IB auto-liquidation

tommcginnis said:
Agreed -- and very much so. But still, who's taken advantage of whom?

To continue in the analogy to which you responded ("When your actions force someone else to take the wheel, don't bitch cuz they didn't take you home."), IB has no right to drive you to the county line and abandon you. But they *do* have every right, AND even the responsibility to IB shareholders and IB regulators, to drive you to *their* house, and abandon you. ("Us!")

And yes, that may trigger yet more "pain" on our parts. But ultimately, that's our bad, not theirs.
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I'm of the opinion that IB has the ability to not abandon the trader and stand by their regulators and shareholders. I don't see why the program can't recognize simple vertical spreads. Now if people are trading iron condors or things with more than 4 legs, I can see the program splitting up the trade because who knows how liquid that'll be, but simple spreads should be liquid enough to give better market prices than splitting up each leg and doing 2 market orders. I'm not saying IB should make every effort to get the trader the best price, but I don't believe what I've suggested would be unreasonable or take extraordinary effort.

I'm just of the belief that in situations of liquidation, IB has an extreme amount of apathy towards the trader. Trader should always be watching the margin line and keeping it healthy. We aren't there to gamble with the broker's money. Imo, IB could continue with their tight liquidation policy without butchering options trades.
 
"Are people going to say that IB doesn't have the ability to program the liquidation in a way that recognizes defined risk option trades?"

Okay -- if this is the focus, I'll try this as a blanket statement:

**IB has no right, nor any obligation, to go into your account and buy-or-sell stuff that does not have a direct role in relieving a risk burden that your trading put on them. Once the risk burden is relieved, then their *ability* to trade the account IS GONE.**

This would certainly cover the long end of any spreads. It would also relieve them of being mind-readers in looking over the inventory of someone who might have dozens of positions interlaced in their portfolio, on just one expiry -- and were they legged into? Rolled into? Rolled into as $5-wide into $10-wides? Or reversed? NONE of that is any of IB's business; it's ours alone.
 
Benihana said:
I'm of the opinion that IB has the ability to not abandon the trader and stand by their regulators and shareholders. I don't see why the program can't recognize simple vertical spreads. Now if people are trading iron condors or things with more than 4 legs, I can see the program splitting up the trade because who knows how liquid that'll be, but simple spreads should be liquid enough to give better market prices than splitting up each leg and doing 2 market orders. I'm not saying IB should make every effort to get the trader the best price, but I don't believe what I've suggested would be unreasonable or take extraordinary effort.

I'm just of the belief that in situations of liquidation, IB has an extreme amount of apathy towards the trader. Trader should always be watching the margin line and keeping it healthy. We aren't there to gamble with the broker's money. Imo, IB could continue with their tight liquidation policy without butchering options trades.
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I want so much to agree with you, but ......... at the end of a busy expiry??? My inventory??? *I* can't make out how all the positions I hold were gotten into. And I'm going to put that on someone else??? [Here's where you put in one of those little smiley faces indicating pointing at me and L[Y]FAO.....] No whey, Ray. Jeez! And how much would that cost?!?!? [:wtf: -- yes. I just did one of those idiotic smiley-face things that I *hate*.... That's how bored I am today. Oi Gods......) And we haven't even gotten into thin markets (like away-from the money options) or super-wide (pre-FED or post-Trumpidiot) markets. Do they GTFO, and then we bitch about whether the price was right? Ohhhhhhh yuck.

The idea that IB, when auto-liquidating for margin-improvement, could look into someone's account and *see* clear sets of spreads, ........ that's just not likely. I am "slim" right now, and have 30 $5-wide SPX positions on right now. Last week, I was "medium" at almost 100.

I try to match risk top-and-bottom, so *very*often*, inventory might look like iron condors. But maybe it's 5-ers on top, and half-as-many 10-ers on bottom....

Had IB any obligation to ALSO trade non-risk-reducing inventory (like selling the long legs of spreads), they would have zero ability to knowledgeably do so.
 
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There are three fundamental questions
Was there enough buying power to finance the short stock on exercise ?
Did IB act reasonably ?
Did they act within the terms of their account agreement ?

Not enough margin to finance the short stock so that would have prevented auto liquidation and saved a couple of hundred dollars. A lot more than the argument that a spread may have traded a nickel better.

