Various Limitations Imposed by Brokers on Option Positions

D

dragonman

Hi, I want to know if there is any limitation on submitting an option spread order to close an existing position and also to submit a separate spread order to open a new position on the same spread at the same time. For example, closing long XYZ vertical call spread 30/40 (which is a position that I already have in my account) and also opening long XYZ vertical call spread 30/40. I'm asking it because I heard somewhere that there are limitations on a retail customer to have an order for both sides of the market in options, so I just want to understand if it applies also to spread orders or only to single orders.

Another issue: I understand that IB has a limitation which is called "Securities Gross Positions Value to Net Liquidation Value", according to which the ratio of the GPV to Net Liq. should not exceed 50 at any time and if so, they start their automatic liquidation procedure (so in this regard it receives the same treatment as a margin deficiency). They calculate the GPV basically by adding the current market value of both long and short positions in absolute values (so that regarding a short 40/30 put vertical spread, when the short leg is 9.275 and the long leg is 3.675 and considering 440 cash in the account before opening the 1 contract position, then after the position is opened although the net liq. vlaue will be 440 (cash (440+560) minues 927.5 plus 367.5) the GPV will be 1295 (927.5+367.5) at current prices).
I just found out about this limitation and I want to understand whether it is required by any regulatory rule or it is just IB's policy and if it is a customary limitation imposed by brokers? Also, what is exactly the logic behind such limitation? Isn't the maximum margin requirement should provide enough security for both the broker and the customer to cover the obligations arising from short positions? This limitation seems to me very arbitrary, since option market values can flactuate dramatically (especially in volatile markets) and therefore the GPV can flactuate dramatically, but if the customer has enough funds in this account to cover the maximum possible loss (as implied by spread orders margin requirements) why does its positions should be liquidated if the option market values reach a certain point, when the risk of the positions did not increase at all (also, why is the max. GPV ratio determined to be 50? why not 75? or 15? or 100? I assume you understand my point).

Appreciate your help.
 
Quote from dragonman:

Hi, I want to know if there is any limitation on submitting an option spread order to close an existing position and also to submit a separate spread order to open a new position on the same spread at the same time. For example, closing long XYZ vertical call spread 30/40 (which is a position that I already have in my account) and also opening long XYZ vertical call spread 30/40. I'm asking it because I heard somewhere that there are limitations on a retail customer to have an order for both sides of the market in options, so I just want to understand if it applies also to spread orders or only to single orders.

Another issue: I understand that IB has a limitation which is called "Securities Gross Positions Value to Net Liquidation Value", according to which the ratio of the GPV to Net Liq. should not exceed 50 at any time and if so, they start their automatic liquidation procedure (so in this regard it receives the same treatment as a margin deficiency). They calculate the GPV basically by adding the current market value of both long and short positions in absolute values (so that regarding a short 40/30 put vertical spread, when the short leg is 9.275 and the long leg is 3.675 and considering 440 cash in the account before opening the 1 contract position, then after the position is opened although the net liq. vlaue will be 440 (cash (440+560) minues 927.5 plus 367.5) the GPV will be 1295 (927.5+367.5) at current prices).
I just found out about this limitation and I want to understand whether it is required by any regulatory rule or it is just IB's policy and if it is a customary limitation imposed by brokers? Also, what is exactly the logic behind such limitation? Isn't the maximum margin requirement should provide enough security for both the broker and the customer to cover the obligations arising from short positions? This limitation seems to me very arbitrary, since option market values can flactuate dramatically (especially in volatile markets) and therefore the GPV can flactuate dramatically, but if the customer has enough funds in this account to cover the maximum possible loss (as implied by spread orders margin requirements) why does its positions should be liquidated if the option market values reach a certain point, when the risk of the positions did not increase at all (also, why is the max. GPV ratio determined to be 50? why not 75? or 15? or 100? I assume you understand my point).

Appreciate your help.
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To my knowledge, there is NO limitation to a "customer" entering a two side market on spreads. Spreads are either held at the broker or in the complex order book. They are not represented on the individual markets.

With regard to GPV, is this a Reg-T or Portfolio Margin account?
 
I don't follow your order placement. If you are short one spread and you want to close it and open the same spread long, place an order to buy 2 spreads. I don't know if it still exists but in the old days, some brokers made you execute the 2 spread order as two separate orders, one to close and one to open. No doubt that was to generate more commissions since they were fee per transaction brokers.

OTOH, if you are short the spread and you place two orders, one to buy it to close and one to sell it to open, that would make no sense since you're closing it to reopen it. Be that as it may, AFAIK, that's being on both sides of the market. The easy answer is to place both orders on the platform If unacceptable, it will not accept the 2nd one.

Margin on vertical spreads is simple. If long, it's the debit cost. If short, it's the diff in strikes less premium received. How that figures into IB's GPV to Net Liq. value for the entire account, I have no clue.

In regard to both of these issues, your best bet is to call IB and get detailed info as to policy.
 
Quote from rmorse:

To my knowledge, there is NO limitation to a "customer" entering a two side market on spreads. Spreads are either held at the broker or in the complex order book. They are not represented on the individual markets.

