Pre-Expiry Margin-Forced Liquidation of Vertical Spreads on Interactive Brokers

[ZZ Trader]

Hi guys,

I am new to the forum and I was not sure where to post this question, if here, or in the Brokers forum or in the Options Forum or in the Interactive Brokers forum...

I hope here is OK but feel free to re-direct me if I posted in the wrong place.

I have an issue with an auto-liquidation procedure that Interactive Brokers applies beginning 2.5 hours before the expiry of a Options Vertical Spread (e.g. ES Futures Bear Calls).

I am not complaining about unfairness or wrongness, I think what IB does is correct to protect their business:

- they read how many options I have in my account

- then they project a Post-Expiry Margin based on how many contracts I would be assigned in the worst-case scenario (i.e. if I have 8 Bear CALLs they assume I may get assigned 8 uncovered SHORT contracts - if the price at expiry fall in between the Vertical Spread Strikes)

- and then based on that calculation/assessment, they proceed to liquidate a number of Bear CALLs in my account, starting from 2.5 hours before expiry, for example they may liquidate 6 out of 8 positions.

The problem I have with their approach is that I need to hold my option spreads in my account until they expire, to give them a chance to end up in profit. If IB closes them 2.5 hours before they expire, often the ES options would have been in profit at the 3PM Chicago Fixing time, but because IB removed them before expiry I may end up with a loss or a missed profit.

My question to all of you is:

have you encountered this approach with all brokers? or is Interactive Brokers very (maybe too) severe in protecting their risk exposure?

If you know any broker that has a more relaxed approach in the scenario described above, maybe someone willing to let the options expire and then auto-liquidate the ITM Future assignments right after the Fixing, I'd love to hear their name.

There may be other solutions to this problem that I am not aware of, so that is why I have posted this issue here because maybe some of you had the same problem and found a solution or a broker with a solution... I'd be happy to hear all your comments about this.

Thank you.

 

[stochastix]

yeah IB is like the automated robot on robocop that says "you have 15 minute to comply" and starts blasting, its fairly conservative. you can reduce your margin requirements by buying out of the money calls on the next month, for instance, or on the same month

 

[Option_Attack]

I don't know about other brokers, but IB got me a few times with this. Maybe this is not a problem if you have Portfolio Margin? Not sure.

 

[ZZ Trader]

@stochastix
when you say: "you can reduce your margin requirements by buying out of the money calls"

do you mean something like a temporary purchase?
just to cover the expiry time window and satisfy IB's margin requirement an avoid forced liquidation? and then sell them back?

@Option_Attack
unfortunately the Portfolio Margin does not help because the only thing that will satisfy IB's margin requirement is that you have a cover for your position at expiry, that means: a number of Futures or options in the account that covers the assignment risk (or part of it).

 

[ZZ Trader]

Anyway, I have been thinking about this and I think what Interactive Brokers is correct and it does address a potential issue with Vertical Spreads:

if the Fixing/Closing price falls between the Strikes, only one leg is assigned and it is not covered/offset by the assignment of the other leg and if the market suddenly makes a sharp move, there could be a heavy loss (or a profit if you're lucky).

This kind of risk cannot be left to chance, so I agree with IB's policy, but I still need a solution to keep my Verticals until expiry.

I am going to try to reformulate this question in another section of the forum without the reference to the broker.

This post was moved here but this is not the right place to discuss this, this is not about the broker, it's about strategy and risk management.

Thanks everybody for the suggestions.