Why is the margin requirement higher for Call - Put?

[Spaghetti Code]

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

I have an ulterior motive in asking these questions: I am implementing a toy brokerage program. This is why I am asking questions about the margin enforcement. Framing these questions as if we were the broker, how could we explain to someone else why the margin requirements? e.g. "Hey guru, the brokerage you run has some unusual margin requirements for seemingly related instruments, how come?"

You need a portfolio margin account. It gives more leverage with SPX options, and also allows cross margining

Clarifying, I am comparing a single long ES future (no option), with the equal exposure SPY short puts and long calls. The expiration is (ideally) exactly one day from now, same as the the settlement time for the Future contract. We should be able to draw a payoff diagram where both portfolios are identical (modulo trading frictions).

 

[guru]

if we were the broker, how could we explain to someone else why the margin requirements?

If I was a broker, I'd start with standard margin requirements, potentially matching yours, then I'd have my team review applicable regulations, come up with risk scenarios, talk to pro traders who have encountered unexpected situations, check how/whether reporting customer's margin usage to CBOE and CME can be reconciled, and ask what else I need to think of or consider.
However, I am not a broker and don't have a team advising me on this. Brokers already did that work and that's why we have what we have, whatever that is

 

[narafa]

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.

Well, the SPY doesn't trade 24 hrs like the ES futures (Actually ES trades slightly less than 24hrs) The SPY options also doesn't trade 24 hrs, so short SPY options (calls or puts) are prone to gaps in SPY (Which theoretically are not there in the ES futures).

Secondly, the SPY is the vehicle used by most investors & funds to get exposure to the S&P500. ES primary function is to provide hedging when needed (And speculation of course). If you want to leverage yourself to the max. with exposure to the S&P500 (For a unit margin), you probably need to think of SP500 leveraged ETFs (SPXL or UPRO).

You also need to consider future options on ES and check their margin requirements for the equivalent of short put-long call.

 

[Gleycooym]

If I was a broker, I'd start with standard margin requirements, potentially matching yours, then I'd have my team review applicable regulations, come up with risk scenarios, talk to pro traders who have encountered unexpected situations, check how/whether reporting customer's margin usage to CBOE and CME can be reconciled, and ask what else I need to think of or consider.
However, I am not a broker and don't have a team advising me on this. Brokers already did that work and that's why we have what we have, whatever that is

Hard to believe to my own ears now but when I was learning the ropes of trading I had thought that I would in future provide brokerage services to other traders, or at least manage their accounts. Now the situation is such that if I just handle my own portfolio well it’s a major feat, gosh how naive can we be!

 

[scadderoccasional]

Hard to believe to my own ears now but when I was learning the ropes of trading I had thought that I would in future provide brokerage services to other traders, or at least manage their accounts. Now the situation is such that if I just handle my own portfolio well it’s a major feat, gosh how naive can we be!

I know what you mean. All the big dreams of yesteryears gone to the wind, or more like gone to the margin call

 

[Gleycooym]

I know what you mean. All the big dreams of yesteryears gone to the wind, or more like gone to the margin call

When I left my job for full time trading based on the profits I was making then, little did I know that it was a short lived dream. I am back with a full time job now and part time trading with fxview. The little dream I had with ib earning 12k average monthly rather burst hard. Seeing all the money gone to 0 was so frustrating that I stopped using that account altogether.

 

[shriekpurser]

I know what you mean. All the big dreams of yesteryears gone to the wind, or more like gone to the margin call

Margin call!! I would do anything to avoid that!

 

[scadderoccasional]

Margin call!! I would do anything to avoid that!

Anybody would! But it’s something as a trader difficult to escape.

 

[Truckmorrisanathoy]

When I left my job for full time trading based on the profits I was making then, little did I know that it was a short lived dream. I am back with a full time job now and part time trading with fxview. The little dream I had with ib earning 12k average monthly rather burst hard. Seeing all the money gone to 0 was so frustrating that I stopped using that account altogether.

I can understand and I would advice to stick to small balance requirement brokers only like the one you are using fxview. Alpari and xtb are some other alternate options that are good.

 

[cortney302]

You should definitely look at various broker platforms. This will give you a better idea.