Stefan_777, You are once again not accurately describing my statements. I don't think, and I never said, that an account complying with margin rules should be liquidated. You misunderstood me on this point. I suggested that the OP's account might have violated margin rules in ways he did not understand, and that these violations might have justified or necessitated at least partial liquidation of his account. You also misunderstood my discussion of assignment risks. I did not raise them as an excuse for liquidating an account in compliance with margin rules. I discussed assignment risks in order to help explain why those margin rules were adopted by the federal government, and why additional margin rules were adopted by IB. Let's assume, hypothetically, that an IB customer has a cash account, and that he initially met the margin requirements for entering his put spreads in a cash account. It is possible that subsequent events involving the account's other positions, such as commodities futures, securities futures, FX, etc., might reduce the account's cash sufficiently so that the account no longer has enough cash to support the put spreads. This would lead to a partial or total auto-liquidation within minutes. Note that the changes in the put option prices would NOT reduce the account's cash balance, and so would NOT trigger the initial liquidation. The trigger would come from losses on positions other than the put spreads, even though this might result in partial or total liquidation of the put spreads.
ATTICUS!!!! Please, man. Can you not put an end to all this debate that's going on between these guys? It is unbelievable to me that someone hasn't weighed in here with a piece of informed guidance on this issue! Is it really that nebulous? Is there really not just a simple answer to all these questions? What's the actual story? Is there any such thing as an options spread that limits risk for the holder? My whole understanding of the options world was that you could construct a position which would limit your losses under any circumstances including the morning California gets hit by The Big One and sinks into the ocean, or Tel Aviv gets a 4 kiloton warhead into downtown. Is that true or isn't it? If it's true, was the position the OP described one of them?
Good points are made but I think ib is at fault. They could always liquidate if the options are exercised which is what happened with etrade. Is there some risk to the firm? Yes, but IMO more risk if they keep using market orders to liquidate the way they currently do anyway. I am not saying that they shouldn't liquidate under any circumstances that market doesn't support their liquidation. In fact they could have caused the crash.
Well if your key premise depends on the OP having hidden positions going against him substantially, what difference does it make whether he has a cash or margin account? In cash accounts, IB restricts the cash that is securing the short put (As you've quoted before). To affect the spread or short put position, he would need catastrophic losses in the hidden futures/fx positions in the cash account that were not caught by IB's immediate auto liquidation FIRST, and would have had to lose more than the cash he used to aquire them. That would be a huge stretch given the information we have from OP. None of your explanations are useful to the OP's scenario. They're just written out to somehow deflect the blame to the customer by speculating he had other losing positions going and didn't understand how that affected his margin...
FINRA rule 2520 states that the only spreads allowed in cash account are European Style cash settled. If the put spread owner is assigned on the short leg, he'll end up long the underlying stock can either liquidate the stock to close out the assigned position or exercise his long put to close out his assigned position. Both are closing transactions and there is no Reg T margin requirement on a closing transaction. The position by itself was fully hedged and should not have been liquidated. If the account had other positions that required margin and fell below the margin requirements for these other positions then the liquidation could possibly be justified.
My guess. A cash and a margin account have different requirements. In a cash account, the short position is not covered by the long position. I believe he might in fact have a cash account. It was also mentioned that it was in CDN. If his account was marked to market in USD, a fluctuation could have reduced his cash requirement and trigger a liquidation. Of course, the long position was sold first in an attempt to raise cash and if that didn't raise enough cash, then the short positions would be liquidated. I don't know if this is what happened but I do believe that this is what could happen. Joe.
But the point of the auto-liquidator is not to protect the idiot on margin, it is to protect all the non-idiots not on margin. And the reason I am comfortable keeping my cash at IB is that they will liquidate positions first and ask questions second. In this particular case, we still don't know enough information to make any conclusions.
Rockford you have to be the single largest IB apologist on these boards. sheesh Theoretically you are correct in that sometimes you actually can lose MORE money on a debit spread than the price you paid for it. I have WHEN I have tried to leg out of the position. That is why this dude lost so much money...the auto liquidation process LEGGED out of the spread. The WHY is the question. If for some reason the short puts were assigned he most likely didn't have the cash to pony up (to pay for the assigned stock)and created a margin issue so the long puts were sold as well as the assigned spy stock...all at prices that created a bigger loss than the original debt. That SUCKS. That is a good reason to stick to the SPX even though you get screwed by the MM's. If this had been a debit spread in the SPX he would not have been assigned the short puts.
....here is your bone...irony, a one arm bandit as a mascot....woof, woof....go ahead dogs, attack....