Unbelievable reply, So they are saying we may auto liquidate your vertical spread at a price substantially below 0. Never mind that it won't be worth less than 0 or if we enter the order as a spread, there will always be a buyer at even a small debit.
IB charges margin on VIX long verticals
- Thread starter ferrycorsten
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Unbelievable reply, So they are saying we may auto liquidate your vertical spread at a price substantially below 0. Never mind that it won't be worth less than 0 or if we enter the order as a spread, there will always be a buyer at even a small debit.
There should be a buyer... but prices can cross aribtragible levels in times of extreme stress. They can persist because no one can arbitrage them.
For example convertible bonds traded below their Corporate counterparts (despite having extra optionality).
SPX futures traded significantly off their theoretical forward values because one couldn't short financials.
In the case of the VIX, what would happen if the VXX turned out to be a fraud. The dislocations in VIX pricing could be massive as dealers try to manage the event. In that event, bid offers may make trading the spread go less than zero.
It's not Interactive Brokers job to assume markets will run orderly in all environments especially when their greatest exposure is when markets aren't acting normally.
That being said, I wouldn't be with a broker that used this logic because there are many brokers that assume more reasonable scenarios.
I agree with what you are saying but once a long spread gets to zero, there is no risk and no benefit from liquidation. They can offer the spread at Zero to get it off the clients sheets in the COB or just leave it there if the account is not closed.
1245
Can they treat the two positions as one? Or is it either difficult or against the regulations under SPAN?
When they liquidate would other firms put it in the combo order book or lift offers/hit bids on the individual legs?
It's a difficult question to answer when everyone here all know that VIX options are traded on the CBOE, clear though the OCC and get the risk calculations of TIMS at the account level. They are not options on futures but are priced vs the future. To my knowledge, no other PB is doing this. Every firm does liquidations differently. I would assume they will do what is easy for them, which is market orders on each leg.
Now to SPAN. I'm NOT an expert on SPAN margin for options on futures. I don't know if SPAN uses offsets in the same manner that TIMS does. This is from the CME:
How SPAN Works:
http://www.cmegroup.com/clearing/risk-management/
For the purposes of SOM under SPAN, there is no such thing as a spread. Each short leg is margined without regard for any longs in the account.
And the reply from IB is just stupid. In case of a margin call, they could liquidate your long spread for a debit, which would only exacerbate the funding deficiency.
Having a margin for a long vert. is not fair to the responsible trader who maintains adequate reserves. IB is a great broker for retail, but you don't want to come close to messing around with auto liq. Not every trader manages their margin well.
AFAIK, if there is a margin deficiency, then TWS looks for an asset to sell to cover the deficiency. If that asset is the long option of the vertical, then that is it. The "liquidate last" feature may help in some cases.
As soon as the long option is sold, then the margin for the short comes into play and it is liquidated.
It is auto, no humans analyze each and every IB acct. to see what is best for the customer. At IB, you are expected to manage your margin reqs. or face the consequences.
AFAIK, if there is a margin deficiency, then TWS looks for an asset to sell to cover the deficiency. If that asset is the long option of the vertical, then that is it. The "liquidate last" feature may help in some cases.
As soon as the long option is sold, then the margin for the short comes into play and it is liquidated.
It is auto, no humans analyze each and every IB acct. to see what is best for the customer. At IB, you are expected to manage your margin reqs. or face the consequences.