Selling Spreads & Risk at IB

M

Mike805

Hi All,
In analyzing a few potential trades, I would like to better understand the potential risk of selling bull spreads through Interactive Brokers.

For example, suppose I have a $100k margin account (4-1 leverage possible) and I would like to sell a bull spread:

Stock XYZ: Current Price = $100
Sell 10 Dec $100 Calls
Buy 10 Dec $150 Calls

Suppose that one day the stock gaps up to $200 per share - how is my loss marked to, say -$50k? Does a wide Bid/ask spread for each leg in such a situation create a problem where IB marks the PnL further against me?

My concern is that IB will mark the PnL based on the spread to show a loss much greater than -$50k, hence, possibly forcing liquidation of the account.

Apologies if this material has been gone through before. I'm curious what IB's policies are here in case of a low liquidity market (like the flash crash for example).
Thanks,
Mike
 
First of 4-1 leverage is intraday only unless you have 100k + and have a PM margin acct your basically at 2-1. But that really has nothing to do With selling options especially at IB as there internal risk can be wonky
 
LOL... cvds16, that's your answer? I see your post history is filled with derogatory crap. Please move on and go vent your frustration elsewhere.

For anyone else, I'm asking about the nuances here and if there are IB specific potential risks.
-Suppose the in the money long call gets assigned? How does the other leg get marked?
-Suppose there are no bid/ask quotes for the options?
-How does one account for the worst case scenario?

I'm asking what the broker-specific risk is here - this is not something you'll find in books as its broker specific. I remember during the flash crash, a few guys got burned as a result of IB's mis-understood liquidation policies.

Thanks,
Mike
 
Autospreader said:
First of 4-1 leverage is intraday only unless you have 100k + and have a PM margin acct your basically at 2-1. But that really has nothing to do With selling options especially at IB as there internal risk can be wonky
More...
Thanks,
The internal risk is what I'm driving at.

I'm looking at a trade where I'd maximize the number of call spreads given an account size. As the leverage increases, what are the liquidation risks?

Mike
 
You are asking questions like these and you wonder why I advise you to read more option books. I am not being deregatory: I am doing you a favour ... a little knowledge can be a dangerous thing it seems in your case ...
And to answer your question the most you can lose is the maximum of the spread. In this example not so refined example that's 50*100 per optionspread (a normal spread would be 10 usd or less would be normal for a bull spread btw). As long as that is safe you won't get liquidated. To maximize the number of call spreads given an account size is just no way to approach this ...
 
Mike805 said:
Hi All,
In analyzing a few potential trades, I would like to better understand the potential risk of selling bull spreads through Interactive Brokers.

For example, suppose I have a $100k margin account (4-1 leverage possible) and I would like to sell a bull spread:

Stock XYZ: Current Price = $100
Sell 10 Dec $100 Calls
Buy 10 Dec $150 Calls

Suppose that one day the stock gaps up to $200 per share - how is my loss marked to, say -$50k? Does a wide Bid/ask spread for each leg in such a situation create a problem where IB marks the PnL further against me?

My concern is that IB will mark the PnL based on the spread to show a loss much greater than -$50k, hence, possibly forcing liquidation of the account.

Apologies if this material has been gone through before. I'm curious what IB's policies are here in case of a low liquidity market (like the flash crash for example).
Thanks,
Mike
More...
That's a bearish position for one thing. Admittedly, I get the words flipped myself when I try to post about my spreads...So maybe it's right on your mind, but if not slow down and figure options out a bit better.

And when you sell credit spreads, they can blow up all kinds of nasty and in ways you don't even think of. I do a credit spread strategy during certain markets too. I wouldn't want now than 3-5% of my investment capital in my version of the strategy because 40% swings are not uncommon.

If you want to, look at the longer posts in my beer & options journal...they detail some of the specific risks in this that have bitten me trading credit spreads.
 
Mike805 said:
Thanks,
The internal risk is what I'm driving at.

I'm looking at a trade where I'd maximize the number of call spreads given an account size. As the leverage increases, what are the liquidation risks?

Mike
More...
With Ib you will be in a margin call situation or margin violation easily. Just my experience
 
IB and Margin have come up several times in here lately. The corresponding Buying Power Reduction of a debit spread should be the price you paid for the spread. The BPR for a credit spread should be the width of the spread minus credit.

However, at IB I hear they squeeze in special requirements many times. VIX and VIX products hold the entire width of the spread(credit or debit).

Someone, that knows IB well? Does the BPR change if a credit spread goes into the money or does it remain static... I can deal with a greater BPR but I just need to know if the BPR is static as long as the option isn't naked?
 
Mike805 said:
-Suppose the in the money long call gets assigned? How does the other leg get marked?
-Suppose there are no bid/ask quotes for the options?
-How does one account for the worst case scenario?
More...

the moment you are assigned the other leg is auto-executed... not sure about what happens if there are no quotes.. likely it goes from prior close or settlement (if futures).. worst case scenario is your marked risk imo... I just had an assignment on NG because I forgot to roll it, so I know.. I was assigned at 1:30AM EST.. wasnt happy.. but it was my fault for forgetting to roll.. oh well.
 
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