IB charges margin on VIX long verticals

[1245]

This was about a month ago, but I will give you this example which is similar: August 15, 2014 1935/40 put vertical. Bid/offer is .50/1.50

If I try to buy 50 at 1.00, initial margin is $2,875 and maintenance is $2,300. Total cash outlay is 2500 plus commissions which I think would be $142.

My near-liquidation was due to the fact that I had a decent profit in the spread, hedged via futures at another broker, then IB didn't update prices quick enough. My margin went down as the put spread value went down, but it was a close call.

Sorry, on a train right now. I'll get you something later tonight that should help.

1245

 

[convexx]

I called them today. Their response was "we have special margin requirements for commodities". I said are you telling me I should have 5k in margin on a long call spread that costed me 2k? This is absurd. What can I do? I have to go through five people to reach the margin department. That's how hard it is to reach them.

I hope someone from IB sees this and corrects the matter soon.

Go with VXX when trading with IB.

 

[butterfacetrader]

IB has excessive margins on futures options.

IB margin for an ES futures contract is $5750.

IB margin for a 30 point OTM short ES call contract is $8910.

How is it possible to lose more money on the 30 point OTM short ES call contract than being short the underlying ES contract?

The obvious answer is that you can't lose more money being short the OTM ES call than being short the ES future.

Whether it makes sense or not, IB just decides what they want to do and then just does it.

Trying to get rational explanations out of IB is an exercise in futility.

Yeah it doesn't make sense, even if implied volatility goes up a lot, if you were short an ES versus short a OTM call, all done at the same time at the same level in different accounts, the short OTM call should lose less money at expiration than a short futures should ES go higher.

That said I think it has something to do with the nature of the settlement with the clearing house/firm? Futures are settled daily. The options are settled at the opening/closing of the contract. Maybe they also account for the fact options are less liquid and have wider bid/ask spreads so if it gaps, frictional losses will be higher closing out a losing call position than ES directly, so they make clients put up more margin to hold a naked short option position. The margin should actually decrease, should you pair the naked short option with an offsetting futures position, so if you were naked short a call, its high, but once you enter a long ES, it should go down.

 

[1245]

This was about a month ago, but I will give you this example which is similar: August 15, 2014 1935/40 put vertical. Bid/offer is .50/1.50

If I try to buy 50 at 1.00, initial margin is $2,875 and maintenance is $2,300. Total cash outlay is 2500 plus commissions which I think would be $142.

My near-liquidation was due to the fact that I had a decent profit in the spread, hedged via futures at another broker, then IB didn't update prices quick enough. My margin went down as the put spread value went down, but it was a close call.

This was the best I could do. I went back to settlement on 7/1/2014. You can see what the CME requires from your segregated account.

1245

 

[chisel]

Here's basically what happened: I was long a bunch of put verticals. When I put them on, I had plenty of excess margin. Now add some realized losses in futures. That reduced my cash. Then ES fell sharply and my verticals increased in value. BUT, margin also went up for the spreads. Then with no other positions other than verticals, ES had a sharp and quick rally and prices were not updated quick enough in my account window so margin did not decrease as fast as it should have. I was $200-300 away from auto-liquidation so I bought some ES futures in the IB account which reduced the margin.

Thank you 1245. IB's margin is much higher than that.

In my account right now all I have are verticals which are worth $1,683, but maintenance margin is $4,670.

 

[1245]

Here's basically what happened: I was long a bunch of put verticals. When I put them on, I had plenty of excess margin. Now add some realized losses in futures. That reduced my cash. Then ES fell sharply and my verticals increased in value. BUT, margin also went up for the spreads. Then with no other positions other than verticals, ES had a sharp and quick rally and prices were not updated quick enough in my account window so margin does not decrease as fast as it should. I was $200-300 away from auto-liquidation so I bought some ES futures in the IB account which reduced the margin.

Thank you 1245. IB's margin is much higher than that.

In my account right now all I have are verticals which are worth $1,683, but maintenance margin is $4,670.

