Why is the margin requirement higher for Call - Put?

S

Spaghetti Code

Context: I am looking at the best way to get long leveraged exposure to the S&P500.

From my understanding, buying a call and shorting a put should have the equivalent payout as shorting a bond and buying the stock (via put-call parity). However, going long on a Futures contract should have the same payout as the call - put, and the stock - bond. Since they have the same payout, and are based on the same underlying, logically they should have the same risk. But, the margin requirements for shorting puts is significantly higher than the futures. Why?

For reference: The /ESZ0 contract, with notional value of ~$183,000 has a margin requirement of $11,000. Ignoring dividends and borrowing costs, the equivalent SPY(~$366) exposure would be 500 shares, or 5 Call-Put pairs with a delta of 1 (.5 - (-.5)). The cost of 5 SPY calls for Dec 16 is 5 * $2.81 = $1405. The premium received for the puts is 5 * $2.64= $1,320.

The problem here is that the margin for 5 short puts is 10% of the underlying value, or $19,620 ($1,320 + 0.1*366*100*5). Why would anyone who wants $183K of S&P exposure ever trade the options when they could get the better BP reduction by trading the futures? It's almost 2x better.
 
Don't know the full details, but IB states that the margin on ES futures is not related to the stock or SPX index/options, they work differently, don't offset each other and buying SPY isn't related to /ES. They also point us to CME website for info on ES futures margin. Basically you may want to learn about each of them separately, not mixing them up.
Google IB margin requirements on futures, vs margin on stock & index options.
 
I pulled the numbers from the CME website and the CBOE margin doc. It isn't from the broker. I don't believe I am mixing them up, since they are all based on the same underlying. There would be an arbitrage opportunity if they weren't the same in payout.
 
As I wrote earlier, it's the broker, IB, that specifically states in various documents that they don't offset each other and selling ES futures against SPY or SPX index options doesn't offset each other in terms of margin. Related underlying doesn't matter when they simply don't cross-apply them. This is not my opinion but the broker's.
It's also IB, the broker, that refers us to CME website for ES/futures margin requirements, and has a separate document on US equities & index margin requirements.
Of course you can contact IB to confirm, or Google it.
 
Last edited:
Some flawed assumptions - if there were no-arbitrage there would be no dealers and there are dozens of desks arbing all three products. First, the spx option is a 100 multiplier and the es is a fifty multiplier - SPY is 1/10 the size of the SPX. If you visited the floor of the CBOE - when there was an active floor - you would see the pit was surrounded by what were called merc clerks that were on live phone lines to the CME and would get signaled a buy or sell from the traders on the floor. Today it's all electronic. You should also bear in mind there are large upstairs markets in the spx and spy. Margin is pretty much less important to pros than it is to retail and the few cents they would make from an arb. look a lot more attractive when you can get that kind of leverage.
A couple of the retail firms give access to spy markets in hours that match es trading.

Any ETF that has a CME future has an active group of folks arbing. That doesn't imply they always are profitable, but they keep things aligned.
 
ajacobson said:
Some flawed assumptions - if there were no-arbitrage there would be no dealers and there are dozens of desks arbing all three products. First, the spx option is a 100 multiplier and the es is a fifty multiplier - SPY is 1/10 the size of the SPX. If you visited the floor of the CBOE - when there was an active floor - you would see the pit was surrounded by what were called merc clerks that were on live phone lines to the CME and would get signaled a buy or sell from the traders on the floor. Today it's all electronic. You should also bear in mind there are large upstairs markets in the spx and spy.
More...
I agree with this, so I feel like there isn't any flawed assumption.

ajacobson said:
Margin is pretty much less important to pros than it is to retail and the few cents they would make from an arb.
More...
From the point of view of the arb, the margin matters a lot though, since it is what allows them to keep ES and SPY options inline. The margin requirements determine how much of their capital they can use to hold open the long and short positions.

guru said:
As I wrote earlier, it's the broker, IB, that specifically states in various documents that they don't offset each other and selling ES futures against SPY or SPX index options doesn't offset each other in terms of margin. Related underlying doesn't matter when they simply don't cross-apply them. This is not my opinion but the broker's.
It's also IB, the broker, that refers us to CME website for ES/futures margin requirements, and has a separate document on US equities & index margin requirements.
Of course you can contact IB to confirm, or Google it.
More...

A few things: I don't use IB regularly (I log in once a quarter), so the specifics of their brokerage aren't that meaningful to me. Other brokers are required to ensure portfolios maintain the minimum margin balance from CBOE, so abstracting out the broker entirely leaves us with the lower bound on margin. I bring it up to avoid conflating the exchange requirements with the broker's. Lastly, even though the products don't move in lock step, you would have to agree that at expiration there is a well defined payout. The value may be slightly off day to day, but they are all defined with the SPX as the underlying, so they can't vary too much. Not enough to account for a nearly 2X margin for the options.
 
Spaghetti Code said:
Other brokers are required to ensure portfolios maintain the minimum margin balance from CBOE.
More...


Seriously? How can IB not be required something that all other brokers would be required? Doesn't make sense.
Though in this case you're talking about /ES futures but then mixing them with CBOE...

And I don't believe that any broker will offset, for example buying 2x /ES calls and offsetting it with selling an equivalent SPX call (due to SPX having 2x the multiplier of ES); or that you could offset selling ES contract while buying equivalent shares of SPY or SPX ITM call, etc.
Futures vs equity/index options are managed/maintained by different organizations who all have their own specs, margin, requirements, etc. They don't care what you think may want to offset what, and they don't even want to know what else is in your account besides their responsibility. Brokers also have to abide by those specs and regulations, not the broker's wishes. Although brokers may also want to separate the two in any case.
While it can also be argued that futures are not the underlying for an index because each /ES option expiry is on different future and each future is a different underlying.

Logically I would assume and like it to work you've assumed, but I can't do anything about things not working the way I'd like, so I'm just explaining how they work because you asked, I'm not arguing the logic of them. So since you've asked then I'm assuming that you actually want to ask a question, not argue that your own answer to you question is correct but any other answer is not :)

Though I may be wrong, so please prove me wrong and show me one broker that does what you think they should do be doing. Or possibly someone more experienced could chime in.
 
Last edited:
monkeyc said:
You need a portfolio margin account. It gives more leverage with SPX options, and also allows cross margining
More...


I have portfolio margin and can't really cross-margin futures with options on the same futures. At least not without risk:
https://ibkr.info/article/990
Anyone wanting to discuss specific scenarios probably should contact IB for more info, at least to get some details before discussing them.
 
Last edited:
You must log in or register to reply here.
Back
Top