IB Forced Liquidation on Defined Risk Options

Discussion in 'Options' started by premtrader, Jun 21, 2013.

  1. It's been a while since I last saw a post regarding IB"s Forced Liquidation. I thought perhaps they have finally put their act together. I was tempted to open an account with them until I came across these recent posts on yelp about IB...


    by Jay J.
    He only has long options (ie zero margin). But IB s/w bug miscalculates the margin and lock up his account.

    by Matt C.
    He was auto/forced liquidated on defined risk credit spreads even with more than enough liquidity in his account.

    I've also read that on ET? someone was forced liquidated beyond the max possible risk of a defined risk spread. How is that possible? IB leg out of the trades?

    Wow! How could this company stay in business?
  2. MattSF


    This is a pile of shit. Professional, yeah. I've had an IB personal account for going on 14 years. I keep track of my volume through excel and it's standing at 540,000 contracts in all, and not once in those 14 years and 540k contracts have I been subjected to an auto-liquidation on an options position, defined or margined.

  3. Thx Matt. Very interesting! You think someone fabricated those stories? It seems like it's only on IB though.

    I wonder if it has something to do with the duration of the options. For e.g., you hold longer dated options (less gamma risk) even if you rarely hold a position for more than a few days. Just my wild guess....
  4. I also have had a account at IB for 10+ years trading futures and options.

    In all that time I have never had a problem of any sort. I have never been auto-liquidated. I don't think I have ever talked to customer service because I have never needed to.

    They are bare bones and cheap. To me everything works as defined. That's good for me.

    I can't help but think that the people who complain so bitterly don't tell the whole story and are responsible for their own problems.
  5. Portfolio Margin accounts are different animals than your regular margin accounts - could that be the difference ?
  6. MrN


    I have used IB for about 12 years and have never had a problem.
  7. Yes but this doesn't prove anything, does it?. It's like a badly designed road junction where 99% of people have never had an accident there. It could still have design flaws and an accident rate 10 times the national average for road junctions.

    The only thing that is relevant is IB's auto-liquidation policy. If a short leg of a defined risk spread is auto-liquidated by itself, rather than the risk being calculated on the whole spread, then there is a problem. If the IB policy never does this and explicitly states it won't, then there is no problem.
  8. Just because something has not happened to you personally, does not mean it hasn't happened to someone else. And even if something hasn't happened to anyone, this doesn't mean it can't happen. What matters is whether IB's policy will cause auto-liquidation in some situations.

    Furthemore, 'defined risk' American-style exercise options DO have huge potential risk to the short leg, due to early exercise, and the lag between exercise by the counterparty, and notification/ability to cover for the trader who is short the leg.

    For example, in a market crash, takeover, short squeeze or other unusual market environment, it is quite possible that the short leg goes massively into the money. If the counterparty exercises the option, the trader short the leg will have a potentially gargantuan cash requirement to meet the margin call. In most situations, the long leg will be sufficient to cover this. However, there is no guarantee that the market will be open, that the market quote will be reasonable, or that the price will be similar. For example you could have a flash crash drive the stock price to 1 cent at the close, get exercised on your short put after the close, next morning you have a huge margin call, but there are no decent offers for the massively ITM put on the size you need. It's quite possible then you can't meet the margin call.

    Or the price has shot back up in the underlying, your long puts are not worth anywhere near enough to meet the margin call, and if you exercise to fulfil the delivery requirement for the underlying, you have to wait until tomorrow to take delivery - this leaves you with a huge margin deficit and you will be closed out by a broker that does not have the discretion, willingness, and funding to maintain your position for 1 trading day. Even if they are willing and able, things like short sale restrictions can really fuck up your day.

    If you have read IB's T&Cs and risk disclaimers, you will see that, like every other broker, they warn you that you cannot expect an orderly liquid market at fair value, that fast markets and crash conditions can result in spreads and other positions going way out of what, and that you must be able to meet your margin requirements under these conditions just as much as under normal conditions.
  9. Lucky you. Here's another example of an IB problem - if you try to place a GTC order outside the day's exchange price limits, they reject the order. So for example if you want to put a GTC bid 30% below the current price, and leave it there for a month while you are away on holiday (or just don't want to have to check the market every day until it comes close enough to the desired order price) - you can't.

    Do you think the customer is responsible for this problem, or IB?

    Also, are you even aware that IB themselves define a forced liquidation policy in their terms and conditions?
    #10     Jun 22, 2013