I can't speak for the way IB works. I can tell you that for futures accounts, the CME provides SPAN calculation 3 times a day. AM, PM and Settlement. SPAN is much different that OCC margin. OCC haircut for PM is calculated only at end of day and is done by shocks. I'm much more familiar with PM then Span. If you buy a vertical spread in OCC margin, your requirement s never more than the premium paid. SPAN can and is often more. There is no good reason for it.

I prefer SPX to ES. 100X the index vs 50X the index and lower overall commissions. Easier to understand. cash settled vs future settled. More customer flow in SPX too. For a PM account, you can offset SPX with SPY.

1245

 

[trickyname]

Fairly sure you're running into the issue of Short Option Minimum in SPAN. From the CME's website:

For long option value (money you pay) we create a credit in the PC Span calculation and for short option value (money you collect) we create a debit. This way you are getting credit against the margin (span risk) calculation for the money that you have already paid out. Long option value is always greater than the span risk that is calculated because we understand that you cannot lose more than what you have paid for a long option. For a short option we create a debit because we want to make sure that you are keeping the premium for that option in the account until you unwind the position or it expires. In other words, a short option will also have additional margin that has to be posted that is not covered by the premium collected.

Additionally, if you have a short deep-out-of-the-money option, CME applies a Short Option Minimum (SOM) to the position. This is because deep-out-of-the-money short options may show zero or minimal Scan Risk given the price and volatility moves in the 16 market scenarios, yet still present risk in the event that these options move closer-to-the-money or in-the-money, thereby generating potentially large losses. Hence CME applies the SOM to each product to account for this potential exposure. Note that if the Scan Risk is lower than the Short Option Minimum, the SOM is charged.

Your scan risk would be equal to the cost of the spread, so that's what most people would think they'd be charged on. However, the spread is made up of a long and a short leg, so while the long option is getting credit for its value, the presence of the short leg in the spread kicks in the SOM for VIX.

I don't know what it is offhand for VIX, but SOM for ES is $46. With a higher vol and a higher multiplier in the VIX, I don't think what you're seeing is out of the ballpark.

 

[FSU]

Fairly sure you're running into the issue of Short Option Minimum in SPAN. From the CME's website:



Your scan risk would be equal to the cost of the spread, so that's what most people would think they'd be charged on. However, the spread is made up of a long and a short leg, so while the long option is getting credit for its value, the presence of the short leg in the spread kicks in the SOM for VIX.

I don't know what it is offhand for VIX, but SOM for ES is $46. With a higher vol and a higher multiplier in the VIX, I don't think what you're seeing is out of the ballpark.

Well, VIX futures and options are not traded on the CME, unlike ES futures and options. ES options exercise into ES futures, VIX options are cash settled. They do not exercise into futures. They are not futures options. I wish someone from IB would come on and explain the original issue raised.

 

[trickyname]

Well, VIX futures and options are not traded on the CME, unlike ES futures and options. ES options exercise into ES futures, VIX options are cash settled. They do not exercise into futures. They are not futures options. I wish someone from IB would come on and explain the original issue raised.

I'm aware they're cash settled, which is why treating the VIX as a "commodity" makes no sense. However, if people are being told that VIX is being margined using SPAN, then what I wrote above still applies. The CME developed SPAN, so any literature that you can find on their website regarding the process still holds.

It's possible that IB might cross-margin VIX options and futures, in which case they would have to calculate both PM and SPAN, and charge the greater of the two.

 

[ferrycorsten]

got another reply from IB:


The following explanation is to clarify the logic behind the additional charge assessed to the VIX spread in question. Although there is a maximum loss associated with the spread, that loss presumes holding the spread through expiration. We cannot presume, however, that the spread will in fact be held through expiration, for a variety of reasons. If, for example, the account were to go into a margin deficiency, and the only holdings in the account that were candidates for liquidation were the VIX legs, an automated liquidation would be executed as two separate legs, with the possibility that the loss on the bid/ask spreads of each leg would be greater than the maximum loss on the spread if it were held through expiration. It is this additional risk that necessitates a House Charge to account for a loss in excess of the exchange margin requirement.

Hopefully, this explanation clarifies the reasoning behind the additional charge.

Sincerely, Jim
Trade Group