Selling SPX box for financing

[elt894]

If you sell a box, the cash that you received goes to the ELV but the value of the options doesn't, if they are american . And that difference makes your account have
an Excess liquidity, which you can use to margin other positions. I am correct ?

Equity with loan = cash value + stock value +bond + fund + european and asian options.
Excess liquidity = ELV - margin

The difference between ELV and NVL has always confused me. I know the definition you give is what's on IB's website, but it's not what I see in practice. I currently have a bunch of American options but NLV and ELV are exactly equal. I've only seen them differ by a few dollars, with ELV = NLV - Net Liquidation Uncertainty. This is for my portfolio margin account; they differ in my IRA margin account, but that isn't so relevant here. All I can say is I'd be surprised if such a loophole really exists for a RegT account.

If a SPX 1000 points box goes to 1050, that will be arbitradged very quickly, doesn't ? and return to a fair value.

And more, if it's a box with european style options, no early assignment risk, the broker knows exactly what you are going to lose at expiration day, so would not be fair to early autoliquidate that box for a biger loss. Someone has found in a similar situation ?

As @Sig mentioned, it's not that the box goes to 1050, it's that the spread is 995/1050 and you get marked at 1050. In other threads he's mentioned being liquidated because a credit spread was marked beyond the maximum loss.

So you have to trick The Algorithm at it's own game by putting in a GTC box order that keeps the half of the spread you care about close to the actual final liquidation value of the box.

I tried this recently and it didn't work for me. I even tried putting the order in a different account (but under the same username). Perhaps now you have place orders on all the legs individually? But then you have the risk of getting picked off on a fast market move.

 

[Sig]

I tried this recently and it didn't work for me. I even tried putting the order in a different account (but under the same username). Perhaps now you have place orders on all the legs individually? But then you have the risk of getting picked off on a fast market move.

I fled IB a while ago so it may have changed. Was it SPX? I'm not sure what the complex order book or equivalent looks like on anything else, so might only work there. Definitely don't want to do it on the legs, you'd have to be constantly updating them.

 

[raf_bcn]

Hi

Simply putting in the same order as a 1 contract GTC at a position it would't be filled, i.e. something like $950 in your case.

Thanks for that trick. It is good to know.

The problem is that if you have wide bid/ask spreads The Algorithm at IB uses the bid or ask, on the side worst for you, to determine the "value", even if that has no bearing on the actual risk of the position.

But I don't understand one thing.
The mark to market value of the box is not taked into account to calculate the Equity with Loan value. So I don't understand How this can drive to a margin deficiency.
Margin deficiency is when Margin required > Equity with loan value.

Tank you.

 

[Sig]

Hi



Thanks for that trick. It is good to know.



But I don't understand one thing.
The mark to market value of the box is not taked into account to calculate the Equity with Loan value. So I don't understand How this can drive to a margin deficiency.
Margin deficiency is when Margin required > Equity with loan value.

Tank you.

If it thinks you have a loss on the box, it takes that away from your equity doesn't it? Again, sorry that I don't have an IB account any longer so can't send a screen shot. I may well be talking out my ass at this point so I'll let someone with more recent IB experience step in and let me know if my knowledge has been superseded here.

 

[elt894]

I fled IB a while ago so it may have changed. Was it SPX? I'm not sure what the complex order book or equivalent looks like on anything else, so might only work there. Definitely don't want to do it on the legs, you'd have to be constantly updating them.

It was on a single-name, I think a conversion. Could have changed or might be specific to SPX.

 

[raf_bcn]

Hi

I currently have a bunch of American options but NLV and ELV are exactly equal. I've only seen them differ by a few dollars

Is usual that I have a ELV like 20 times my NLV. They are different things.

Net Liquidation Value - the total of all assets (position value and cash deposited with IB) marked to market. The amount of cash you would get by liquidating all positions, now.
Equity with Loan Value - your Collateral - the cash balance combined with position market value.

If it thinks you have a loss on the box, it takes that away from your equity doesn't it? Again, sorry that I don't have an IB account any longer so can't send a screen shot.

In theory doesn't. Because american options value are not taked into account to calculate the ELV. Why? I don't know , european and asian are. This could be explained by this question will have to answer someone with more knowledge on this subject.

 

[elt894]

Is usual that I have a ELV like 20 times my NLV. They are different things.

Net Liquidation Value - the total of all assets (position value and cash deposited with IB) marked to market. The amount of cash you would get by liquidating all positions, now.
Equity with Loan Value - your Collateral - the cash balance combined with position market value.

It seems that ELV has a different (seemingly undocumented) meaning in a portfolio margin account.

On this page, it says the margin for shorting a box in a RegT account is MAX(1.02 x cost to close, Long Call Strike – Short Call Strike). Selling a box would increase your ELV but also increase your margin by a similar amount. So there's no effect on excess liquidity. On the other hand, it looks like buying a box spread has no impact on margin but decreases your ELV, so it just eats up your excess liquidity.

Is that the effect you see in the order preview window if you start to enter the trade?

 

[raf_bcn]

Hi

It seems that ELV has a different (seemingly undocumented) meaning in a portfolio margin account.

The ELV is exactly the same in a portfolio margin account than in a reg t account. The difference is in the margin.

Equity with Loan Value (ELV) – Forms the basis for determining whether a client has the necessary assets to either initiate or maintain security positions. Equals cash + stock value + bond value + mutual fund value + European and Asian options value (excludes market value U.S. securities & futures options and cash maintained in futures segment).
Excess Liquidity (ELV – Maintenance Margin) – equals Equity with Loan Value less the Maintenance Margin Requirement.


Thanks.

 

[elt894]

The ELV is exactly the same in a portfolio margin account than in a reg t account. The difference is in the margin.

Do you have a PM account? I've seen you post the definition of ELV a dozen times saying it doesn't include American options. I understand why by that definition selling a box would increase ELV. It simply isn't the case for a PM account. Take a look at the attached screen shot.

Did you read the rest of my post? Can you post a similar screenshot with a RegT account? I suspect it will show ELV and margin both increasing by 10k.

 

[raf_bcn]

Hi

It seems that ELV has a different (seemingly undocumented) meaning in a portfolio margin account.

Obviously I did't catch what you was saying. Let me say it was not easy without a further explanation. Now with your screenshot it is clear. And I am surprised.

On this page, it says the margin for shorting a box in a RegT account is MAX(1.02 x cost to close, Long Call Strike – Short Call Strike). Selling a box would increase your ELV but also increase your margin by a similar amount. So there's no effect on excess liquidity. On the other hand, it looks like buying a box spread has no impact on margin but decreases your ELV, so it just eats up your excess liquidity.

And What you are saying here seems correct to me. And to buy a box seems logical that reduces your ELV since reduces your cash.

But now, continuing with your example, exactly , if i sell a 100 goog box in a reg t account the ELV will increase by the amount you recieve and also the margin.

But I am mainly interested in what happen in a Portfolio margin account, I see through the Risk navigator that the maintenance margin is only 150,00
But the risk navigator doesn't shows the ELV. I assumed that was going to increase by the received amount.
Your capture shows it's not going to increase, but why ?
Maybe it is an error of the order preview. When you trade this, what happens with the ELV showed in your real account ?
Do you have any explanation ?

Thank you.