Iron Condor on Interactive Brokers

christianhgross · Nov 8, 2009

Quote from erol:

thanks...

Basically, my account size (aside from my trading activity) precludes me from opening an IB account.

So basically, I want to know what I'm missing, since it seems some of the experienced traders are using them.

I work in a hedge fund and we sell premium. We have a proprietary model that allows us to look at mispricings. Thus we really don't care about all of the pretty graphs. And many pros will buy specific tools for the task. IB to a large degree does expect you to do that.

I have never used the IB technical analysis tools, and would not know where to start with them. I run everything from my Excel spreadsheet and .NET code. No graphics, just number crunching.

The real experienced traders use IB because it is a bare bones platform suitable for those people who want to control every aspect of their trade.

TheoHornsby · Nov 8, 2009

Quote from riskfreetrading:

One issue with IB is the margin. If the two sides do not have the same distance between strikes, I think they margin it as a two unrelated spreads. It is stupid as one them will be worthless. If someone can refute or confirm what I wrote, please do.

You think they margin it as a two unrelated spreads?

Have you become the uninformed rookie of these boards?

dagnyt · Nov 8, 2009

Quote from TheoHornsby:

You think they margin it as a two unrelated spreads?

Have you become the uninformed rookie of these boards?

At IB, if you sell a call spread with a 10 point difference between the strikes and also sell a put spread with any difference between the strikes - OTHER THAN 10, then the margin for each spread is calculated separately, and you must meet BOTH, That's $1,000 for the calls, and 100 x strike diff for puts.

Mark

nagaraj_h · Nov 9, 2009

I also confirmed with IB about margin requirements. For an unbalanced Iron Condor, the total margin is sum of margins on each side of the Iron Condor. It doesn't make any sense. As a brokerage specializing in options, IB should know better.

dagnyt · Nov 9, 2009

Quote from nagaraj_h:

I also confirmed with IB about margin requirements. For an unbalanced Iron Condor, the total margin is sum of margins on each side of the Iron Condor. It doesn't make any sense. As a brokerage specializing in options, IB should know better.

It's not a question of knowing better.

They set their algorithm for determining margin and are unwilling too budge.

Take it or leave it.

Mark

christianhgross · Nov 10, 2009

Quote from riskfreetrading:

One issue with IB is the margin. If the two sides do not have the same distance between strikes, I think they margin it as a two unrelated spreads. It is stupid as one them will be worthless. If someone can refute or confirm what I wrote, please do.

No, they don't margin it as two unrelated spreads. I would actually argue that IB margin is superior to ToS. ToS gives you about a 1/3 to 40% less margin than IB. My friend and I compared what margin he gets and I get. Another thing that IB does is give you Portfolio margin (100K+), and not just RegT margin.

Now getting back to the margining of iron condors is that you are actually doing the wrong thing and IB is telling you that.

When you build an iron condor with the same distance you are actually setting up a higher risk trade on the PUT side. Remember on indicies and stocks the PUT side usually has a higher ImplVol and hence you need higher margin. Move further down the scale on the PUT side.

christianhgross · Nov 10, 2009

Quote from nagaraj_h:

I also confirmed with IB about margin requirements. For an unbalanced Iron Condor, the total margin is sum of margins on each side of the Iron Condor. It doesn't make any sense. As a brokerage specializing in options, IB should know better.

That's crap! The total margin is not the sum of margins. I know because we put on these trades ALL DAY LONG!

The total margin required is the worst margin needed. Of course IB gives margin depending on the total monies in your account. The less money you have the worse your margin becomes. The more money you have the better your margin...

nagaraj_h · Nov 10, 2009

Quote from christianhgross:

That's crap! The total margin is not the sum of margins. I know because we put on these trades ALL DAY LONG!

The total margin required is the worst margin needed. Of course IB gives margin depending on the total monies in your account. The less money you have the worse your margin becomes. The more money you have the better your margin...

There is no need to use offensive language. I do not represent any broker.

Regarding margins on Iron Condor, I am not sure if we are referring to the same thing. I mean the reduction in buying power (BP) when I place the trade.

Example: If I place a 590-600 Put credit spread and 700-710 Call credit spread, the BP is $1000 - total credit received. If I place 590-600 Put credit spread and 700-720 call credit spread, the BP is ($1000 â credit received for put spread) + ($2000 â credit received for call spread). I confirmed this with an actual person working for Interactive Brokers (not with a friend).

christianhgross · Nov 10, 2009

Quote from nagaraj_h:

Regarding margins on Iron Condor, I am not sure if we are referring to the same thing. I mean the reduction in buying power (BP) when I place the trade.

Example: If I place a 590-600 Put credit spread and 700-710 Call credit spread, the BP is $1000 - total credit received. If I place 590-600 Put credit spread and 700-720 call credit spread, the BP is ($1000 â credit received for put spread) + ($2000 â credit received for call spread). I confirmed this with an actual person working for Interactive Brokers (not with a friend).

Ok, if you are looking at the IB definition of Buying power, sure you might have a point. But if you are dealing with credit spreads what you need to follow is initial and current maintenance margin. And of course Excess Liquidity. Buying power is sort of useless from what I have seen in terms of credit spreads or naked short options.

I just went through the margin calculations on my live account with the examples you gave me. The calculation is not linear and it is dependent on the balance of the spread. For example the 700-720 spread could have a larger loss and thus is a bigger potential loss than say the put with a 10 point spread.

nagaraj_h · Nov 10, 2009

Quote from christianhgross:

Ok, if you are looking at the IB definition of Buying power, sure you might have a point. But if you are dealing with credit spreads what you need to follow is initial and current maintenance margin. And of course Excess Liquidity. Buying power is sort of useless from what I have seen in terms of credit spreads or naked short options.

I just went through the margin calculations on my live account with the examples you gave me. The calculation is not linear and it is dependent on the balance of the spread. For example the 700-720 spread could have a larger loss and thus is a bigger potential loss than say the put with a 10 point spread.

But the maximum loss is only $2000 - total credit received (when the underlying is above 720), since the put credit spread expires worthless. If the underlying is below 590, the call credit spread expires worthless and the loss is $1000 - total credit received. There is no reason to reduce BP for each side of the trade. It doesn't make sense to lock more capital than is mathematically necessary. It reduces the number of contracts that can be entered.