margin requirements when legging out of of iron condor

Discussion in 'Options' started by starvingtrader, May 18, 2011.

  1. I trade through OptionsHouse. I do a lot of credit spreads, and many times after I put a credit spread on, I'll put on another credit spread on the other side of the market and effectively leg into an iron condor.

    When I put on the second leg of the iron condor, the order summary shows that no extra margin is required, which is correct (assuming the max risk of the 2nd leg is not greater than the max risk of the 1st leg). This is convenient because some brokerages don't do this. When I try to do it on Ameritrade they require separate margin. But anyway...

    When I take off one of the legs of the iron condor, it tells me that I don't have enough buying power to do so. This doesn't make sense to me since the margin should be the same for 1 or 2 legs of an iron condor (for simplicity's sake, let's assume the max risk on both legs is equal). Does anyone know why this is? OptionsHouse doesn't seem to know.

    I thought this might be a possible explanation... Is is possible that if I liquidate a leg that has a loss, then it creates a realized loss and hence a lower account balance where I now don't have enough money to cover the margin for the first leg?
  2. You are pretty close in your guess. Taking one side of the iron condor off leaves you with a credit spread that has the same amount of margin as the original iron condor-- therefore buying back one side does not reduce your margin requirements related to your position. If you have to pay up for a substantial loss on one side, then your cash balance will decline noticeably and reduce your ability to carry margin. You may be forced to close out both sides to cut the margin requirements down if you are running "close to the edge".

    I have a recommendation for you that is important. Keep some of your powder dry! You should always maintain a decent cash reserve. This way, nobody will be forcing you to do what you really don't want to do, and you will dramatically reduce your risk of utter ruin in the event the market moves rapidly against your iron condor overrunning your strikes completely
  3. This doesn't make any sense. Your account balance has to be higher than the maximum loss of the IC. The long options put a cap on the maximum loss, what was the maximum loss? Was it higher than the account balance?

    You are leaving out important information.
  4. rmorse

    rmorse ET Sponsor

    Is this a portfolio margin or reg-t margin account? If it were PM, this is how some prime brokers do the calculation. Some add a premium to the haircut result:
  5. Forex, here's the problem. Yes, you can close out the iron condor completely at maximum loss, and the thing is done. You will still have some funds in the account because you are required to be able to completely cover this loss.

    But, if you try to close ONLY one side (the one with a large loss), you may be FORCED to close the other, too. The reason is that taking off one side does not reduce the margin requirements on the remaining spreads.

    Hopefully, that clearly explains the issue.

    I had this happen once. Fortunately, that time the market turned around, and I survived, but it taught me to always keep a healthy cash reserve that gives me flexibility to adjust positions, roll to the new month, cover and recover as I choose. Keep powder dry. I'd say it's a very important lesson for any trader to learn.
  6. JohnGreen,

    Thanks for the confirmation.

    I had another incident where I took off one side of an iron condor, and was forced to take off the 2nd side. So, instead of taking off the whole 2nd side, I just tried to take off the short half since that is the part the makes the margin requirements so high.

    Do you know what the margin requirement is for leaving on the long only part of the second leg? In this theoretical example with HPQ stock at 37:

    Buy 100 HPQ 35 puts for $0.10
    Sell 100 HPQ 34 puts for $0.20

    Sell 100 HPQ 40 calls for $0.20
    Buy 100 HPQ 41 calls for $0.10

    Assuming it is 1 hour till expiration with the stock at 36. Both the 40 & 41 calls are nearly worthless and selling for $0.02 and $0.01 respectively.

    If I take off the other 3 legs but leave on the 41 calls, is the margin for that (now) long position going to be the original $0.10 or the current value of $0.01?
  7. Good news.

    The margin requirements on long options is zero.

    If something amazing happens, and the options go in the money, that could be interesting and there would be some significant exercise issues related to that. Most brokers will assume that you want to exercise unless you tell them otherwise (on any option that is in the money).

    Hope that helps.
  8. How could the margin requirement of the long options be 0? Doesn't that imply that someone could put on an iron condor, then take the other 3 legs off, and then free-ride on the (supposedly) free long options?
  9. There is no such thing as a free ride... The long options had to be paid for at some point.

    When you set up an Iron Condor, you get paid for the short options, but you still have to use some of that premium money to buy the long options.

    Then, if at some point you are able to repurchase the short options, the long ones will still remain and could do some work for you, or expire worthless.