options account with few restrictions..

Discussion in 'Options' started by GGSAE, Nov 13, 2006.

  1. How would that work out in an IRA "cash account" since the short will involve the use of margin?
     
    #11     Nov 22, 2006
  2. ryank

    ryank

    You are not borrowing money when you sell an option. The margin is the amount of cash you need to have in your account to cover your max loss basically.

    Here is an example taken from thinkorswim.com:

    # How do I calculate the margin on a short call or short put?
    The margin requirement of a short call or short put involves three calculations. The margin required is the largest value of the results of those calculations.
    The calculations are:
    1) 100% of the proceeds of the sale + 20% of the stock value ? the out-of-the-money value
    2) 100% of the proceeds of the sale + 10% of the stock value
    3) 100% of the proceeds of the sale + minimum dollar amount per option contract (currently $250)

    For example, the margin required to sell 3 XYZ Apr 50 calls at $2.00, with XYZ at $49.00 is found through the formulas above.
    1) $600 + $2940 - $300 = $3240
    2) $600 + $1470 = $2070
    3) $600 + 750 = $1350

    The margin requirement is, therefore, $3240.
    The same method is applied to find the margin on short puts.
     
    #12     Nov 23, 2006

  3. Does IB have trading levels? Or is it the same as TOS, once approved any strategy is available?
     
    #13     Nov 23, 2006
  4. The term "margin" seems to have many meanings so I'll just avoid using it for now.

    For IRA accounts basically you must have enough cash to cover the risk of any spread you play. For example, to have a $5 wide credit call spread you must have $500 cash for each spread.

    That is the rough idea, there are some nuances that may vary per broker. For example, some brokers may let the credit from the above spread count toward the $500.

    Don
     
    #14     Nov 23, 2006
  5. ids

    ids

    IB does not have notion of trading levels. You can trade whatever you want in limits of margin requirements.
     
    #15     Nov 23, 2006
  6. GGSAE

    GGSAE

    So the difference between buying a single call or selling a straddle or spread is just margin requirement?
     
    #16     Nov 23, 2006
  7. ryank

    ryank

    Yes. Buying a call doesn't require margin, selling a straddle or spread does.
     
    #17     Nov 23, 2006
  8. What happens in an IRA account if you are about to be assigned on a position that will result in being short stock? I'm assuming the broker will automatically close out the spread at expiration if you don't do it.
     
    #18     Nov 23, 2006
  9. Eliot that actually happened to me earlier this year. TOS worked with me to add liquidity to the account so I could work out the situation. They were great.
     
    #19     Nov 23, 2006
  10. I read a thread somewhere (probably here) about someone who had a short put in hist IRA. He thought it was going to expire OTM, but it was assigned anyway. Then some bad news came out over the weekend and the stock dropped. He didn't have enough other securities in his account to settle the long stock. He was in a bind because the broker wanted him to add cash but he couldn't due to IRS rules. I've probably mangled the details, but I think the gist is correct.

    I was thinking about this later. Can you add more $$$ to an IRA, but without the tax writeoff?
     
    #20     Nov 23, 2006