Margining complex spreads

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DennisR

I was hoping an experienced options trader can help me figure this out. The spread i'm interested in has to be entered as 3 seperate spreads in TOS, yet each individual leg has fairly high margin requirements on its own.

I'm sure the margin requirement would not be so high if all 3 spreads were able to be entered simultaneously. (Imagine if you had to enter the short strikes of an iron condor first.) Is the trick to buy all long positions first, then enter shorts? I'd be glad to share the exact trade for anyone willing to help here. I trade with TOS and would think the commissions would get large if i had to enter each thing seperate. Anyone have experience with stuff like this? Thanks
Dennis
 
Dennis,

I am not sure I understand your question, but in case you do not know, most spreads involving calls have put equivalents. If your concern to enter the long leg first is due to the possibility that it opposite to your view of the immediate movement of the market, then enter the equivalent instead (for instance if market is heading south use the long put first). In most spreads, you are long a strike and short another strike. If market is coming down, buy the put long strike first, if it is heading up, buy the call long leg first. I would never start with the short leg anyway. There is the potential issue of exercise of short american puts, but it depends on your position, etc.

If the spreads involve ITM options, then legging is riskier if you do not want market exposure. If you are sure/want it, it can lead to good entries. If OTM options are used, legging is easier (that is a main reason why bid/ask spreads are lower for OTM options).

I hope it helps, but pls. provide as much clarification as you could while protecting your trades.
 
at any broker your margin is going to be based on the actual position rather than the theoretical finished position when you are done legging in.

So it depends on your available buying power, if you can handle the naked short for a while, then leg it, if you can't, buy the longs first or call their trade desk and they can likely work the orders as a package if they know where you are going with it. TOS will also switch your commision schedule around so its less or no ticket fee or minimum and all per contact fee, that way you are not penalized for breaking the orders up.
 
Remember, long options do not have a margin requirement. So, your margin requirement will be based on your shorts. For example, I am trading a short straddle ( a short put and call ATM). Unfortunately, unlike IB, my platform doesn't permit simultaneous execution of each leg. So, I enter the cheaper leg first. For instance, the put was priced at 36 and the call was priced at 37. I entered the put trade first and was filled at 36. At this point my initial margin was $4500.00 (initial margin for 1 ES futures contract--remember ATM and ITM margins for options is the same as the margin for an ES contract) plus the value of the put ($1800.00). This came out to be to $6300.00 just for this leg. Then I placed the order for the call. During the time of waiting for the fill of the put, the market advanced. so, the call was filled at $39.25. Now, with the call, the initial margin for both of these legs is considered. Basically, for short straddles, theinitial margin is equal to the initial margin for the leg with the higher initial margin requirement plus the value of the more expensive option. Well, at this point, the call was ITM. So, this leg was the more expensive ($4500.00) versus the put, which was now OTM (and a lower margin requirement). The more expensive premium now belonged to the call ($1990). So, now the initial margin for the short straddle was $4500.00 plus $1990, which equalled about $6490.00. The maintenance margin was equal to $1990 (value of the more expensive option) plus $3600 (maintenance margin for the ITM put--same as maintenance margin for the ES futures).

Now suppose I was planning an ATM bear call spread (credit spread), and the market was heading upward. I would probably enter the long call first; then enter the short call as soon as the long call is filled. I would do the opposite is the market was falling. Your margin is based on the short call. If possible, I like to do spreads at or near 4PM ET. Now, let's look at a bear put spread (debit spread). I would probably enter the short put first if the market is advancing, the opposite if it is declining. Initial margin, if I am not mistaken is the total cost of the spread. Maintenance margin is the total value of the spread. Hope this helps.
 
Thanks guys. my particular trade involves Deep in the money spreads. I can only get the risk profile I want on american style options, due to the contracts being held tight by arbitragers. I suppose the risk is in being assigned early, but would TOS protect me from this if I am setting up to hold to expiration? I am glad to share the trade if anyone pm's me.

It would also be very beneficial if these brokers had an "all or nothing" type order entry so you don't have to leg in or be naked for any amount of time.
 
Quote from DennisR:

Thanks guys. my particular trade involves Deep in the money spreads. I can only get the risk profile I want on american style options, due to the contracts being held tight by arbitragers. I suppose the risk is in being assigned early, but would TOS protect me from this if I am setting up to hold to expiration? I am glad to share the trade if anyone pm's me.

It would also be very beneficial if these brokers had an "all or nothing" type order entry so you don't have to leg in or be naked for any amount of time.
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No, no broker or anyone else could protect you against early assignment. It's a random procedure.
 
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