Let me first explain it with cash-settled options, and then with physically settled options. If you are trading a spread on American style, cash-settled options, then you face the following risk of extreme uncontrolled loss: A strong market move puts the spread deep in the money at the close of trading. The short option leg is exercised, generating a huge loss. You take comfort in your long option leg, which will limit that loss, with profit left over to spare. It is, however, too late to exercise your long option leg on the same day, because you didn't receive notice of assignment on the short leg until after it was already too late for you to issue early exercise instructions (note this will always be the case). So you resolve to exercise the long option leg as soon as possible, which would be the following trading day. So you are perfectly safe, right? Wrong. You wake up and learn that the market has gapped open violently in the opposite direction from yesterday's big move. It keeps going and never looks back. Your long option leg becomes worthless by the close. You issue exercise instructions, but you get no cash because your long option leg is now worthless. You are now stuck with the entire loss generated by the short leg. But there is another thing that can go wrong. Suppose the loss generated by the short leg so severely reduces your account equity, that you are in violation of margin rules. The long option leg counterbalanced this loss by becoming extremely valuable, but because it is an option, its value DOES NOT count toward measuring your account equity or satisfying your margin obligations. The broker now has the right to liquidate your long option leg by selling it before you have a chance to exercise it. The broker wishes to do this in order to generate some cash, which would count toward your account equity and reduce your margin obligations. What if there is no reasonable bid at the time of sale? What if the bid is near zero? This scenario also sticks you with most or all of the loss generated by the short leg. Here is another nightmare scenario, which applies to physically settled, American style options. You have incurred a massive loss on the short option leg, and you have been stuck with a long or short equity position by assignment of your short option leg, and you resolve to exercise your long option leg in 24 hours, so as to reverse your massive loss. But - oh no! This massive loss triggers a margin violation! Your long option leg is extremely valuable, but because it is an option, its value does not count toward measuring your account equity or satisfying your margin obligations. So, the broker has the right to liquidate your account, and your long option leg is sold at an unreasonably low price before you get a chance to exercise it, and once again, you are stuck with most or all of the loss generated by the short option leg. A variation on that nightmare scenario might occur where your long option leg is not liquidated, but the long or short equity position resulting from your short leg's assignment is liquidated instead, because you don't have enough margin to carry that equity position. You are confident you will be OK, though, because you plan to exercise your long option leg in 24 hours. But oh no! By the time you get the proceeds from exercising your long option leg, they have dwindled to near zero, because the market moved hard and fast against your long option leg! And once again, you are stuck with most or all of the massive loss generated by the short option leg! Here is another variation on that nightmare scenario, which can occur when you are using options in order to get a great deal of leverage, to benefit from price movements on notional underlying quantities so large you could never afford to swing them around as underlyings. Your long or short equity position is liquidated, but your long option leg is left intact, and the market does NOT move against your long leg before you can exercise it. This successful exercise results in a new long or short equity position. You resolve to play it safe by closing that equity position at tomorrow morning's open. But oh no! The market gaps hard and far against you, and because you were excessively leveraged, the gap wipes out your entire account!
When a CN$ based account (like the OP's) purchases a US$ denominated put spread, does IB: 1. automatically purchase and hold sufficient US$ to cover margin obligations until the position is liquidated, or do they 2. leave the cash in CN$ and monitor to ensure that sufficient US$ can be purchased to cover the margin obligations? If the second, then the fall in CN$/US$ on the 6th, may have left the OP unable to cover the margin requirements for his put spreads, which are denominated in US$. I don't know since I trade only US$ denominated securities with IB, but ask because this is roughly, though not exactly consistent with both accounts.
I've held from the start that if what the OP said is true and he did not have any other losing positions, then the liquidation was unfair. Conversely, that means if he had other positions that were going against him, the liquidation was fair. I'm too neutral to be right or wrong on that, and it's still inconclusive anyway. But as for arguing against your tangents which were clearly irrelevant to the OP's situation, I've caused you to jump around clinging to new theories hoping one of them might turn out great for you. From that, I don't even need you to admit you're wrong, it's just implied.
No, the thread proves you are lying, and I'm not going to waste time on the details, nobody cares, so please just go away.
one case was posted on this thread and u suggest that the business model might need to be changed. you have exactly zero reason to date to suggest that auto liquidation is of poor design. " Without human judgement, you risk auto-liquidating at these insane prices" you had insane prices. u have absolutely no facts to support the necessity of human judgment.
Agree. I believe auto liquidation is dangerous for those who hedge their exposure after the market crashes... excerpt from another thread... I think this ghost is smoking something...
i think lescor is in that 1 million worth of stock several times per week,albeit temporarily, and a large fund is that way ,$millions long,for the better part of decades
There seems to exist a mistaken assumption by some here that there exists some implied right to a liquid or even marginally rational market in any stock, option contract, futures contract, or any other financial asset. Sometimes markets are liquid, sometimes they are not. Markets are generally irrational to some degree, they are either too positively skewed or too negatively skewed most of the time. Correlations exist at times, those same correlations break down at times. Sometimes by a little bit, sometimes by tremendous amounts. Because a correlation or some semblance of rationality existed yesterday or even 5 minutes ago does not mean it will exist tomorrow or two minutes from now. Trading on margin exposes you to these risks. You therefore either learn to deal with them, or you're in the wrong line of business. And if you don't know the terms under which you're accepting margin loans, you're DEFINITELY in the wrong line of business.
This is an intelligent post. I'd add that aggressive auto-liquidation is great (it defends your clearing firm's capital) as long as you're not the one being liquidated. Reminds me of an Andy Rooney bit -- "I'm strongly in favor of the 55 mph speed limit... for everyone else."