With regard to GPV, is this a Reg-T or Portfolio Margin account?
More...

This is a Reg-T account, not Portfolio Margin. How does it affect the GPV? Are there differnt GPV limitations for different types of accounts?

Regarding the two side question, I understand your logic and it makes sense but it is very confusing, since as you see I receive other answers as well.

Do you know what is the regulatory source for this limitation? If so, I will try to look at it and understand from the language (if it is readable, of course...)
 
Quote from spindr0:

I don't follow your order placement. If you are short one spread and you want to close it and open the same spread long, place an order to buy 2 spreads. I don't know if it still exists but in the old days, some brokers made you execute the 2 spread order as two separate orders, one to close and one to open. No doubt that was to generate more commissions since they were fee per transaction brokers.

OTOH, if you are short the spread and you place two orders, one to buy it to close and one to sell it to open, that would make no sense since you're closing it to reopen it. Be that as it may, AFAIK, that's being on both sides of the market. The easy answer is to place both orders on the platform If unacceptable, it will not accept the 2nd one.

Margin on vertical spreads is simple. If long, it's the debit cost. If short, it's the diff in strikes less premium received. How that figures into IB's GPV to Net Liq. value for the entire account, I have no clue.

In regard to both of these issues, your best bet is to call IB and get detailed info as to policy.
More...

Sometimes I find it difficult to get fills on the opening order than the closing order (and vice versa), so if I want to close position to take a profit and simultaneously open a new one I prefer just to have two working orders -- one for opening and one for closing. If such orders are not allowed because of being at the two sides of the market, do you think the broker should not let me to place the orders to begin with? Or is it possible that I place the orders without any restriction from my broker and later find out that I breached some regulatory limitation (this is what worrying me and the reason for asking this question).

As to GPV -- I will ask IB but first I want to check with people here if they have heard about it and what is the logic behind that.
 
Quote from dragonman:

This is a Reg-T account, not Portfolio Margin. How does it affect the GPV? Are there differnt GPV limitations for different types of accounts?

Regarding the two side question, I understand your logic and it makes sense but it is very confusing, since as you see I receive other answers as well.

Do you know what is the regulatory source for this limitation? If so, I will try to look at it and understand from the language (if it is readable, of course...)
More...

It's my understanding that the restriction on two side markets for customers trading options, are rules on the exchanges, not an SEC rule. Because, if your account is labeled as "professional Customer," most option exchanges allow two sided markets. They charge extra for floor execution fees for Pro cust.
 
Quote from dragonman:

Sometimes I find it difficult to get fills on the opening order than the closing order (and vice versa), so if I want to close position to take a profit and simultaneously open a new one I prefer just to have two working orders -- one for opening and one for closing. If such orders are not allowed because of being at the two sides of the market, do you think the broker should not let me to place the orders to begin with? Or is it possible that I place the orders without any restriction from my broker and later find out that I breached some regulatory limitation (this is what worrying me and the reason for asking this question).
More...
Again I repeat, why would you want to close a spread and simultaneously open the same one? OTOH, if any of the legs were different then it would be not the same spread. If there's a limitation, place the synthetic combo that gets you from A to B in one spread trade instead of two. Not only would that get around such limitation but would save transactions (slippage and commissions).

I can tell you for sure that I've had situations where I was short a put $4. At $3.50 I was willing to sell more at $4 or cover at $3. IB's platform prevented the placement of both orders being open simultaneously. One or the other could be open, period. Extending that to spreads... I would assume that if being two sided is a violation, the platform would again reject the 2nd order. So place the order on the platform and find out. :)
 
I asked IB about the GPB to Net Liq limitation and they said that the limitation exists not because of a regulatory rule but it is IB's own decisions which is based on risk management factors. However, I did not succeed to get from them any explanation as to its basic logic and what exactly are the risks which such limitation is aimed to reduce.

Does anyone know of other brokers that impose such limitation or IB is the only one?

Also, if there are any suggestions as to the related risks such ratio is aimed to reduce, please let me know.
 
Quote from spindr0:

Again I repeat, why would you want to close a spread and simultaneously open the same one? OTOH, if any of the legs were different then it would be not the same spread. If there's a limitation, place the synthetic combo that gets you from A to B in one spread trade instead of two. Not only would that get around such limitation but would save transactions (slippage and commissions).

I can tell you for sure that I've had situations where I was short a put $4. At $3.50 I was willing to sell more at $4 or cover at $3. IB's platform prevented the placement of both orders being open simultaneously. One or the other could be open, period. Extending that to spreads... I would assume that if being two sided is a violation, the platform would again reject the 2nd order. So place the order on the platform and find out. :)
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i think in a case of averaging better and taking profits.
 
Quote from tomk96:

i think in a case of averaging better and taking profits.
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Again, why would one close spread A and simultaneously open spread A? That just incurs slippage and commissions.

If closing spread A and opening spread B and there's a common leg on opposite sides of the market, factor it out and execute the synthetic link (spread C).


Non sequitur: Anyone know of a web site that lists the dividends on groups of stocks - say the DOW 30 or S&P 500, etc.? I really don't want to look them up one at a time. TIA
 
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