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Synthetic long uses more margin than just being long?
- Thread starter beefcaketrade
- Start date
In theory there should be no vega risk as vega should be the same for the same strike, which in a synthetic position, they are the same strike for both long and short leg, which cancels out. You are theoretically no different to being long or short the underlying and have the same delta exposure.It is not strictly the same as you are exposed to vega risk and as such more risk should incur a higher margin requirement. There have been other threads lately regarding IB's margin policies, so perhaps they're being extra cautious. What sort of margin difference are you referring to here? Is it relatively small or massive? I would expect some difference due to the additional vega exposure.
The only real reason I can think of is liquidity risk, because options markets are thin and bid/ask spread can eat your P&L right up. Hence maybe a larger margin room to offset the frictional losses from trading. But, you can make that same argument for the underlying market too. Not everything is like AAPL or ES with huge liquidity and tight spreads.
Basically the system setup in place wants to heavily penalize naked short options positions for margin requirement. Probably more heavy handed than it ought to when compared to just the underlying and the margin required to hold those positions.
Not too familiar with how CME's SPAN works. Just a blackbox with a blackbox set of algorithms?My experience with futures options with IB is that they calculate every futures option position according to SPAN with no regard to any other position you have, where as any other broker would calculate the two option position together if you enter the position together, which would lead to a more rational margin requirement. It doesn't make sense but it generally explains their futures margins.
Is it not just ultimately based on projecting worst case one day moves? That's basically IB's stress test already. But does it specifically penalize short options specifically?
If I am short an ES put at 2350. Or I am long ES at 2350. And the market drops 20% overnight. Am I not more or less pretty much screwed around the same? In fact I might come out ahead with the short put as I am credited some premium at least to pad the massive loss.
I'm not sure how SPAN works, but does SPAN specifically call out naked short options to penalize?
In IB's margin page, they do make note that short options may have higher than normal exchange required margin requirement. It seems to be house rules. I can see the logic of being safe. But between a long position, or a synthetic long, not sure what the real difference really is to demand a higher margin requirement for the synthetic position.
You can and should use SPAN to evaluate a portfolio, i.e. if you have a 5 point spread you can't lose more than 5 points if the market moves against you 5% of 99%. IB doesn't appear to do that, they stress test the long position, calculate SPAN for that, and put it in your margin requirement. Then they independently stress test your short position, calculate your SPAN for that, and add that margin to the margin for the previous position. This leads to ridiculous behavior like charging you margin for a debit spread (where you can't lose more money than you initially paid for the spread), and some of the more irrational stuff discussed on this thread. SPAN is able to evaluate a portfolio together, I've used 3 other brokers who do and never heard of anyone besides IB who doesn't, but for whatever reason they're not intelligent enough at IB to program their algorithm to handle it or they just don't give a crap.Not too familiar with how CME's SPAN works. Just a blackbox with a blackbox set of algorithms?
Is it not just ultimately based on projecting worst case one day moves? That's basically IB's stress test already. But does it specifically penalize short options specifically?
If I am short an ES put at 2350. Or I am long ES at 2350. And the market drops 20% overnight. Am I not more or less pretty much screwed around the same? In fact I might come out ahead with the short put as I am credited some premium at least to pad the massive loss.
I'm not sure how SPAN works, but does SPAN specifically call out naked short options to penalize?
In IB's margin page, they do make note that short options may have higher than normal exchange required margin requirement. It seems to be house rules. I can see the logic of being safe. But between a long position, or a synthetic long, not sure what the real difference really is to demand a higher margin requirement for the synthetic position.
So SPAN is just a stress test. But does it single out naked short options? I don't think it does right? So doesn't explain why a short futures put is more heavily penalized than long futures. Supposing that a market tank should hit both equally.You can and should use SPAN to evaluate a portfolio, i.e. if you have a 5 point spread you can't lose more than 5 points if the market moves against you 5% of 99%. IB doesn't appear to do that, they stress test the long position, calculate SPAN for that, and put it in your margin requirement. Then they independently stress test your short position, calculate your SPAN for that, and add that margin to the margin for the previous position. This leads to ridiculous behavior like charging you margin for a debit spread (where you can't lose more money than you initially paid for the spread), and some of the more irrational stuff discussed on this thread. SPAN is able to evaluate a portfolio together, I've used 3 other brokers who do and never heard of anyone besides IB who doesn't, but for whatever reason they're not intelligent enough at IB to program their algorithm to handle it or they just don't give a crap.
I'm pretty sure it's still because of their independent evaluation of each position, but I won't tie myself into knots too much trying to explain what I feel is at it's root a completely irrational system that IB uses. At a high level, they assign some level of risk to the short and some level of risk to the long and sum those, which results in higher margin than just the future. I haven't bought the SPAN software so can't run it myself, that's just my suspicion based on my past experience with them. Agree 1000% that it makes no sense at all, that's IB for you. Just switch brokers, this is just the tip of the iceberg of their ineptitude and irrational behavior, more and more of which will bite you in the behind the longer you're with them.So SPAN is just a stress test. But does it single out naked short options? I don't think it does right? So doesn't explain why a short futures put is more heavily penalized than long futures. Supposing that a market tank should hit both equally.
I'm pretty sure it's still because of their independent evaluation of each position, but I won't tie myself into knots too much trying to explain what I feel is at it's root a completely irrational system that IB uses. At a high level, they assign some level of risk to the short and some level of risk to the long and sum those, which results in higher margin than just the future. I haven't bought the SPAN software so can't run it myself, that's just my suspicion based on my past experience with them. Agree 1000% that it makes no sense at all, that's IB for you. Just switch brokers, this is just the tip of the iceberg of their ineptitude and irrational behavior, more and more of which will bite you in the behind the longer you're with them.
