Interactive Brokers Incorrect Option Margin Requirements

[frostengine]

In my account, I only have vertical (credit) spreads. Looking at my margin requirements I see:

RegT Margin: 24k
Current Initial margin: 35k
Current Maintenance margin: 24k

The RegT and maintenance margin amounts are correct - essentially matches the difference between the spread strikes (which is the most you can lose on the position). However, my initial margin is 11k higher. This is causing issues for opening new positions.

The current initial margin is staying there, never changes to the correct lower number. Day after day.... After closing some positions, I have been able to identify that the incorrect margin is requirement is coming from my VXX spreads.

It appears that IB is requiring more margin than its possible to lose on the spreads. I know a few weeks ago IB changed the margin requirements on volatility related instruments. However, even with those changes margin should NEVER be higher than the spread difference. What am I missing here?

Anyone else having a similar issue?

 

[Robert Morse]

Trading VXX?

 

[Sig]

In my account, I only have vertical (credit) spreads. Looking at my margin requirements I see:

RegT Margin: 24k
Current Initial margin: 35k
Current Maintenance margin: 24k

The RegT and maintenance margin amounts are correct - essentially matches the difference between the spread strikes (which is the most you can lose on the position). However, my initial margin is 11k higher. This is causing issues for opening new positions.

The current initial margin is staying there, never changes to the correct lower number. Day after day.... After closing some positions, I have been able to identify that the incorrect margin is requirement is coming from my VXX spreads.

It appears that IB is requiring more margin than its possible to lose on the spreads. I know a few weeks ago IB changed the margin requirements on volatility related instruments. However, even with those changes margin should NEVER be higher than the spread difference. What am I missing here?

Anyone else having a similar issue?

IB is infamously for not gasping the fundamental concept that a spread has a maximum loss and charging you margin on some higher amount. If you get lucky you may talk to a human there that gets the concept, but they'll always defer to "the algorithm" that runs the place and which is impervious to logic or change.

In a less cynical explanation, in order to keep costs low IB programs everything into their system. The programmers don't know a lot about trading, and because they depend on the software to protect the company, they're clearly incentivized to minimize risk even if it means doing irrational things that lose them customers. At the same time, their front line staff don't hold much sway with these programmers, and can only influence the code base if it's losing IB money or rises to the level of analysts bringing up a particularly dumb behavior on a conference call with the CEO (true story). Anything else is just tough shit for you the customer. Don't like it, go elsewhere (which a lot of us have done). It's a business model, an infuriating one that I don't think is entirely necessary, but it's theirs.

 

[JackRab]

There has been some threads about this in the past...

Basically, IB sometimes decides to calculate margin based on individual legs in stead on the spread. I think their argument is that you might run into trouble when your short leg is assigned and they start to liquidate because of (short/long) underlying holdings that are too big for the account...

It's stupid really...

Is this spread in American style options? It definitely shouldn't happen in European style... but again, IB...

 

[Robert Morse]

Calculating reg-t margin is not that straight forward when you have many positions. Each clearing firm has a process for pairing off spreads and looking for naked options. They don't look for the spreads as you entered them.

 

[algotrader12]

Yes, I am seeing that as well, they now require crazy initial margin to own put spreads in all vol etps and not just that, looks like they now charge initial margin for just owning options. I have some puts and they are charging me around to 100% initial margin. This makes no sense at all, owning options has no risk, you are only risking what you paid for option. I am ok with them raising margin requirements for being short volatility and writing calls and maybe even puts, but buying options is margin-able now? Have they lost their minds ? The worst part is that they are not providing any details about what is happening. They change margin requirements on vix etps daily now and keep customers in the dark. I am starting to look where to move, this is too much.

 

[frostengine]

Yes, I am seeing that as well, they now require crazy initial margin to own put spreads in all vol etps and not just that, looks like they now charge initial margin for just owning options. I have some puts and they are charging me around to 100% initial margin. This makes no sense at all, owning options has no risk, you are only risking what you paid for option. I am ok with them raising margin requirements for being short volatility and writing calls and maybe even puts, but buying options is margin-able now? Have they lost their minds ? The worst part is that they are not providing any details about what is happening. They change margin requirements on vix etps daily now and keep customers in the dark. I am starting to look where to move, this is too much.

I’m looking to move as well. Any suggestions? I mostly trade options only these days.

 

[viruscore1]

I’m looking to move as well. Any suggestions? I mostly trade options only these days.

I've tried tradestation. They also have issues, maybe more serious than other. I use IB but verify the numbers on etrade pro with success. They sent me a callaway diablo driver

 

[ajacobson]

Bob is spot on. It isn't as easy as it used to be. Products now trade overnight of have underylings that trade overnight. There are other products like European Calendars that also present special margin issues.
Keep in mind - margin is not intended to protect you, but rather product your broker from being left with a large unsecured debit.
Over time you are going to find there will little opportunity for regulatory arbitrage between brokers.
American Equity options are pretty easy - most everything else has gotten pretty complicated.

Ask yourself the question as to what could wrong with the position and how tight am I on available SMA (margin) in my account.

I suspect - actually I fear the industry is simply going to send this business away with the exception of very well capitalized account. I would expect to see products with underlyings that trade overnight to become harder to margin and eventually see spreads not recognized by any retail brokerage.

 

[Sig]

Bob is spot on. It isn't as easy as it used to be. Products now trade overnight of have underylings that trade overnight. There are other products like European Calendars that also present special margin issues.
Keep in mind - margin is not intended to protect you, but rather product your broker from being left with a large unsecured debit.
Over time you are going to find there will little opportunity for regulatory arbitrage between brokers.
American Equity options are pretty easy - most everything else has gotten pretty complicated.

Ask yourself the question as to what could wrong with the position and how tight am I on available SMA (margin) in my account.

I suspect - actually I fear the industry is simply going to send this business away with the exception of very well capitalized account. I would expect to see products with underlyings that trade overnight to become harder to margin and eventually see spreads not recognized by any retail brokerage.

Let's be clear here. One poster is talking about buying an option. You can never, never lose more than you paid for an option. That's a fundamental attribute of an option! Same thing with a vertical spread with european options which is the other subject under discussion. The max loss is defined. There's nothing hard to calculate about either of those scenarios. It has nothing to do with overnight trading, or what could go wrong. It has everything to do with one broker, IB, that either doesn't grasp these fundamental concepts or is too lazy to fix what is an obviously malfunctioning algorithm. There is no ambiguity here!