Should you close your IB accounts now?

[Random.Capital]

Quote from donnap:

The SPY option market froze yesterday. It ceasesd to work. But that doesn't mean that the options became worthless, just like they don't when the market closes.

This is fundamentally no different than the "eventually" argument made by LTCM. And yes, "eventually", it's (usually) true.

The question is who holds the risk in the meantime, and how they get compensated for it. Some here are clearly asking for a free lunch, whether they recognize it or not.

 

[stefan_777]

Quote from Random.Capital:

No.

You are long one, short the other. So in one case, it's the BID that matters, in the other it's the ASK. As was documented in the other thread, even on options the bid-ask went to astronomical levels on some issues.

Come on, this isn't rocket science.

Just because the bid/ask are at crazy wide levels that could result in a larger loss than the initial debit if closed at the market doesn't mean the machine should liquidate a fully paid for debit spread at all.

As long as the spread stays intact and no person or machine stupidly or recklessly legs out (the correct or incorrect way), the spread's debit is the maximum loss as usual.

Either both expire OTM and the initial debit is lost, or the long gets ITM and will be exercised at its strike price, regardless of what its bid/ask is. If the short gets ITM, then by definition of a vertical debit spread, the long is even deeper ITM, and can definitely be exercised to cover the short assignment, regardless of bid/ask/last prices of either.

 

[stock777]

Normally I would tend to agree, that almost all risk needs to be borne by the trader, but in the case of an option spread on the same instrument, I'm not so sure.

What exactly triggered the liquidate here? Was it only and entirely the bid/ask nonsense on these contracts?

If so , there should be code in there to calculate the maximum exposure per spread. The notion that some contracts would be well bid, and the others not leaves you open to anything.

PS I hope this is not the first time you folks have considered that prices can get stupid, and that you can be forced out at clearly horseshit levels. I posted an ETF here a while back that traded at 100 even though intrinsic was $10.

Free market means free to rip you a new one.

 

[GTC]

According to IB's customer service, IB can liquidate any time it deems necessary including in extended hours and IB is not required to wait a certain period of time--but IB can choose to do so if wanted.

 

[Optionpro007]

Quote from Random.Capital:



The question is who holds the risk in the meantime, and how they get compensated for it. Some here are clearly asking for a free lunch, whether they recognize it or not.

+1

 

[atrocious]

Quote from Random.Capital:

the auto liquifier did what it was supposed to do, make decisions on the ACTUAL market and not on the THEORETICAL one.

Oh cut the caveat emptor bullshit already!

First of all, you don't write IB's liquidation policy or engine, who are you to say what it's "supposed" to do.

80% of the options I trade are quoted no bid no offer at some point during the trading day, often hours at a time. This is routinely the case for after hours in futures options, DITM, or when markets are pulled prior to economic reports.

Any broker including IB is marking these options on a theoretical model using greeks and the underlying price. In defense of IB and as someone who trades thousands of short option positions through them, I've never found these marks to be unfair.

RC, are you suggesting that a broker should arbitrarily abandon theoretical marks on options and mark to electronic bid-offer at whim?

Or if my position outsizes the posted market, i.e. long 10,000 calls which are 10 bid for 100, we'll mark my remaining 9,900 to zero?

 

[donnap]

Quote from Random.Capital:



The question is who holds the risk in the meantime, and how they get compensated for it. Some here are clearly asking for a free lunch, whether they recognize it or not.

No, the question is how is the risk defined. The trader held the risk and the broker had no risk - until the auto - liq. kicked in.

TWS' logic failed to adequately define risk in this case.

 

[athlonmank8]

Quote from ids:

We never auto-liquidate instantaneously. You always have 10 minutes to deal with a problem.

. Took me 10 min to figure out what the hell was going on. Not to mention many aren't at their computers. The point is your auto-liquidate is BROKEN. It needs to be fixed. Giving someone 10 min is not the point.

 

[Ghost of Cutten]

Quote from Random.Capital:

This is fundamentally no different than the "eventually" argument made by LTCM. And yes, "eventually", it's (usually) true.

The question is who holds the risk in the meantime, and how they get compensated for it. Some here are clearly asking for a free lunch, whether they recognize it or not.

There is no risk beyond the premium paid in a debit spread. Just like there is no risk beyond the price paid for a share. If someone sells MSFT for -$100 per share, should IB liquidate all MSFT longs?

 

[Ghost of Cutten]

Quote from Random.Capital:

Yes, you are, and yes, it can.

I don't how to make this any clearer - if nobody wants to buy your long leg, then you do NOT have a spread, you have a naked short.

You have a long leg which, even in the absence of any market, can be exercised and cancel out the short leg. The liability from the short option is, by definition, offset by the right of the long option. It is a feature of the contractual terms of the options, not the price they trade at.