IB Made an Error. Will They Fix It?

IDS, thank you for taking the time to respond but this is the same answer I received from IB customer service and I believe it is incorrect.

I understand when you buy options you have to pay for them. I believe futures options however, are different. When you buy futures options, similar to trading the underying futures contract, it's about margin (SPAN). When I buy a futures option I'm not concerned with how much it costs because it's leveraged and is "mark-to-market" just like the underlying futures contract. The only thing I'm concerned about is the margin required to hold the position.

This makes sense to me because I have to leg into my positions to begin with. For instance, on Monday when I was flat I had to long 20 ES 1260 Puts trading at around 16.00. This is primarily because the IB combo tickets on GLOBEX don't work so I have to leg in. So under your reasoning, in order for me to open 20 long ES 1260 puts @ 16 I would need 16,000 in cash. However, this is not the case. I only required the initial margin which was around 6000 to establish the position. Then I sold 20 1250 puts which further reduced my margin because my portfolio now has less risk according to SPAN.

In other words if futures options are are margined via SPAN then you don't need to lay cash out for them. Otherwise if you're paying cash then why use SPAN at all?

I agree that equity options are different. However, I've always been under the assumption that futures options are margined and not bought. Please correct me if I'm wrong...
 
ddunbar,

Thank you for the information and the kind words.

I understand what your saying about the terminology and that commodities uses the "total cash value" to determine my ability to open and close positions.

To me it sounds like your describing the margin requirements for equity options and not futures options on GLOBEX. It is my understanding that on GLOBEX SPAN is the marging system. So, as long as my "Net Liquidation Value" in my account is higher than the "Initial Margin" required to execute the trade then I should be fine.

Remember, I have no equity or equity option positions. I'm only carring the mentioned positions on GLOBEX which are all subject to SPAN margining. Therefore, if my current margin is below (much below) my current Net Liquidation Value and when I click check margin on the order ticket to close my short puts I'm still below the initial margin on the screen then I should be fine right?

If all my positions are margined with SPAN and my Net Liquidation value is much higher than my margin required then why can't I close these puts? Why is my money tied up in supporting a position that according to my margin only requires a small amount of my capital to support?

Thanks in advance for the replies...
 
Let me take a whack it it...

As others have said, taking off one leg of a spread generally results in increased margin requirements*. So, it is possible to leg into a spread incrementally, but you then have to leg out of it incrementally too.

In the following, I'm talking about initial margin for 1 contract (or spread), for Sep06 expiration, and I ignore spreads and commissions.

I played with the demo a little. With ES ~1270, the margin for +1280P is $1530, which is roughly the size of the premium, and what you would lose if the value went to 0 (around ES +15%). However, if you then -1270P, it drops to ~$189, which is what you lose on the spread up a few % (ignoring skew).

So, with $153K in your account, you can do these in order:

+100x 1280P = $0 avail cash
-100x 1270P = $134100
+87x 1280P = $990
-87x 1270P = $117657
+76 1280P = $1377
-76 1270P = $103293

So, you now have 263 spreads on and still have $103K available cash.

However, if you try to buy back 263x1270P, it would leave you +263x1280P, the margin requirement for which would be $402K - way too much.

There is also a 2% minimum margin to position value requirement which comes into play at some point when legging in incrementally like this to make sure you have the ability to leg back out without unreasonably high execution risk - not sure exactly how to apply it, though.

Looking at it from a risk perspective, your original bull call spread plus bear put spread combo is theoretically greek neutral. If you buy back the short puts, though, it becomes net bearish, among other things, with delta=-25, gamma=+0.31, vega=+90, theta=-12. Thus, it stands to reason that it requires more margin.


*I'm using the word "margin" instead of "performance bond" because it's easier to type. Note that the CME/CBOT clearing docs use these terms interchangeably now, too.
 
alanm,

I fully agree with what you're saying. In my specific situation the margin with both put and call spreads on with a 20 lot size was around 1500 dollars at around 1pm today. In IB I created a ticket to buy back the 20 1250 puts that I was short. I then right clicked on the ticket and clicked check margin. This function is supposed to tell me what the margin would be if I executed that ticket. The result was an initial margin of 4500. My Net Liquidation value in my account is many multiples more that this value. So the question is why wouldn't I be able to close my short puts if my Net Liquidation value was significantly more than my initial and maintenance margins required when I checked margin for the buy back of the 20 puts?
 
Also, in my account window I believe there's an issue (probably related to my inability to close the 20 short puts). My total column for "Total Cash Value" is near 0 and my Commodities column for "Total Cash Value" is exactly 0.

As I mentioned before, the only positions I'm holding in this account is the 20 lot call and put debit spreads. In my experience with IB (the last 3 years) the "Total Cash Value" when holding debit (or credit spreads) is the difference (sum) between the cash in your account and the debit (or credit) of the spread.

Specifically when you subtract the debit value of the futures options spread I'm holding from my initial cash balance I should get the Commodities "Total Cash Value".

