IB Forced Liquidation on Defined Risk Options

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

  1. Can't you just execute long leg then?
     
    #11     Jun 22, 2013
  2. MattSF

    MattSF


    You're obviously speaking outside of your depth. IB nets the undefined risk in an option series. If there is none then there is no risk of auto-liquidation, distinct of being assigned. There is risk of assignment, but IB does not predict when it will occur. There would be auto-liquidations en masse if IB were "predicting" assignments. I mention "prediction" as the Yelpers never mentioned assignments, so you're looking to pick fly shit out of pepper. The assignment action would be met with an exercise. Of course the holder of those puts may be in an accident or attacked by zombies.......... his or her phone may be rendered useless by the electromagnetic pulse of a 20 mt nuclear detonation.
     
    #12     Jun 22, 2013
  3. gkishot

    gkishot

    That should not matter if all legs have the same unerlying.
     
    #13     Jun 22, 2013
  4. Why am I obviously speaking out of my depth? The fact is that options positions with any short leg have considerable risk beyond the net. Pin risk, assignment mismatches, inability to meet the delivery requirements etc. It even says so on IB's T&Cs and risk disclaimer which you sign when you open an account.

    If you are short puts, your total risk on a (American exercise) vertical put spread is the put strike times the multiplier. If you are short calls, your total risk on a vertical call spread is infinity (if you don't exercise the long leg at expiry).
     
    #14     Jun 22, 2013
  5. Not always - the exercise deadline may have already have passed; assignment may not be instantaneous; you may not have enough cash to meet the margin requirements of the underlying long; there may not be longs available for delivery (e.g. a genuine short squeeze, like VW voting stock during the Porsche takeover in 2008, or Jack Simplot's potato default in the 70s).

    Example: you have a 50/60 bull call spread. The market is at $49.99 10 seconds before the exercise notice deadline. Do you exercise your calls or not? If you don't exercise, then you have a small risk that the short 60 calls get exercised, and before the market opens the next day, the stock could be above 60 (e.g. takeover). You then have open-ended risk.
     
    #15     Jun 22, 2013
  6. hajimow

    hajimow

    I have had account with IB for 12 years and I was also liquidated on my option position but they were well deserved liquidations because I was exceeding my margin. Actually IB has saved my ass a lot. If IB does not liquidate me when it should I will close my account in a heart beat.
    If after all these faithful customers telling you that IB is "almost" perfect, you still believe those BS, I recommend you not to open an account with IB because IB is not for everyone.
     
    #16     Jun 22, 2013
  7. Read the risk disclaimer quoted earlier in thread:

    http://ibkb.interactivebrokers.com/tag/position-liquidations

    "IB reserves the right to prohibit the exercise of stock options and/or close short options if the effect of the exercise/assignment would be to place the account in margin deficit."

    So, IB says that auto-liquidations in vertical spreads can occur, even if you have enough margin to cover the difference between the strikes. They clearly explain their reasoning:

    "While the purchase of an option generally requires no margin since the position is paid in full, once exercised the account holder is obligated to either pay for the ensuing long stock position in full (in the case of a call exercised in a cash account or stock subject to 100% margin) or finance the long/short stock position (in the case of a call/put exercised in a margin account)."

    "Accounts which do not have sufficient equity on hand prior to exercise introduce undue risk should an adverse price change in the underlying occur upon delivery. This uncollateralized risk can be especially pronounced and may far exceed any in-the-money value the long option may have held, particularly at expiration when clearinghouses automatically exercise options at in-the-money levels as low as $0.01 per share."

    So, even long options holders must be able to fully finance the margin on buying the underlying, or be subject to auto liquidation near the expiration date.

    "To protect against these scenarios as expiration nears, IB will simulate the effect of expiration assuming plausible underlying price scenarios and evaluating the exposure of each account assuming stock delivery. If the exposure is deemed excessive, IB reserves the right to either: 1) liquidate options prior to expiration; 2) allow the options to lapse; and/or 3) allow delivery and liquidate the underlying immediately thereafter. In addition, the account may be restricted from opening new positions to prevent an increase in exposure."

    It is quite possible that a vertical spread where you can't fully finance underlying delivery conditions, could put you into margin deficit, and thus get auto-liquidated according to IB's policy above.

    Now, if you are in American style options, you face the risk of early exercise as well. This can turn a fully hedged vertical spread into one with a mismatch between the long and short legs. In certain extreme market scenarios, this can result in devastating losses even if you are fully able to finance delivery when you originally put the position on.
     
    #17     Jun 22, 2013
  8. FSU

    FSU

    This is the main thing that has worried me about IB, a company that I think is great in so many other areas.

    I once had a butterfly on in the SPX PM settled options. It was a way out of the money put butterfly that I had put on for 0. Now there is no risk at all being long this butterfly. This is a cash settled index with no early exercise. There is no scenario where any money could be lost with this position. At the end of the day the markets went 50 (yes 50) dollars wide on most options. There was a 1 lot offered on one of my longs at .10, but my short option went 0 bid 50 offer, along with my other long. So this butterfly marked at a credit of 24.95. I was long 100, so that was almost a $250,000 mark against me.

    What would happen with IB's auto liquidation if this put my account in deficit? Remember there is no risk at all in this position, it can't lose money. Would they auto liquidate in the morning by putting market orders for each leg?
     
    #18     Jun 22, 2013
  9. Not AFAIK. As I understand it, they would only auto-liquidate if you had genuine risk e.g. having to pay for delivery, early exercise possibility etc. Cash-settled Euro-style options should have limited worst-case theoretical risk, assuming the exchange doesn't default or something like that.
     
    #19     Jun 22, 2013