Relax, the truth will come out. The essential information OP hasn't posted was what exactly were the options marked to (market price in account window) when the liquidation alert was issued? As I posted on another thread, IB in my experience does not mark options to the posted bid/ask, instead pricing them theoretically based on underlying and yesterday's greeks. I have never seen an option marked to zero or infinity just because there is no bid no offer as is often the case in futures options.
I also had a auto liquidate problem with IB about three months ago, cost me over 15k. They auto liquidated over 1 mil in stock when they shouldn't have, I had valid outstanding MOC orders on these stocks that NYSE just took to much time to fill(around 4:35 PM), so IB CPU just started getting me out after hours, five minutes later NYSE fills the MOC's and now I am on the exact opposite side of the trade. You would think someone would call me to discuss the situation before they liquidate 1mil+ of stock post market. I am still in discussions with them on this, basically my ticket has been open for over two months, they say management is reviewing my request for compensation, and will get back to me in a few days. So I reply to the ticket every two to three weeks and I get the same "management is reviewing" response every time.
I stand corrected. If that truly was his position then yes - there should be no margin call. A Portfolio Margin account would not allow for a liquidation. Being long two put spreads with cash in the account should leave him with ZERO chance of liquidation. It is my understanding that even without a Portfolio Margin account that the margin required should be zero. So either it is a mistake on IB's part or the trader isn't being truthful about other positions that he had.
Just a few general comments. While I agree that we really don't have enough information to understand everything about this situation, we do have enough information to draw a few conclusions. First, when the liquidation took place they legged out of the position. I think this is a major flaw in the liquidation engine. If you're going to liquidate some spreads, liquidate them as spreads, not as single option positions. This alone exposes the account holder to needless risk. And on that particular day a one minute (or 3 minute) difference in the time one leg was liquidated versus another was enough to literally destroy an account. If that is what IB did, and it certainly looks as if that's what they did, I think that this could be construed to be gross negligence on the part of IB. That's a problem that IB needs to address. Second, there was a story about IB liquidating positions in after hours at huge bid-ask spreads. Again, gross negligence. These are both things that IB CAN do something about, and certainly should. And further, I think IB should address this forum more generally about the workings of the auto-liquidation setup. And finally, although it is not clear to me how IB prices options, certainly I would hope it is not pricing them exclusively off of a bid-ask with no trades. And I think it is clear that IB's software could be written to flag an account where a massive change in pricing has occurred in a very small time period. Auto-liquidation under those circumstances with review is a problem. OldTrader
Even if the trader has other positions, the bots should only closed those other positions. It makes no sense at all to close his winning spreads. I believe the poster. I had similar issue with IB some years ago. Unless u had bought the debit spread as one combo trade, their bots see each leg of the option as separate trades. I am surprised IB had not fixed its dumb bots after 2008.
I sometimes wonder if people read threads to see if the issue was previously discussed or they just post anything with a misguided notion of getting 15 minutes of fame. "]Even if the trader has other positions, the bots should only closed those other positions. It makes no sense at all to close his winning spreads." winning trades has nothing to do with liquidations. you are trying to raise cash. "Unless u had bought the debit spread as one combo trade, their bots see each leg of the option as separate trades.:" there is no reason the bots care or remember the way combos were created whether you leg in or created a combo through a combo order.
I wondered the same, until I saw that IB's option margin table shows that spreads are paid up front in cash, and the maintenance is the same as the initial, both in the margin and cash account. People keep talking about what the options were marked to. That is trumped by the actual contract structure of the debit spread itself. There is no risk beyond that. But only when someone or something stupidly liquidates when there's no real market for the legs. Just because the bid/ask/last are at foolish levels is no excuse to liquidate, this is not stocks or futures etc.. The entire world could come to an end and that debit spread would still have its legal structure protecting it from losses larger than the inital debit. Apparently it doesn't have protection against dumb robots though. I'd have to say the same for our entire market after Thursday.
Aren't option MM's no longer bound by the maximum allowed quote range...? What the appropriately named BS model (which here stands not for Black-Scholes but for Bjerksund-Stensland, this being an American option) assumes is that volatility scales according to the 'square root of time' rule, i.e. that the 'alpha' parameter below is equal to exactly 2.0 (raising something to the power of 0.5 being of course equivalent to taking a square root of it), because stock returns are assumed to follow random walk (with finite variance...): sigma_annualized = sigma_daily * days_per_year ^ (1/alpha), where alpha = 2 by assumption of a random walk e.g. 0.1587 = 0.01 * 252^0.5 (annualized std. dev. is around 16% when daily std. dev. is 1%) Let's just assume that we settle for a very noisy estimator of realized volatility - the good old intraday range [1]. So if ES contract priced at 1150 had an intraday range of excactly 100 points on that fateful day, that would give us a variance estimate of around: 0.0076 (100/1150^2) and given that we have only 1 such extreme observation, the range would become our daily standard deviation estimate [2]. Now, if we annualize our 8.7% intraday standard deviation (here simply equal to the intraday range), under the 'square root of time rule' it becomes: sigma_annualized = sigma_daily * days_per_year ^ 0.5 sigma_annualized = 0.087 * 252 ^ 0.5 = 1.38 That's almost as much as the VXO (VIX predecessor) intraday high of 152.48 recorded on October 19, 1987 [3]. The official maximum VIX reading on May 6, 2010 was only 40.71 - I daresay that was a bit of an underestimate... (probably caused by the built-in momentum, i.e. the near-unity 'previous variance' parameter present in typical time-varying volatility models most likely used by market makers). That May 6th Intraday Crash exposed once again how inadequate are finite-variance options pricing models and trading advice based on them, such as the good old portfolio insurance still used today (allegedly without any regard to market impact) by certain brokers... who at the same time go long the very instrument their clients have shorted - volatility (either directly as our alleged victim here, or implicitly, by signing the auto-liquidation agreement) [4]. _______ [1] "Parkinson [1980] showed that the daily high-low range, properly scaled, is also an unbiased estimator of daily volatility -- but five times more efficient than the squared daily close-to-close return when the underlying process is a random walk" source: 'Range-based Volatility Estimators', URL: http://mahalanobis.twoday.net/stories/3019155/ [2] the minimum value in: 'Table 9.1 Use of Range to Estimate Standard Deviation', from Reference Tables by National Institute of Standards and Technology, NIST, URL: http://ts.nist.gov/WeightsAndMeasures/upload/Reference_Tables_Dec_2003.pdf [3] VIX and More: VXO Chart from 1987-1988 and Explanation of VIX vs. VXO, VIX and More blog, URL: http://vixandmore.blogspot.com/2008/10/vxo-chart-from-1987-1988-and.html [4] "Anytime volatility falls, we will take a loss on our long volatility position. When it rises, we take a gain on our volatility position.", T. Peterffy, Interactive Brokers Group Inc Q4 2009 Earnings Call Transcript, URL: http://seekingalpha.com/article/183...rs-group-inc-q4-2009-earnings-call-transcript