For instance if I had 20K in my account and I was holding a 1 lot 1260/1250 ES put debit spread that cost me 4 points to put on then my "Total Cash Value" would be my 20K minus 200 (4 *50) for a total of 19800. My "Net Liquidation Value" would be my initial 20K plus or minus any real-time P/L on the debit spread based on current market value.

If I put on a 1 lot 1260/1250 ES put credit spread for 3 points then my "Total Cash Value" would be my 20K plus 150 (3 *50) for a total of 20150 and my "Net Liquidation Value" would be my initial 20K plus or minus any real-time P/L on the credit spread based on current market value.

I'm assuming I'm correct in this because this has been my experience for the past 3 years trading futures options through IB. So if this is correct then my current Commodities column for "Total Cash Value" should not be 0 but the difference between the initial cash in my account minus the debit I paid for both put and call spreads. My "Net Liquidation Value" (which determines if I'm above or below my margin requirements) would be my initial cash balance before putting on the debit spreads plus or minus any profit or loss incurred by the real-time market value of my futures options.

In my case my "Net Liquidation Value" is correct but my "Total Cash Value" for the Commodities column is 0. I believe my "Total Cash Value" should be the difference between my initial cash balance (before I put the debit spread on) and the cost of the debit spread (which is 7 points or $7000). I can tell you for a certainty that my cash value before I initiated the debit spread is far greater than 0 even after subtracting 7K from it.

Am I incorrect in my thinking???
 
I'm not sure why you expect anyone to be able to tell you what the problem is when you obviously don't give all the details necessary to know. You leave some of the keys out like how much cash was there in the beginning, how many spreads at what debit did, and what the legs of those spreads are worth today.

But clearly there is a couple of factors at work here. First, you've had a problem with your account in which IB has had to credit some funds ($10K), and in which IB is investigating a question concerning another $6300. These could have a bearing on your problem now obviously.

Next though, I can imagine a situation where you bought a debit spread, and in which the options went up in value. In this case, you bought a put spread, and the puts went up in value. Now you want to buy back the short puts. I can easily imagine a situation where the short put value would exceed the value of cash in your account...and in fact, that seems to be what IB is telling you, and what the system is stating.

What I don't know is whether IB give you "margin" usuage on the increased value of the long puts. Do they in commodity options? To my understanding they don't in equity options.

But even if they do, the other question revolves around whether the cash is correct in the account after the various problems that occurred prior to this.

You need to set forth ample detail to be able to answer your question. But one thing I've got considerable confidence in...is that IB's systems work fine...that sometimes the user's understanding of the system is not where it should be. But again, in your case, your account may have issues because of the various errors that have taken place.

By the way, the initial problem here began with you "rolling the dice". By that I mean you took chances on that Friday that really seem silly...especially in hindsight. Had you not done so none of the problems would have occurred. It does sound like sometime when wrong in IB's reports of the assignment. But remember that you WERE assigned, and that all that was lacking was the proper notification so that you could have closed the short position Sunday night. Had you waited for the opening on Monday it was already a big net loser. As it turns out, you were trying to pick up pennies, never a good idea in the market, especially the leveraged derivatives markets.

If you are truly earnest then present the detail necessary to give you an informed answer. If not, then simply give IB an opportunity to figure out what has gone on. But let's not start adding up what you think you "might" have done, and that's what IB "cost" you. I think that requires all of us to make assumptions that some of us may be unwilling to make. I do find it rather amazing that you evidently have used IB for 3 years trading these types of situations, evidently with no issues, until just now. This would lead me to look closer at what the recent events, rather than to assume that something with IB's system is suddenly jacked up, which is what you seem to be implying.

OldTrader
 
Michael: What you're saying generally makes sense as far as the cash value, but as OT said, it's hard to know how the cash got depleted without the details of exactly what positions were put on and when. In particular, since futures and FOPs are MTM at each closing, that cash value will move around as the positions win/lose each day.

In the demo, starting with 500K, and ES around 1275-1280, I put on (in several pieces) 829x -1280/+1270 calls and -1280/+1290 puts for a debit of ~$12.0442. Initial margin is $77719 (829x93.75). Cash value, as expected, is now just $631 ($500K-829x12.0442). NLV is 408K, reflecting losses due to bid/ask spread and unrealized P&L. EWL is 346K, which is NLV minus maintenance margin of $62K.

This appears to now be a position similar to your original posting.

In Option Trader, if I click on the offer of the 1280 puts, it creates an order to buy 829x. If I check margin on that order, it says initial margin would be 1299K (expected - 829x ~$1567 - way too much), and the order is rejected if I attempt to send it. That is, unlike your case, "check margin" works as expected here.

Even if I attempt to buy just 1x 1280P @ 26.25, it rejects the order, saying that cash would be reduced to -682.95 (631.20 - 50x26.25 - 1.65). The key here is that it appears that you must still have sufficient cash to buy the option. This implies that, just like equities, you have paid the ~$2.435MM to purchase the long options and received ~$1.935MM from the sale of the short options. Whether this is what actually happens with FOPs (buyers pay sellers premium) or not, I don't know.
 
cohenmichaela,

Your understanding is incorrect and our CS is providing a good explanation. I will try to improve this explanation here to compensate a bit your moral loss because of our error.

