Options default questions

[MTE]

Quote from kxvid:

I don't know but it would be bad if ETFC failed. All that 1000 new accounts a day talk, that would be a nightmare for the SIPC.
My understanding is just because something isn't covered doesn't mean the SIPC won't work to sort it out. People with futures positions have gotten their positions back after a brokerage failure even though they aren't covered.

The funds in a futures account are usually held in a segregated account, which means that if the broker fails then your funds are safe.

 

[kxvid]

Quote from kxvid:

Is there a limit to number uncovered options you can write? I know it varies per broker, but brokers never seem to say how many uncovered options you can write. All I've seen is brokers requiring 30,000 or so ( in the case of OXPS) to write uncovered options on your account. It never lists how many uncovered options you can write.

Can anybody answer this question? thanks

 

[MTE]

Quote from kxvid:

Can anybody answer this question? thanks

Exchanges have set position limits. I'm sure clearing firms and brokers have their own internal limits depending on the particular client/account size.

 

[def]

Quote from kxvid:

Can anybody answer this question? thanks

There are position limits by product set by the exchange. The amount any individual can short depends primarily on the amount of capital the broker requires they pledge as collateral.

 

[kxvid]

Quote from def:

There are position limits by product set by the exchange. The amount any individual can short depends primarily on the amount of capital the broker requires they pledge as collateral.

Thanks for the answer.

For the purpose of example lets say an individual writes an OTM call. If the market moves against the option writer, the broker will require more collateral. Is the amount of collateral determined by the amount it would cost to buy back the options in the market?

As I understand the amount of options you can write depends mainly account capital as you said but many other things such as call or put, OTM, covered or uncovered, etc. There must be sophisticated risk models developed by brokerages to determine risk and therefore the amount of options an individual can write, is this correct? How does someone with an account at your brokerage find out how many options they can write? Would it change often due to changes in market risk?

 

[GTS]

Quote from kxvid:

For the purpose of example lets say an individual writes an OTM call. If the market moves against the option writer, the broker will require more collateral. Is the amount of collateral determined by the amount it would cost to buy back the options in the market?

Read Page 5 : http://www.cboe.com/tradtool/marginmanual2000.pdf, specifically "Margin Account Maintenance Requirement"

 

[dmo]

Quote from kxvid:

Thanks for the answer.

For the purpose of example lets say an individual writes an OTM call. If the market moves against the option writer, the broker will require more collateral. Is the amount of collateral determined by the amount it would cost to buy back the options in the market?

As I understand the amount of options you can write depends mainly account capital as you said but many other things such as call or put, OTM, covered or uncovered, etc. There must be sophisticated risk models developed by brokerages to determine risk and therefore the amount of options an individual can write, is this correct? How does someone with an account at your brokerage find out how many options they can write? Would it change often due to changes in market risk?

In futures and options on futures - which is to say products regulated by the CFTC - you have risk margining. The exchange sets a "worst scenario" for the following day, and how much your position would lose in that scenario is determined by the SPAN system. That is your margin.

In equities and options on equities - products regulated by the SEC - risk margining is not allowed. They have their own somewhat senseless margining rules, which you can find at the link in the above post.

 

[MTE]

Quote from kxvid:

Thanks for the answer.

For the purpose of example lets say an individual writes an OTM call. If the market moves against the option writer, the broker will require more collateral. Is the amount of collateral determined by the amount it would cost to buy back the options in the market?

As I understand the amount of options you can write depends mainly account capital as you said but many other things such as call or put, OTM, covered or uncovered, etc. There must be sophisticated risk models developed by brokerages to determine risk and therefore the amount of options an individual can write, is this correct? How does someone with an account at your brokerage find out how many options they can write? Would it change often due to changes in market risk?

Are you serious!? If I'm understanding this correctly you have been trading options, yet you've never heard about margin or margin requirement or any other related concept!?

I don't mean this as a negative, but I really find it hard to believe that anyone could trade options or any other instrument for that matter and not know about this stuff.

 

[jwcapital]

One of the best features of IB is its real-time margin calculator; since I trade mainly futures options, this feature is invaluable. Obviously a short OTM call or put will require less margin than an ATM option. The ATM margin is the same as a futures margin. Obviously, once the short ATM option becomes ITM, margin requirements go up..same as futures contract moving against you. Anyway, the real-time margin calculator is invaluable for naked options as well as all spreads.

 

[donnap]

Quote from kxvid:



The clearing house steps in a takes the loss, right? I remember reading about a 2,000%+ return on a far OTM GOOG call option, somebody got burned big time on that trade.

2000%!!

So the option went up 20x or 21x, whatever.

A $2 call went to around $40

A $5 call moved to around $100

I would think that that's happened more than once with GOOG. Its happened with the puts as well. 2000% moves are not that uncommon with options.

And yes, sometimes naked shorts get burned bigtime.