He's ignoring the fact brokers have specific initial and maintenance margins for spreads which take into account potential issues with assignment or wacky pricing, and that's all you have to meet, black swan or not. You're obligated to fulfill the margin requirements laid out before you, which are easy to see, and if you don't meet them initially, you can't trade in the first place. Blind as a bat and loves to drink the koolaid that IB can do no wrong. Who else could argue in favor of a profitable position in both spreads and currencies being liquidated in the middle of the day by legging out incorrectly with no assignment notice of course? Even after someone from IB came out and said it wasn't an options pricing issue. Go figure.
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PUT options liquidated at worst possible prices
- Thread starter somedudetrader
- Start date
He's ignoring the fact brokers have specific initial and maintenance margins for spreads which take into account potential issues with assignment or wacky pricing, and that's all you have to meet, black swan or not. You're obligated to fulfill the margin requirements laid out before you, which are easy to see, and if you don't meet them initially, you can't trade in the first place. Blind as a bat and loves to drink the koolaid that IB can do no wrong. Who else could argue in favor of a profitable position in both spreads and currencies being liquidated in the middle of the day by legging out incorrectly with no assignment notice of course? Even after someone from IB came out and said it wasn't an options pricing issue. Go figure.
good insight, i wonder just how much of a profit center for ib the auto-bot is. owners probably lovingly pet its bot-butt every nite and day as it goes out harvesting 24/7 from the heavy foot crowd.
Quote from Rodney King:
Thanks.
To take it to the next level: It's the petal-to-the-metal / no-money-down custs who make cheap commish for everyone else possible. Their losses from autoliquidation lubricate the gears at the brokerages that use that procedure. In that sense, those custs are a public good, to use the economics term.
Quote from traderlux:
good insight, i wonder just how much of a profit center for ib the auto-bot is. owners probably lovingly pet its bot-butt every nite and day as it goes out harvesting 24/7 from the heavy foot crowd.
It is about as likely as IB front running your orders. 0
where are all the posts from the traders whose options were liquidated last week by the auto-bot. I am still waiting for the results.
they are a figment of your paranoid imagination similar to this statement that the auto-bot is a profit center. now the truth of your position vs. IB
has come to light. what is your agenda? who are you dogging for to use your words?
Jerkstore,
I think it is still pretty clear that you never actually read my lengthy post, before you stated that it was "Not true."
My lengthy post explained some of the hidden but extreme dangers of trading put spreads under certain circumstances. My post covered both cash settled and physically settled types of puts. Your response was that my conclusion was "not true". I asked you to explain why it was not true for cash settled options, to which you answered that we were not talking about cash settled options. But I was talking about cash settled options, and you said my comments were not true.
So let me suggest that before you express disagreement with something, you should read it first.
You commented that in a retail account, assignment of a physically settled put spread's short leg simply produces a long stock / long put combination, and that this is the same as a put spread. But it is not the same in a retail account, because federal law imposes different margin requirements, as I detailed in my lengthy post. These different margin requirements are the source of a hidden extreme risk. You don't know about this because your knowledge comes from trading as a market-maker, who is not subject to the same margin requirements as a retail account.
I think, based on your posting, that you have little or no awareness of retail margin rules, and that this is at least partly why you don't acknowledge the risks involved with retail trading of put spreads.
It also seems to me that you are confusing margin requirements with margin interest charges. I was trying to explain margin requirements, and how they interact with put spreads to cause extreme risks under certain circumstances. Your disagreement is based on a discussion of margin interest rates of approximately 0.75% per year, which is totally irrelevant to the risks I am trying to explain.
Margin interest rates are small, usually predictable charges, which a retail customer pays to his broker in exchange for margin loans. But margin requirements are something totally different. Margin requirements limit the positions a retail account is permitted to hold, relative to the account's structure, contents, and value. Margin rules, under certain circumstances, can prevent a customer from holding a long or short stock position, and this in turn can block the customer from receiving the protection he expects from the long leg of a put spread; and this, in turn, can expose the customer to the same risks as a short naked put.