For me they're a fine broker. I never put on those trades anyway. I just don't understand the logic here based on a trial what if trade.
Regarding synthetic positions, they have advantages. You can circumvent stock loan if you're shorting. Or circumvent high borrowing fees by using synthetic shorts. That's what some people did shorting TSLA way back when. Borrowing fee was super high back then. So they did synthetic shorts. So there is a use for it, but it involves naked shorting options.
I think IB is miles and miles ahead of the competition as far as brokers go. International market access. Multi asset class trading. Good trading platform. Mobile access. Security token. Generally low fees. All good features.
I agree that synthetics have benefits, although I'd maintain that if a stock has high borrow fee's it's reflected in a violation of put/call parity to get back to the no arbitrage situation, otherwise you have a license to print risk free money.For me they're a fine broker. I never put on those trades anyway. I just don't understand the logic here based on a trial what if trade.
Regarding synthetic positions, they have advantages. You can circumvent stock loan if you're shorting. Or circumvent high borrowing fees by using synthetic shorts. That's what some people did shorting TSLA way back when. Borrowing fee was super high back then. So they did synthetic shorts. So there is a use for it, but it involves naked shorting options.
I think IB is miles and miles ahead of the competition as far as brokers go. International market access. Multi asset class trading. Good trading platform. Mobile access. Security token. Generally low fees. All good features.
If you actually use international market access, multi-asset class trading, the platform, security token?, and the fees for what you're doing actually are lowest, and that all overwhelms the occasional irrational and totally unforeseen autoliquidation at the bid/ask that loses you a few thousand dollars, then yeah, IB is great for you.
When I got mad enough at them really think about my options I realized that I don't ever use the international trading, and there are in fact plenty of brokers who offer the products I actually do trade at a significantly lower commission rate than IB with just as solid of a platform (and I hate security tokens!). Plus they have customer service reps who grasp basic concepts like a debit spread and won't fabricate an answer when they don't know the answer, they don't autoliquidate, they don't randomly change margin and charge irrational margin where none should be charged at all.......I could go on and on. You have to ask yourself, if you're dealing with people who can't grasp the concept we're talking about here, are they really the people you want to tie your money up with?
I agree that synthetics have benefits, although I'd maintain that if a stock has high borrow fee's it's reflected in a violation of put/call parity to get back to the no arbitrage situation, otherwise you have a license to print risk free money.
If you actually use international market access, multi-asset class trading, the platform, security token?, and the fees for what you're doing actually are lowest, and that all overwhelms the occasional irrational and totally unforeseen autoliquidation at the bid/ask that loses you a few thousand dollars, then yeah, IB is great for you.
When I got mad enough at them really think about my options I realized that I don't ever use the international trading, and there are in fact plenty of brokers who offer the products I actually do trade at a significantly lower commission rate than IB with just as solid of a platform (and I hate security tokens!). Plus they have customer service reps who grasp basic concepts like a debit spread and won't fabricate an answer when they don't know the answer, they don't autoliquidate, they don't randomly change margin and charge irrational margin where none should be charged at all.......I could go on and on. You have to ask yourself, if you're dealing with people who can't grasp the concept we're talking about here, are they really the people you want to tie your money up with?
Not sure. Maybe you're right in that it reflects in the options pricing to reflect borrowing cost. But not sure exactly as cost of stock borrowing is not the risk free rate used to price options right? Where does that stock borrowing rate factor in? I'm not sure how there's an arb opportunity per se for printing risk free money?
Do you mean you are long stock and simultaneously synthetic short as well to achieve delta neutral and immediately loan out your long stock to earn borrowing fee as an arb?
Also borrowing cost rates can change daily and is dynamic depending on demand for shares. And each stock lender may have limited inventory and have different borrow rates. Hard to imagine options pricing reflecting what the tiny niche lending market establishment shows.
But the options spreads are horrible anyway. So you'd probably get eaten alive with slippage and frictional losses. There they probably more than makeup any 'lending cost' would have costed you.
If the borrow costs are say, 20%, and the options don't reflect that, then you simply do the following transaction:Not sure. Maybe you're right in that it reflects in the options pricing to reflect borrowing cost. But not sure exactly as cost of stock borrowing is not the risk free rate used to price options right? Where does that stock borrowing rate factor in? I'm not sure how there's an arb opportunity per se for printing risk free money?
Do you mean you are long stock and simultaneously synthetic short as well to achieve delta neutral and immediately loan out your long stock to earn borrowing fee as an arb?
Also borrowing cost rates can change daily and is dynamic depending on demand for shares. And each stock lender may have limited inventory and have different borrow rates. Hard to imagine options pricing reflecting what the tiny niche lending market establishment shows.
But the options spreads are horrible anyway. So you'd probably get eaten alive with slippage and frictional losses. There they probably more than makeup any 'lending cost' would have costed you.
Buy shares in the stock, lend them at 20%. Buy the ATM put and sell the ATM call, which if put call parity is holding will cost you only the transaction cost (which is far less than 20%). No matter what the stock price does, your synthetic short exactly balances your actual long, and you get a free 20% out of the deal.
Sure as a retail guy you may not be able to capture the 20% lend rate, but enough institutional guys can that they'd arb that opportunity away in less than a second. And it doesn't matter that the rates change every day, as long as that lending rate exceeds your round trip transaction costs on the synthetic short you're making risk-free money.
But that's all theory. Take a look at a stock with a high borrow rate; since you're with IB I can tell you that you can add a column to see this in an annualized percentage basis for any stock, or at least you used to be able to. Then see if put/call parity holds for ATM options for that stock. It won't (but if I'm wrong, please let me know the stock!)