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Selling Options on Futures?


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Selling Options on Futures?

  #7341 (permalink)
henry86401
Hong Kong China
 
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Thanks for the reply Symple.

I wanted to try sell an option but hedged.

This is on a commodities future so it should use the SPAN methodology ? I can also delta hedge it buying / selling the underlying future but that doesn't reduce the margin but actually increase the margin.

I don't understand why ib is not doing "risk based" margin according to some of their website instructions.


Symple View Post
@henry86401

If you sell options, call or put, unprotected, no matter if they are against stocks, futures or in your case ETF, you expose yourself and the broker to the highest possible risk.

Thus, every broker, no matter where, will protect itself by charging you the full margin that it can.

If you want to have a smaller margin, then you must sell the options protected, that is you make a hedge by having the underlying value in your portfolio.

Example in your case: You first buy your "Horizons Emerging Markets Equity Index ETF" and after it is in the trading account you sell your options against it.

Depending on the delta you sell, the number of options you sell can vary.

If you want to lower the margin even more, then you can buy the underlying value first, wait until it has increased in value and at the next significant correction you sell the calls.

But as I said before: As long as you sell unprotected options every broker will give you the full margin and with the examples I have shown here, if it is not clear, you have to check in advance with the brokerage house if they even include this kind of trade in their margin calculations.

Symple


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  #7342 (permalink)
Symple
Zuerich / Switzerland
 
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@henry86401

You then may move to an other broker house if IB is not able to work with you in this matter. Before I went to any broker house I checked in advance about this topic. Some told me directly they do not use special margins calculations when it comes to hedges. So it was clear to me not to work together with this houses, even they had god reputations.

Hope you will find your way through the matter and wish you further good success.

Symple

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  #7343 (permalink)
 myrrdin 
Linz Austria
 
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henry86401 View Post
Thanks for the reply Symple.

I wanted to try sell an option but hedged.

This is on a commodities future so it should use the SPAN methodology ? I can also delta hedge it buying / selling the underlying future but that doesn't reduce the margin but actually increase the margin.

I don't understand why ib is not doing "risk based" margin according to some of their website instructions.

For clarification: SPAN margin is the minimum margin that has to be applied by all brokers. But they are free to apply higher margins.

Interactive Brokers tries to keep risk low, and applies higher margins and forced liquidation (instead of margin calls). Of course there are advantages and disadvantages.

Best regards, Myrrdin

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  #7344 (permalink)
 
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 josh 
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Many (most?) brokers simply do not apply SPAN margin. It's a shame, and anyone doing more than very casual premium selling should find a broker that calculates margin using SPAN.

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 SMCJB 
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@henry86401, Interactive Brokers have an industry wide reputation for high margin requirements and a reputation for abrupt and aggressive liquidations for margin reasons. This will happen intra-day as well, not just at end of day based upon end of day levels. This is a shame as IB are one of the few (only?) places you can actually trade Equities, Futures and FX in the same account.

As @Symple and @josh implied, many brokers simply do not apply SPAN margin especially for options, although I would say that it is not most - especially for futures. When it comes to option selling, there are a lot of brokers that just aren't interested in that type of business, and as such increase margins to make it more difficult to do it ~ in effect they are sending the business somewhere else.

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  #7346 (permalink)
NotJonathan
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Really sad to see this thread died after I finished reading all the post? Anyone interesting to getting it back going? I was short CLN P57 and long CLNP47 prior to the drop we had the past few days.

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  #7347 (permalink)
 
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 SMCJB 
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Not futures related but have people seen what is happening with SVB / Silicon Valley Bank Put Options expiring this Friday 3/17? As people probably know the FDIC have taken over the Bank and the stock has been suspended. Now people are finding themselves in the situation that brokerage houses will not let them exercise their Puts, unless they are long the underlying stock, as you can't be short or borrow a stock that is suspended/isn't trading! If the stock doesn't start trading again before tomorrow (even OTC) a lot of people will lose a lot of money that they expected to make!

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  #7348 (permalink)
NotJonathan
Raleigh, NC
 
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SMCJB View Post
Not futures related but have people seen what is happening with SVB / Silicon Valley Bank Put Options expiring this Friday 3/17? As people probably know the FDIC have taken over the Bank and the stock has been suspended. Now people are finding themselves in the situation that brokerage houses will not let them exercise their Puts, unless they are long the underlying stock, as you can't be short or borrow a stock that is suspended/isn't trading! If the stock doesn't start trading again before tomorrow (even OTC) a lot of people will lose a lot of money that they expected to make!

I have been following the collapse and aftermath, but the upcoming options expiration has not even crossed my mind. Is there any precedent to this situation (as I typed this I realized there would be many, but my exposure to trading is limited). So how was this resolved in the past?

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  #7349 (permalink)
 
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 MDRider 
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myrrdin View Post
For clarification: SPAN margin is the minimum margin that has to be applied by all brokers. But they are free to apply higher margins.

Interactive Brokers tries to keep risk low, and applies higher margins and forced liquidation (instead of margin calls). Of course there are advantages and disadvantages.

Best regards, Myrrdin

Selling naked puts and calls does carry risk and the brokers respond with relatively high margins but this can be managed by following a few rules. TDAmeritrade will let you trade all types of options in the same margin account, but their margins tend to be about as high as the other large brokers. I've been trading oil futures options for a few years and haven't had a margin call there but try to keep the total at around 50% of my account.

DeCarley Trading is a boutique broker that seems to have lower margins and reduces them further after the initial trade. They also allow retirement accounts to be used for futures trading, which is rare. Carley Garner is great to work with and has written several helpful books on the subject. Margin goes up as volatility rises with abrupt market fluctuations, like in this week, and Carley will occasionally contact you to make adjustments that will lower their risk if things get out of hand.

While you can hedge by forming a spread and reduce the margin somewhat, it's more effective to create a strangle each month. If you open the month by selling Puts at a delta of around 10 when the oil market dips, you can then sell Calls when the price seems to peak without adding margin at all, as the risk can only run in one direction. Hedging with wings added to one or both sides (created by buying cheaper options further away from the money to form an iron condor for the month) will also control the risk. Both options will decay over time due to theta and can be closed as expiration nears.

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 SMCJB 
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SMCJB View Post
Not futures related but have people seen what is happening with SVB / Silicon Valley Bank Put Options expiring this Friday 3/17? As people probably know the FDIC have taken over the Bank and the stock has been suspended. Now people are finding themselves in the situation that brokerage houses will not let them exercise their Puts, unless they are long the underlying stock, as you can't be short or borrow a stock that is suspended/isn't trading! If the stock doesn't start trading again before tomorrow (even OTC) a lot of people will lose a lot of money that they expected to make!


NotJonathan View Post
I have been following the collapse and aftermath, but the upcoming options expiration has not even crossed my mind. Is there any precedent to this situation (as I typed this I realized there would be many, but my exposure to trading is limited). So how was this resolved in the past?

Something similar happened with Lehman Brothers but the stock started trading on the Thursday following the Sunday bankruptcy before the Friday options expiration. I gather that the fact that the bankruptcy occurred over the weekend rather than during the trading week has made things more difficult. Systems are still using a last traded price that doesn't reflect anything close to the true value of the stock. Some brokers that are allowing people to exercise and go short are then margining based upon the last trade price which involves a lot of Capital.

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Last Updated on July 28, 2023


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