Quote from MattSF:
This is a pile of shit. Professional, yeah. I've had an IB personal account for going on 14 years. I keep track of my volume through excel and it's standing at 540,000 contracts in all, and not once in those 14 years and 540k contracts have I been subjected to an auto-liquidation on an options position, defined or margined.
Just because something has not happened to you personally, does not mean it hasn't happened to someone else. And even if something hasn't happened to anyone, this doesn't mean it can't happen. What matters is whether IB's policy will cause auto-liquidation in some situations.
Furthemore, 'defined risk' American-style exercise options DO have huge potential risk to the short leg, due to early exercise, and the lag between exercise by the counterparty, and notification/ability to cover for the trader who is short the leg.
For example, in a market crash, takeover, short squeeze or other unusual market environment, it is quite possible that the short leg goes massively into the money. If the counterparty exercises the option, the trader short the leg will have a potentially gargantuan cash requirement to meet the margin call. In most situations, the long leg will be sufficient to cover this. However, there is no guarantee that the market will be open, that the market quote will be reasonable, or that the price will be similar. For example you could have a flash crash drive the stock price to 1 cent at the close, get exercised on your short put after the close, next morning you have a huge margin call, but there are no decent offers for the massively ITM put on the size you need. It's quite possible then you can't meet the margin call.
Or the price has shot back up in the underlying, your long puts are not worth anywhere near enough to meet the margin call, and if you exercise to fulfil the delivery requirement for the underlying, you have to wait until tomorrow to take delivery - this leaves you with a huge margin deficit and you will be closed out by a broker that does not have the discretion, willingness, and funding to maintain your position for 1 trading day. Even if they are willing and able, things like short sale restrictions can really fuck up your day.
If you have read IB's T&Cs and risk disclaimers, you will see that, like every other broker, they warn you that you cannot expect an orderly liquid market at fair value, that fast markets and crash conditions can result in spreads and other positions going way out of what, and that you must be able to meet your margin requirements under these conditions just as much as under normal conditions.
