When I worked at Ameritrade years ago they had a margin requirement on doing debit spreads...of the difference between the strike prices x the number of shares...this was even in their margin handbook. I had always assumed that every firm used that formula. It seems that some firms do not place that margin requirement on debit spreads?
Your original assumption is correct for Reg-T margin accounts. Where are you seeing a different margin requirement? And, is it in a Reg-T or CPM account? Bob
I was used to seeing both debit and credit spreads having a margin requirement. Recently I was entering debit spreads on a platform that clears thru Penson and noticed that they were not holding margin against the debit spreads and even allowed me to enter an order that I did not have enough funds to meet what I calculated the margin requirement should have been. The platform even showed the impact on margin as zero. The spread was a buy of 15 AAPL Jan 400 calls and sell of 15 Jan 415 calls for a net debit of 7.90. I got a message that I have enough funds to meet the trade requirements, which I did for the cost of the trade, but not the margin requirement which I figured as (15 x 1500=$22,500). This is a new plaform for me (that I opened specifically to do some spreads on) and when I entered a smaller order and noticed that margin was not being used to do the trade I increased the number of contracts. When I attempt to enter a bullish put credit spread on AAPL selling the 405 puts simultaneously buying the 395 puts for a credit of 4.05 the trading platform does hold a margin requirement. This account is a reg-t margin account.
What Platform? The margin requirement would be 15*7.90*100=$11850. Margin requirements for Reg-T accounts for a debit vertical spread is the net debit you are paying.
I had not done a spread trade in a very long time, but I am looking at an old margin handbook from Ameritrade, before they became TD Ameritrade and they list the margin requirements on a debit spread as follows: "The initial and margin maintenance requirments are calculated by multiplying the difference between the premium paid for the long contracts and the premium received by selling the short contracts by the number of shares deliverable for the option contracts"... This should be 14.00 -6.95 = 7.05 x 1500 shares or $10,575. I screwed up in the previous post on the calculation LOL!!! However my question still stands as I was thinking that the margin maintenance requirement would be seperate from the cost of the trade...net debit and commission.
That is where my thinking was wrong. Thinking the cost of the trade was seperate from the margin maintenance requirement on a debit spread. Thanks for the education rmorse.
No problem. interesting thing about portfolio margin. Because there is a minimum margin per option of $37.50 per option, buying low priced spreads have higher requirements under PM than reg-t.
Go to http://www.theocc.com/risk-management/cpm/. Launch the online position editor. Pick an option you know trades at a low price that is OTM. Enter a position. Then go to http://www.cboe.com/tradtool/mcalc/default.aspx. Put the same position in. Check the difference. Reg-T looks at cash and max loss. CPM looks at how much money you will lose if the stock moves up/down 15%. In most cases CPM is better. But, because of the minimum haircut requirement per contact, cheap options can be better in Reg-T if you are long. If you do a spread in Reg-T, make sure you don't leg into it. If you sell first, you have to be able to meet the short side margin, even if you close it, or hedge it one second later. I would recommend that anyone with equity/option experience that understands leverage, use CPM if they have enough assets. You don't have to use the leverage just because it's offered to you. Bob