Suppose I naked short a thousand deep out of the money puts for $3, and suppose they're extremely illiquid, with a usual bid of $1 and an ask of $5. The margin formula uses the put price, but doesn't define it. I can think of a lot of ways they could define the price of the put, and it matters a lot which one they use: 1. The last trade price 2. The ask price 3. Halfway between bid and ask 4. Black-Scholes price 5. Something else.
I believe they use #3. You can verify on Monday by looking at the margin page and comparing to the current bid/ask average.
Looks like they completely ignore the options margin formula that's posted on their website when you have portfolio margin. To naked short 100 SPXPM Dec '18 500 puts @ $3.3, the maintenance margin is only 11k According to their posted formula, it should be around 500*100*100*0.1 + 33k = 533k That's off by a factor of 50. Also for some reason the margin for the same exact options on SPX is 4x more than SPXPM. I double checked that the multiplier is the same. Why would the margin be different?
I've had them autosell a spread on me using 2. It was especially galling because the max loss on the 5 point spread was 5 points and I had plenty to cover that, but because they were using the ridiculous ask they computed it as if I could lose 7 points on a 5 point spread. All attempts to communicate this with their talking heads resulted in them essentially telling me they all prayed to the "algorithm" and didn't dare question it or those who programmed it no matter how irrational it's behavior. This won't help you, but before I switched from them I started entering a GTC order just outside the max value of a spread for 1 contract whenever I sold a spread, i.e. I'd offer to sell a 5 point spread for $5.10. That way my order was always used as "worst case" by their algorithm and they didn't screw me any more (on that item at least!), and if someone hit me on it I at least made a risk free nickle or so.
Scrooge, as someone with positions in these options, I can tell you that margin requirements seem to have no basis with what they say it should be and it can change daily. I don't have a position in an Interactive Brokers account, but my firm will have similar margin issues. I will suggest that if you put a short position on in SPX 2018 options, you do it in the SPX and not the SPXPM's as the PM's have a greater risk of a very bad mark. I would also suggest you enter the position as a spread. You will get a better fill and have less of a margin issue. For example, if you want to sell the SPX 500 puts in 2018, instead of offering just the puts, offer the 500/100 put spread. The 100 puts are only .10, so you will not lose anything on them, but it will allow your spread to go to the COB and you will get a better fill on the 500 puts.
According to the CBOE website, they let you hedge a short SPXPM option with an identical long SPX option (but not vice versa), so I can close it out that way if I can't fill at a good price on SPXPM. Does anyone know if that will work on IB?
The OCC recognizes this as a hedge with a 100% offset. The clearing broker can add some risk because of the am to pm risk, but I don't really know why they would do that before expiration. It is less risk than being short a calendar spread with at least 2 to 3 days in there.
Scrooge, portfolio margin doesn't have a preset formula and at IB PM doesn't take into account any type of static hedges (options hedged with options). I have been burned badly for using portfolio margin with defined risk spreads (like verticals, or butterflies) at Interactive Brokers. A couple years ago, IB autoliquidated the short leg of my SPX fly, even though I had more than enough cash to cover max loss and also despite the fact that the fly could never lose more than spread between strikes. The reason is that the Portfolio Margin algo looks at each option individually and they don't care about offsetting hedges with other options
Are you sure? The margin required for Debit Spreads, Credit Spreads, Butterflies is based on the short options only? Sounds like BS to me.
I posted about that case here when it happened. It was very real. The hard lessons here is don't use portfolio margin with IB if doing defined risk spreads is the core of your trading. I solved the issue by "downgrading" my account to Reg-T which actually uses common sense rules for defined risk positions.