Margin Violation & Automated Trade

G

Greenfuji

I trade with IB and I write options. Occassionally I get a margin violation which I try to correct by buying the positions back. Sometimes the positions are grossly overpriced, i.e. the exchange values the option at 2 points but the offer is 50 points, and my offer is not executed.

When IB's automated trade quicks in and has purchased the option at 50 points, I have successfully called IB and got the trade busted.

On other occassions when the offer has been say 5 or even 10 times the exchange value for the option, and the automated trade kicks in, I have taken the hit on the chin.

What I'm wondering is at what level can I realistically get a trade busted when this occurs? Are there rules stating that when a trade is executed at say 200%, 300% etc of the exchange value, it can be busted? When I have called IB to get a trade busted due to grossly overpriced offers, they already new about the trade and handled it proffessionally.

Please don't reply by saying "option writing is bad, mkay". Thanks for your responses in advance.
 
Quote from Greenfuji:

I trade with IB and I write options. Occassionally I get a margin violation which I try to correct by buying the positions back. Sometimes the positions are grossly overpriced, i.e. the exchange values the option at 2 points but the offer is 50 points, and my offer is not executed.

When IB's automated trade quicks in and has purchased the option at 50 points, I have successfully called IB and got the trade busted.

On other occassions when the offer has been say 5 or even 10 times the exchange value for the option, and the automated trade kicks in, I have taken the hit on the chin.

What I'm wondering is at what level can I realistically get a trade busted when this occurs? Are there rules stating that when a trade is executed at say 200%, 300% etc of the exchange value, it can be busted? When I have called IB to get a trade busted due to grossly overpriced offers, they already new about the trade and handled it proffessionally.

Please don't reply by saying "option writing is bad, mkay". Thanks for your responses in advance.
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Generally, the erroneous trade rules apply to market makers only. I think it would be very difficult for any customer to get options busted. However, you may have a case if you "traded through" the market (paid a higher price at one Exchange while the option was offered lower at another). But this should not happen if you use IB's SMART order routing.


I'm not sure what you mean by "Exchange Value" - If only one Exchange has an option listed then Market Makers (not customers) can actually bust trades if they trade outside of a "theoretical range". If the option is multi listed then the theoretical range is determined using the other Exchanges BBO.

Are you talking about equity options?
 
To clarify I am talking about index options. I trade the European markets, mainly the FTSE.

What I mean by exchange value is the strike price the option settles at after market close.
 
You probably need to put up more margin to keep this from happening in the first place. That will probably make your strategies a lot less effective per $ of capital.

Another solution is to use an account at a prop trading shop that will give you risk-based haircut margins rather than retail. You won't be as susceptible to getting liquidated just because you get a mark to market that triggers a call.

Traveler
 
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