IB autoliqidating defined risk position

[blueplayer]

Ticket has been opened but in todays market action IB autoliquidated portions of an Iron fly (defined risk at max loss of 60 per contract) when in the account there was more than enough cash to cover max loss.

If someone from IB could explain to us the rationale behind those kind of actions. For reference that is the only position in the account at this time.

 

[1245]

In my opinion, IB is good for equities and terrible for options. The wide spreads cause a glitch that only a person can over ride. They don't care that you were hedged

 

[1245]

For a low volume retail option account, I would look into TD. For higher volume, an institutional account with an introducing broker. You will have less issues

 

[convexx]

Ticket has been opened but in todays market action IB autoliquidated portions of an Iron fly (defined risk at max loss of 60 per contract) when in the account there was more than enough cash to cover max loss.

If someone from IB could explain to us the rationale behind those kind of actions. For reference that is the only position in the account at this time.

Did you go "on call" due to another position?

 

[butterfacetrader]

Ticket has been opened but in todays market action IB autoliquidated portions of an Iron fly (defined risk at max loss of 60 per contract) when in the account there was more than enough cash to cover max loss.

If someone from IB could explain to us the rationale behind those kind of actions. For reference that is the only position in the account at this time.

I think this happens bc they treat each contract as if what happens when it is exercised into the underlying position, and then settled by closing the trade by exercising the other leg.

E.g:

Say you have $1000 in the account.

XYZ stock trades at $100. $99 strike puts quote for $3. $98 strike puts quote for $2.5.

You do one debit put spread by selling $99 strike and buying the $98 strike to collect $0.5 per contract, or $50 total. Your maximum loss is also $50 (99 strike minus 98 strike for 100 shares is $100 loss plus $50 premium collected).

If XYZ trades at $80 by expiration, rendering that put spread a loss, the broker won't let you hold to expiration. Even though you have $1000 in your account, and your maximum loss to you is $50. Because to buy the stock at $99 strike put that you sold, you will require almost $5000 in your account on Reg-T margin. So you will never be allowed to allow the short option leg to be exercised to begin with during expiration. Even though you will immediately be able to sell back at a loss at $98 strike, for a total loss of $100, but for which you have collected $50 in premium, netting total theoretical loss of $50 to your account, or leaving $950 from $1000.

The thing is they will allow you to open the contract as a spread position, and allow you to close it out as a spread position, but not allow to exercise because it uses more margin than available to you. Closing spread manually is problematic for illiquid options where there is no way to close out a contract without substantial losses (more than the spread position loss).

To close out contracts manually, you will need to close the short legs first (the ones that takes all the margin) before closing the long leg of the spread, for example.

Basically they don't want to lend more to you to fulfill options assignment obligations even for a split second than regulations allow, even though losses are known and capped.

 

[blueplayer]

I think this happens bc they treat each contract as if what happens when it is exercised into the underlying position, and then settled by closing the trade by exercising the other leg.

E.g:

Say you have $1000 in the account.

XYZ stock trades at $100. $99 strike puts quote for $3. $98 strike puts quote for $2.5.

You do one debit put spread by selling $99 strike and buying the $98 strike to collect $0.5 per contract, or $50 total. Your maximum loss is also $50 (99 strike minus 98 strike for 100 shares is $100 loss plus $50 premium collected).

If XYZ trades at $80 by expiration, rendering that put spread a loss, the broker won't let you hold to expiration. Even though you have $1000 in your account, and your maximum loss to you is $50. Because to buy the stock at $99 strike put that you sold, you will require almost $5000 in your account on Reg-T margin. So you will never be allowed to allow the short option leg to be exercised to begin with during expiration. Even though you will immediately be able to sell back at a loss at $98 strike, for a total loss of $100, but for which you have collected $50 in premium, netting total theoretical loss of $50 to your account, or leaving $950 from $1000.

The thing is they will allow you to open the contract as a spread position, and allow you to close it out as a spread position, but not allow to exercise because it uses more margin than available to you. Closing spread manually is problematic for illiquid options where there is no way to close out a contract without substantial losses (more than the spread position loss).

To close out contracts manually, you will need to close the short legs first (the ones that takes all the margin) before closing the long leg of the spread, for example.

Basically they don't want to lend more to you to fulfill options assignment obligations even for a split second than regulations allow, even though losses are known and capped.

This is an SPX iron fly so it is settled in cash. I don't see any risk here at all other than the defined one.

 

[blueplayer]

Did you go "on call" due to another position?

This fly was the only position in the account yesterday a NOV SPX Iron fly 60 wide. To be exact 36 contracts (after they liquidated about 9 in various combinations). Total cash in the account is north of 239K more than enough to cover the whole fly at max loss (which is only 36*60 ~ 216K).

Why autoliquidation at all?

 

[blueplayer]

For a low volume retail option account, I would look into TD. For higher volume, an institutional account with an introducing broker. You will have less issues

I'm starting to agree here. I also use JPM for the bigger stuff but this is disappointing that IB can't even compute the correct risk for such an small fly.

 

[convexx]

This fly was the only position in the account yesterday a NOV SPX Iron fly 60 wide. To be exact 36 contracts (after they liquidated about 9 in various combinations). Total cash in the account is north of 239K more than enough to cover the whole fly at max loss (which is only 36*60 ~ 216K).

Why autoliquidation at all?

Wow, that's odd. I have seen bad liquidations with IB when carrying futures and the algo erroneously pulls some defined-risk legs... that's BS. I would definitely push it to arbitration.

 

[blueplayer]

Wow, that's odd. I have seen bad liquidations with IB when carrying futures and the algo erroneously pulls some defined-risk legs... that's BS. I would definitely push it to arbitration.

Finally talked to human there, the official line is that the account is configured for Portfolio Margin and the risk algos don't even look at the strategy but the individual legs and that is why this thing are happening.

So yes, if you happen to have a PM account with IB then *ANY* strategy that involves a short leg (verticals, flies, calendars) is at risk of autoliquidation. So you have been warned.