I will try to experiment with both the approaches to see the differences.

I don't know know if this is okay to ask in the same question but VXX options can be exercised at any time(American Options) and VIX options can only be exercised at expiration(European Option).

My question is there. Would it be the same margin requirement of 200$ if I used a VIX Option assuming that the price is the same for the example as it would using a VXX Option?
 
optiontrader123 said:
Then I understand, thanks. I think that was my main concern so the margin requirement is static during the trade. That is good anyway.
Yes, that is true, just buying a PUT would be an alternative here too. I will try to experiment with both the approaches to see the differences.

I don't know know if this is okay to ask in the same question but VXX options can be exercised at any time(American Options) and VIX options can only be exercised at expiration(European Option).

My question is there. Would it be the same margin requirement of 200$ if I used a VIX Option assuming that the price is the same for the example as it would using a VXX Option?
More...


They are the same. The only risk is execution and rho, but that's beyond what we're discussing here.

The margin requirement is the same as the premium paid on the put. IOW, there is no margin. It's simply the cost of the $200 put.
 
Thank you, that is great information. Then I know much more how to think now in regard to this.
Yes rho and execution is something else there.
Okay, so there is no margin actually as long as I paid for what is nessecary for the trade, 200$.

PopyDeek, Thank you for all help!
 
optiontrader123 said:
Thank you, that is great information. Then I know much more how to think now in regard to this.
Yes rho and execution is something else there.
Okay, so there is no margin actually as long as I paid for what is nessecary for the trade, 200$.

PopyDeek, Thank you for all help!
More...

Yes, the difference between a call and a put is (in this case)... shares.

Long shares and long put = Long call (synth)
Short shares and long call = long put (synth)
 
I got a little bit unsure again. I think I need to ask to be really sure. I will just ask a simple question in the end to make it simple.

This position require 200$ margin:
- Sell Short 100 shares of VXX at 10 dollar
- 1 Buy option for 2$ at strike 10 dollar

(Let us assume that I have 1000$ in my margin account so I have more than 200$ at this time)

What happens now if we for the example say that VXX goes up to 100$ tomorrow.
Will I get a margin call?
 
With other words, assuming that the price of VXX goes up to 100$ tomorrow will I need more than 200$ in margin or is it capped to 200$ for margin requirement even that VXX goes up to 100$?
 
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