As alanm correctly mentioned, whatever is called margin in futures world is performance bond requirements. Performance bond requirements are sum of additional and premium margins. Additional margin covers a maximal possible loss of the portfolio during next trading day. Additional margin is what you see as margin in your “Check margin” box.

Buying an option, you are getting a privilege and you must pay for that. ES futures options are premium-style. Even if an option is marked-to-market, the clearinghouse must be sure that you are capable to close your position. Premium margin covers it. It is equal to your option value. In a way, it is not much different from the equity side.

The collateral for performance bond requirements is cash. There are other possibilities such as treasury bonds but it is out of scope of the discussion. It is permitted to use net options value to cover an additional margin. Premium is covered by cash. Futures are leveraged product and you cannot borrow money (what is also called margin on equity side) to cover performance bond requirements. BTW, it is the reason why futures and futures options are permitted on IRA accounts without restrictions.

It is a simplified picture of course. To keep this letter reasonable in size, I dropped discussion of how variation margin (P&L) affects it.

Your phrase, “When I buy a futures option I'm not concerned with how much it costs” is absolutely stunning.
 
Here's more details then. My original cash value on Sunday night, before IB put me short 10 ES contracts @ 1245 because of their assignment error was 20000. At this point it was all cash and I was flat.

Monday morning I find I am short 10 ES contracts @ 1245 with the ES trading @ 1257.50 so I close my positions for a 12.5 point loss on 10 contracts. This is a 6250 loss plus commissions which puts my account at around 13730.

At this point I put on the 2 debit spreads below.

Long 20 AUG ES 1260 Put @ 16.00
Short 20 AUG ES 1250 Put @ 12.75

Long 20 AUG ES 1280 Call @ 9.25
Short 20 AUG ES 1290 Call @ 5.50

A note of interest here. Everyone to this point (including IB) has suggested that I need cash in hand to pay for the full value of options that I am long (minus the credit of options that I am short of course). I believe this is incorrect. I legged into these spreads because the IB GLOBEX combo ticket has never worked for me. My first execution was long 20 AUG ES 1260 Puts @ 16. I obviously couldn't afford the 16K price tag of these puts if I only had around 13.7K in my account. The trade executed and I was long with margin around 5 or 6K.

Now this is the point when IB re-executed the short 10 ES @ 1245 transaction for me which dropped me down another 10K and IB starts liquidating some of my options positions because now I don't have margin to support them. I call IB and they say sorry my bad and start reinitiating my options positions. They also remove the short 10 ES @ 1245.

Now my account is back up to around 13.9K. I have a small profit on my call debits so that's why my Net Liquidation value is up slightly. My debit spreads are back on with 20 lot size and my margin is around 1500.

I create a ticket to buy back my 20 short puts. I click check margin and it says 4500 to buy them back. I have a Net Liquidation value of almost 14K. If the margin required to buy back the 20 puts is 4500 then why shouldn't I be able to do it???

Again I don't believe you need cash to "buy" options on futures. You only need margin to support it, just like the underlying futures contract. If I'm wrong will someone please correct me and also explain why I was able to purchase the 20 long puts to begin with...
 
ids,

Thank you for the response. I understand what you are saying. If I am wrong (which I'm willing to accept) please answer me one question.

You are saying that I would need to pay for the premium of a long futures option if I was flat and trying to buy. As I just mentioned, I bought 20 ES AUG 1260 puts @ 1260 for 16.00. I only had 13.7K in my account. My margin was around 5 - 6K (I don't remember exactly how much). If I have to pay for my long futures options then how could I buy 16K worth of them with only 13.7K of cash in my account and no other positions on???

To address your comment of

"Your phrase, “When I buy a futures option I'm not concerned with how much it costs” is absolutely stunning."

I can only say please take my words in context. Trying to make me look bad or feel stupid doesn't accomplish anything useful. I was referring to the fact that I'm only concerned with the margin required and not the cost of the options when establishing a position. This should be obvious based on the past posts I've made. Of course I'm concerned with their market value in relation to my strategies and my P/L. The main question I've had here is if cash is required to "buy" futures options, or do you just need enough cash to supply margin (or performance bond). You and a few others have said I'm wrong and that you need cash. Then why could I buy futures options puts that had a higher market value than my account?

I feel when you post statements that indirectly attack my intelligence it shows negative on IB customer service. This is the kind of treatment I've received all week even though the first 2 problems (IB exercise assignment and IB doubling short 10 ES contracts) have already been established to be IB's fault. Regardless of this fact, everytime I call customer service I get "you're wrong" and "the system is fine" and "you must be stupid" in one form or another. Please have some respect for your customers so we can all get our problems resolved. If that means I'm wrong in my thinking then please tell it to me in a respectful way and make a valid attempt to answer my question. I am your customer after all.
 
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