Let me also explain what I meant by a "market dislocation". The protection one expects from a put spread's long leg is only guaranteed where the customer has the opportunity to exercise the spread's long leg and hold an equity position, so as to limit losses generated by the short leg. If retail margin rules block the customer from holding such an equity position, then the customer is deprived of the long put's protection, unless he can promptly sell the long put at a reasonable price. But sometimes, an option or other asset cannot be sold at a reasonable price, because markets are sometimes disrupted and sometimes there is no reasonable bid or even no bid at all. This is what happened last week. This danger of finding no reasonable bid, when it is necessary to sell the long put in order to cover loss from the short put, is a contributor to the hidden extreme danger of trading put spreads in retail accounts.
Anyway, let me ask you once again. Please actually read my lengthy post's explanations, not just its conclusion, before you tell us that the explanations are wrong.
I think it is still pretty clear that you never actually read my lengthy post, before you stated that it was "Not true."
My lengthy post explained some of the hidden but extreme dangers of trading put spreads under certain circumstances. My post covered both cash settled and physically settled types of puts. Your response was that my conclusion was "not true". I asked you to explain why it was not true for cash settled options, to which you answered that we were not talking about cash settled options. But I was talking about cash settled options, and you said my comments were not true.
So let me suggest that before you express disagreement with something, you should read it first.
You commented that in a retail account, assignment of a physically settled put spread's short leg simply produces a long stock / long put combination, and that this is the same as a put spread. But it is not the same in a retail account, because federal law imposes different margin requirements, as I detailed in my lengthy post. These different margin requirements are the source of a hidden extreme risk. You don't know about this because your knowledge comes from trading as a market-maker, who is not subject to the same margin requirements as a retail account.
I think, based on your posting, that you have little or no awareness of retail margin rules, and that this is at least partly why you don't acknowledge the risks involved with retail trading of put spreads.
It also seems to me that you are confusing margin requirements with margin interest charges. I was trying to explain margin requirements, and how they interact with put spreads to cause extreme risks under certain circumstances. Your disagreement is based on a discussion of margin interest rates of approximately 0.75% per year, which is totally irrelevant to the risks I am trying to explain.
Margin interest rates are small, usually predictable charges, which a retail customer pays to his broker in exchange for margin loans. But margin requirements are something totally different. Margin requirements limit the positions a retail account is permitted to hold, relative to the account's structure, contents, and value. Margin rules, under certain circumstances, can prevent a customer from holding a long or short stock position, and this in turn can block the customer from receiving the protection he expects from the long leg of a put spread; and this, in turn, can expose the customer to the same risks as a short naked put.
Let me also explain what I meant by a "market dislocation". The protection one expects from a put spread's long leg is only guaranteed where the customer has the opportunity to exercise the spread's long leg and hold an equity position, so as to limit losses generated by the short leg. If retail margin rules block the customer from holding such an equity position, then the customer is deprived of the long put's protection, unless he can promptly sell the long put at a reasonable price. But sometimes, an option or other asset cannot be sold at a reasonable price, because markets are sometimes disrupted and sometimes there is no reasonable bid or even no bid at all. This is what happened last week. This danger of finding no reasonable bid, when it is necessary to sell the long put in order to cover loss from the short put, is a contributor to the hidden extreme danger of trading put spreads in retail accounts.
Anyway, let me ask you once again. Please actually read my lengthy post's explanations, not just its conclusion, before you tell us that the explanations are wrong.
Quote from ammo:
the only part i had trouble with was the firm worrying about your margin on stock,they are only at risk if you leg out of the option 1st and the computer they set up probably wouldnt let you
Margin requirements on long and short stock positions are imposed by federal law and enforced by retail brokers. If you don't understand how and why these margin rules can lead to account liquidations, then you are taking extreme and unnecessary risks by trading option spreads. You need to understand margin rules before you trade option spreads.
I read your long winded post. It shows a basic knowledge of options, combined with a lot of confusion and innaccuracies.
This statement, where YOU state your conclusion to your rambling post regarding the OP and his SPY spread, is WRONG.
Quote from jimrockford:
But getting back to the case at hand, the OP was trading SPY puts, which are American style, so that there were scenarios in which the long put leg would fail to limit extreme and uncontrolled losses generated by the short put leg. So there are circumstances in which it might make sense for a broker to liquidate the OP's put spreads.
This statement, where YOU state your conclusion to your rambling post regarding the OP and his SPY spread, is WRONG.