Did they act reasonably - filled at the natural and I was unavailable. They acted reasonably. In fact they did you a favor with the benefit of hindsight and today's action in AMZN. Could you have rolled the spread up and out and bought some time? if you want to play armchair quarterback you could have done that all morning and recouped a few hundred dollars by the close.

Did they act in accordance with the terms of the account agreement ? There is still an unanswered question as to what notification did they provide prior to closing the spread.

The oldest scam in the option business is hiding on expiration and then complaining about how the exit was performed. Margin and auto liquidation are a way for a firm to protect themselves from an unsecured debit. This is the firm's defense. Margin and auto liquidation aren't there to benefit the customer - surprisingly - they are in place to protect the firm from getting hung with an unsecured.
 
I've been in the situation countless times where a spread expires ITM and each leg is exercised and assigned. The issue in this instance was that the long leg was ATM. If it expired OTM, I would have been in a situation of being short stock.

As I wrote in the OP, I was going to close the position because of the pin risk. If AMZN was at $967 like it was for most of the day, this would never have been an issue. The legs would have been exercised/assigned and the difference debited from my account. My remaining question is this--what is the ITM threshold of IB simply allowing exercise/assignment vs. liquidation. Would IB liquidate if near the close AMZN was trading at $964?...$962? What is that number? Knowing this will help me understand if I have to actively close similar positions in the future.
 
Price is not relevant on the underlying. What counts is the spread. It could have been trading at a $1000. The auto liquidation would still have to occur.
What notification did they provide ?
If you were worried about pin risk - you would never have carried the spread into expiration.
Did you have enough margin to finance an exercise ?
 
tommcginnis said:
I want so much to agree with you, but ......... at the end of a busy expiry??? My inventory??? *I* can't make out how all the positions I hold were gotten into. And I'm going to put that on someone else??? [Here's where you put in one of those little smiley faces indicating pointing at me and L[Y]FAO.....] No whey, Ray. Jeez! And how much would that cost?!?!? [:wtf: -- yes. I just did one of those idiotic smiley-face things that I *hate*.... That's how bored I am today. Oi Gods......) And we haven't even gotten into thin markets (like away-from the money options) or super-wide (pre-FED or post-Trumpidiot) markets. Do they GTFO, and then we bitch about whether the price was right? Ohhhhhhh yuck.

The idea that IB, when auto-liquidating for margin-improvement, could look into someone's account and *see* clear sets of spreads, ........ that's just not likely. I am "slim" right now, and have 30 $5-wide SPX positions on right now. Last week, I was "medium" at almost 100.

I try to match risk top-and-bottom, so *very*often*, inventory might look like iron condors. But maybe it's 5-ers on top, and half-as-many 10-ers on bottom....

Had IB any obligation to ALSO trade non-risk-reducing inventory (like selling the long legs of spreads), they would have zero ability to knowledgeably do so.
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Having that many options in one product, I wouldn't expect it to know what the idea or core parts of your position are. My point is basically for two scenarios.

1. Trader has just one option spread on in a product.

2. IB is giving margin credit for whatever option combo is going on.

These also assume the program wants to liquidate 2 or more options of the same product. If it only wants to get rid of one, the whole thing is impossible to begin with. If the program is capable of giving some sort of span margin equivalent (I don't know if IB does because I don't use it), I'd think it is capable of recognizing spreads.

Is it possible for a trader to get screwed by it liquidating a "spread" that really isn't a spread, of course it is. I'd argue that the fill would normally be better than separating those orders and creating 2 market orders. Really the only thing on debate is whether IB should make the effort to do this, or maybe I'm naive in thinking it is possible to have the program work the way I think it should.
 
ajacobson said:
Price is not relevant on the underlying. What counts is the spread. It could have been trading at a $1000. The auto liquidation would still have to occur.
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I don't think this is accurate. Otherwise this assignment/exercise would not have happened.

GOOGL capture.PNG
 
Simply not true. A $30 dollar wide spread would present a riskless arbitrage if it traded wrong.

What was the $30 box during the day ?
 
The liquidation did not occur because of the spread--it occurred due to the approaching expiry. There was plenty of margin to cover the spread, but not enough for assignment absent the exercise of the long call. The market value of the spread (or the box) is irrelevant.

So given the AMZN spread was liquidated but the GOOGL spread earlier was not, I would argue that the level of ITM-ness plays a role in whether or not liquidation occurs (GOOGL was ~$925 in this instance and the long call was $10 ITM).
 
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