Margin for Butterfly-Like Position

[NeuralNet34]

I want to hold a position in my account such as:
+100 shares ABC
-2 ABC Call at 15
+1 ABC Call at 20

However, I was shown a margin error before placing the trade. I called the options team at my broker who explained that they view the trade as a Covered Call (zero margin) and a Bear Call Spread ($500 margin).

However, I believe this entire position should have zero margin, similar to a butterfly. You can even decompose my desired position as:
Covered Call:
: +100 shares ABC
: -1 ABC Call at 10
Call Butterfly:
: +1 ABC Call at 10
: -2 ABC Call at 15
: +1 ABC Call at 20
which are two zero-margin positions. However my broker said that margin doesn't work like this.

If I am wrong, please let me know what I am misunderstanding about margin. Or if I am right, do you have suggestions about how I can best communicate this to my broker so I can place the trade?

 

[Robert Morse]

This breaks down to a buy write (100 shares-1 ABC 15 call) and a credit spread 1 time. The margin on the Buy Write is not $0 and the margin of the credit spread is max loss.

+100 shares ABC
-2 ABC Call at 15
+1 ABC Call at 20

 

[BlueWaterSailor]

I think you're confusing calculation - where all kinds of operations are permissible - with positions that are actually held. Margin is irrelevant to the former, but definitely applies to the latter.

 

[NeuralNet34]

Thanks for the replies. I think I didn't use the term "zero-margin" correctly, or maybe I didn't understand the responses, so let me try again. I have bought all the positions in full (there is no margin loan). Suppose I have two accounts:

Account 1:
: +100 shares ABC
: -1 ABC Call at 10
: $0 cash
Account 2:
: +1 ABC Call at 10
: -2 ABC Call at 15
: +1 ABC Call at 20
: $0 cash

Neither of these accounts has a margin violation. If I combine these accounts, I get the desired position, so it doesn't make sense why that would have a margin violation.

 

[BlueWaterSailor]

Account 1:
: +100 shares ABC
: -1 ABC Call at 10
: $0 cash
Account 2:
: +1 ABC Call at 10
: -2 ABC Call at 15
: +1 ABC Call at 20
: $0 cash

Neither of these accounts has a margin violation. If I combine these accounts, I get the desired position, so it doesn't make sense why that would have a margin violation.

You can't hold a short and a long at the same strike/tenor in one account, so they would cancel out - and you'd be left with the position that's been explained to you.

If I try to combine my regular account with my IRA while holding a short call in the former, that would violate the rules of the IRA - and I wouldn't be allowed to do that. All the fine-feathered reasoning about why I "should" be able to do so, or that it's valid in its current position isn't going to matter; brokers have their rules (as well as having to obey rules handed down to them), and that's how it is. It's the other kid's ball, bat, and back yard - and you have to follow his rules if you want to play. The best thing you can do is remember what those rules are so you don't run afoul of them again; arguing against them isn't going to get you much.

 

[NeuralNet34]

brokers have their rules (as well as having to obey rules handed down to them), and that's how it is.

This resolves my confusion. The rules don't make sense (to me), but that's the rules nonetheless.

Is there a definitive reference as to what the rules are?

For example, most brokers define a butterfly spread where all four legs have the exact same expiration. Does this mean that:
: +1 ABC Call at 10, exp Mar'22
: -2 ABC Call at 15, exp Mar'22
: +1 ABC Call at 20, exp Jun'22
would require $500 margin since it is treated as two separate two-legged spreads? Common sense says you can replace any long call leg with a later expiration or lower strike, but it may not be in the rules.

I'd like to know where the rules are written out officially so these sorts of questions can be answered by referring to the rules directly.

 

[BlueWaterSailor]

This resolves my confusion. The rules don't make sense (to me), but that's the rules nonetheless.

Is there a definitive reference as to what the rules are?

Some rules are explicit - they'll be part of that stack of docs you signed off on when joining up. Some - e.g., exactly how they'll handle your expired shorts vs. longs, how long you're subject to exercise after expiration, in-house risk management criteria, etc. - are implied, and good luck figuring them out. All part of the game/broker's leverage on their clients, and why you need to manage whatever risks you can from your end (e.g., not holding into expiration.)

I treat all of that as a clue to not try skating too close to the edge, to clarify things that seem like large risks well ahead of time, and to keep a little more spare cash/margin than absolutely necessary. Seems to be working well so far.