IB's margin formula for covered calls

Discussion in 'Options' started by Ninja, Nov 25, 2002.

  1. Ninja


    Is this a standard formula, used by other brokers too?
    Margin Requirement = Stock maintenance margin requirements + 100% of in the money option value

    What I do not understand is this: If I buy shares from cash (not on margin) and later sell a (covered) call on this stock and the stock price goes up, why is this considered a risk for my account and the positions are liquidated when the call is too much in the money?

  2. Might be because your call could be "CALLED" at anytime.
  3. Ninja


    I already have the shares in my account. So why is such a formula necessary? Why will my position be liquidated if the stock price rises too much above the strike price?
  4. Htrader

    Htrader Guest

    this is to prevent a situation where you sell the underlying stock, but still hold the short call and immediately face a margin call.
  5. Not a very convincing argument (although it's probably correct).

    This could really be handled differently. Why does the system not just evaluate, prior to accepting the sell order for the underlying stock, the new margin requirement for the resulting naked short call position and simply prohibit this sale of the underlying if this resulted in insufficient funds in the account to cover this margin?
  6. Ninja


    Yes, thats what I would expect since they always evaluate when you buy or sell something and if necessary they reject your order and a nice message pops up.

    I always thought that if I sell covered calls then I don't need to worry about margin calls and things like that.