Test your knowledge of new IB margins!

W

weewilly

You trade SPX options and open a portfolio margin account at IB with 200k USD. SPX is about 2650 and you want a bearish options position. You buy 100 2655/2650 SPX put debit spreads in the June expiration cycle. You pay $3 for the spread and it can widen to $5 if the market is below 2650 by expiration. The option marks were $78 for the longs, $75 for the shorts, net $3, your debit. You are risking $30,000 to make $20,000. Your account now has $170,000 cash and a $30,000 options position.

Immediately after you open the position, the market falls hard. Three days later the SPX is down 350 points to 2300. There have been limit moves and trading halts. Vol is out of sight. SPX is finding support, however, and you want to act.

Your 2655P longs are marked at about $405 and your 2650P shorts about $400, but the spread market is quite wide due to the micro-structure of these now deep in-the-money puts. You cannot sell them yet for the full $5.

Which of the following is true?

A) You can box the spread off by buying 100 June 2650/2655 calls.
B) You can sell puts or put credit spreads below the market and play for a rebound and vol crush.
C) You can sell some or all of your put verticals.
D) You can use futures to play aggressively for a rebound.
E) You can buy 1 share of GE stock.
 
Okay... so... on a leg by leg basis... that's 4 mln per leg.

So I guess you can't just buy the short leg back, since you might get liquidity value issues. Same with the long... if you would try to sell that, you would likely get into margin violation.

So... try the call spread to box it? If you do it leg by leg, first the buy then the sell? Might still be a screw up in their margining system.

Futures... you could do that.. but you're basically delta flat in position at the moment, so that's a about 30k+ in margin per 1 future. So you can't do more than 6 futures. Maybe even less or none if IB's system fails in the put spread.

You could sell you're put spread.... I assume via the spread trade/combo it's possible all 100x at once. If leg by leg... you're likely stuck in doing them 1-3 at a time.

It's well known their margining system in spreads is almost useless.... probably not so much by IB themselves, but it is on ET ;) :D
 
The multiple choice is not about what you should do, it's about what you can do.

The account is marked at about $215,000. Cash is $170,000. Options about $45,000.
 
The answer is C. The only thing you can do with the account is reduce open positions. You cannot open new positions even if they serve to reduce risk.

IB has instituted a 30x rule that you will find no documentation on. That rule states that, if the sum of the notional value of your option positions exceeds 30x your account mark, you can open no further positions, even if the longs and shorts offset each other (as they do in this case).

In my example, we have longs valued at $4,050,000 and shorts valued at $4m for a total of $8,050,000. Now divide by 30 and we have $268,333.33 which exceeds your account value and locks you down. You can only sell your debit spreads at likely unfavorable prices.
 
Okay... fair enough. I knew it was something weird like that. IB and spreads... they don't go well together.

But you say unfavorable prices... I seriously doubt you would be way of the mark if you would sell this small put spread in a combo. You wouldn't get 5 for it... since that's max value and there's still some value in the same call spread... so I would guess you can get to within 20 cents of the fair value. I don't see why that wouldn't be picked up by a market maker/algo.
 
The point is not optimizing the example trade. The problem is that traders normally expect the notional value of offsetting options to be irrelevant. It is the spread that matters. At IB this is not the case. An explosion in option values, in your favor or not, offset or not, they consider additional risk.
 
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