Margin requirement for Calendar Spread

Koppanyi · Aug 18, 2005

Hi,

I'm a beginner and next week I'll try to begin trading at IB with a margin account. I don't have too many funds to buy several contracts for covered call writing, so I want to set up Long Calendar Spreads with call options, but I'd like to be sure how margin works for this spread contruction.
I heard that Calendar Spreads are purchased in a margin account, but no margin requirements is necessary because, theoretically, the purchased option has a longer life than the written option.
What do I have to do if my short calls is exercised in an automated trading environment like IB? And what will the broker act after this?

Thank you!

MTE · Aug 18, 2005

Yes, you're right, there's no margin requirement for a long calendar spread, the only requirement is the intial debit.

You may want to ask IB about how they handle assignments, especially if you don't have enough capital to sustain the stock position. Generally, you'd have several alternatives. You can exercise your long option to cover the assignment, you can cover the stock position in the market and sell the long call, you can keep the resulting position if you like, and so on....

smilingsynic · Aug 19, 2005

Quote from MTE:

Yes, you're right, there's no margin requirement for a long calendar spread, the only requirement is the intial debit.

You may want to ask IB about how they handle assignments, especially if you don't have enough capital to sustain the stock position. Generally, you'd have several alternatives. You can exercise your long option to cover the assignment, you can cover the stock position in the market and sell the long call, you can keep the resulting position if you like, and so on....

According to my experience, IB's approach to handling assignments is the silent treatment. One morning you'll wake up, and you think you are short puts, but you're not anymore--you're long stock (the converse for short calls). No bulletins; no emails. I don't mind, though. That's business.

freehouse · Aug 19, 2005

Quote from Koppanyi:

Hi,

I'm a beginner and next week I'll try to begin trading at IB with a margin account. I don't have too many funds to buy several contracts for covered call writing, so I want to set up Long Calendar Spreads with call options, but I'd like to be sure how margin works for this spread contruction.
I heard that Calendar Spreads are purchased in a margin account, but no margin requirements is necessary because, theoretically, the purchased option has a longer life than the written option.
What do I have to do if my short calls is exercised in an automated trading environment like IB? And what will the broker act after this?

Thank you!

Remember that all margin accounts must have a minimum of $2000 in equity.

Koppanyi · Aug 19, 2005

Thanks MTE,

I'll ask IB for details. I can afford to buy cheaper stocks but I'd like to invest in more instuments with leverage. However I think if I allow the LEAP to be exercised, the leverage conception will break off.

Koppanyi · Aug 19, 2005

Hi,

I'll transfer $5000, maybe it's enough to begin trading.

But I have some problems because of not having trading experience.

For example I don't know what happen if I'm exercised and, after this, I don't buy the stocks or exercise my LEAP call immediately. It may happen, because I can't monitor the events all day.

andyszyd · Aug 20, 2005

Good luck on Calendar spreads, I lost 30% of my acc doing it last year.
You will only make money if the market od stock stays flat or goes op a little but not to much in a time of frame of your short calls. (monthly)
If the market or stock goes up or down in a month you will lose money.
If the stock loses 15-20 or more % in a month you'll lose big.

The odds are against making money in calendar spreads under most of market conditions.

You never know which of "blue chips" will be the next Merk.

I suspect you are another potential victim of terrys tips or compoundstockearnings.

Koppanyi · Aug 20, 2005

Quote from andyszyd:

Good luck on Calendar spreads, I lost 30% of my acc doing it last year.
You will only make money if the market od stock stays flat or goes op a little but not to much in a time of frame of your short calls. (monthly)
If the market or stock goes up or down in a month you will lose money.
If the stock loses 15-20 or more % in a month you'll lose big.

The odds are against making money in calendar spreads under most of market conditions.

You never know which of "blue chips" will be the next Merk.

I suspect you are another potential victim of terrys tips or compoundstockearnings.

OK, but imagine what would have been if you'd applied covered calls month to month... I think, one of the advantages of this technique is we lose less so our stop loss is the price of the LEAP.

What do you suggest instead of calendar spreads? Which strategy is the safest?

MTE · Aug 21, 2005

Quote from Koppanyi:

OK, but imagine what would have been if you'd applied covered calls month to month... I think, one of the advantages of this technique is we lose less so our stop loss is the price of the LEAP.

What do you suggest instead of calendar spreads? Which strategy is the safest?

Actually, "the safest strategy" is a relative term. Almost any strategy can be as safe or as risky as you want/need it to be. The key is proper risk and trade management.