Quote from stefan_777:
He's ignoring the fact brokers have specific initial and maintenance margins for spreads which take into account potential issues with assignment or wacky pricing, and that's all you have to meet, black swan or not. You're obligated to fulfill the margin requirements laid out before you, which are easy to see, and if you don't meet them initially, you can't trade in the first place. Blind as a bat and loves to drink the koolaid that IB can do no wrong. Who else could argue in favor of a profitable position in both spreads and currencies being liquidated in the middle of the day by legging out incorrectly with no assignment notice of course? Even after someone from IB came out and said it wasn't an options pricing issue. Go figure.
Stefan_777,
IB does not have specific margin requirements for option spreads in cash accounts, where the options are physically settled or American style. You are ignoring this fact. IB's requirements, for such put spreads, are the same as for short naked puts. Everybody on this thread, who expressed any opinion on this point, has already told you that you are wrong in this area.
IB does have specific margin requirements for such option spreads in margin accounts, but those margin rules do not ensure a customer will have sufficient margin to be able to avoid extreme losses due to assignment of a short leg. This danger requires knowledge and care by the customer, which it seems many or most retail customers recklessly ignore.
You have, in this thread, falsely attributed many very unreasonable statements, which I never actually made.
I never suggested, for example, that IB can do no wrong. I said quite the opposite, that IB's documentation on margin rules is not sufficiently clear, and that for this reason, IB might be partly at fault for the OP's situation.
I never argued in favor of liquidating the OP's profitable options spread. I explained, instead, that such an unfortunate result can be caused by a customer's carelessness and can be required by margin rules; and that these margin rules are designed to address actual risks which do exist, though few people seem to understand those risks.
I don't think we have enough information to judge whether the OP was at fault, or if IB was at fault. The flow of details has been very limited, and has apparently halted entirely, so that we may have never have enough information. We would need to know about anything which might have affected the account, from the time the put spreads were entered, until the time they were liqudated; but we don't have this information; and we still don't even know if it was a cash account!
These are only some examples of how you falsely attributed very unreasonable statements to me. I think this pattern of dishonesty, in combination with your other conduct throughout this thread, indicates that nothing you say should be taken seriously. I think that any attempts by you, to attribute statements to me, should be assumed false and should be ignored by anyone reading.
jim rockford,
Please provide references backing up why a broker can liquidate a spread that is in good standing within initial and maintenance margin, based on these special assignment margin risks (extreme dangers) you're talking about.
You've already spun your wheels with the thought that this might be a cash account with short puts, but IB and other brokers require the cash account holder to hold the full amount of cash to pay for a potential assignment of the short puts. This is what they mean by paying the put strike price. Why in the case of a cash account would someone ever have to be liquidated if they have enough cash to cover the worst possible event, which is satisfactory to IB, american style physically settled or not?
In a cash account, they won't let you short a "naked" put unless you have enough cash to hold it till expiration and be able to pay for either the physical or cash delivery in full once assigned.
I suspect you don't understand what the requirement really is to hold a short "so called naked" put in a cash account.
Nevertheless, you're obfuscating something that is easily visible and accessible on IB's margin website.
Please provide references backing up why a broker can liquidate a spread that is in good standing within initial and maintenance margin, based on these special assignment margin risks (extreme dangers) you're talking about.
You've already spun your wheels with the thought that this might be a cash account with short puts, but IB and other brokers require the cash account holder to hold the full amount of cash to pay for a potential assignment of the short puts. This is what they mean by paying the put strike price. Why in the case of a cash account would someone ever have to be liquidated if they have enough cash to cover the worst possible event, which is satisfactory to IB, american style physically settled or not?
In a cash account, they won't let you short a "naked" put unless you have enough cash to hold it till expiration and be able to pay for either the physical or cash delivery in full once assigned.
I suspect you don't understand what the requirement really is to hold a short "so called naked" put in a cash account.
Nevertheless, you're obfuscating something that is easily visible and accessible on IB's margin website.
are u another one of those rare et genius'esQuote from jimrockford:
Margin requirements on long and short stock positions are imposed by federal law and enforced by retail brokers. If you don't understand how and why these margin rules can lead to account liquidations, then you are taking extreme and unnecessary risks by trading option spreads. You need to understand margin rules before you trade option spreads.