I'm still new to options and would like some help. I'm using a simulation account for now. if I short a Call option...I've read that this is a risky strategy... If I'm not mistaken, your account can go negative... But correct me if I'm wrong, but doesn't Interactive Brokers or other brokers usually have daily margin requirements that prevent your account from going negative by automatically closing it out?
If you are short an option and your account goes into margin deficit IB will attempt to liquidate. However, it is not always possible to liquidate before an account's equity goes negative. Legally, you would still be on the hook to cover any losses on top of what you funded should this occur. This could easily happen - think takeovers, earnings surprises etc. It's good that you are asking these questions. However, I would highly urge you to read up on option strategies, know the risk profile/return of every trade and understand the basic theory before putting on any naked positions. I'd also suggest you start with hedged strategies where you can quantify your maximum loss.
Actually, I've read quite a lot to the point that now I'm a little confused and trying to clear things up. Either way, this is why I'm using a simulation account. I'm in the learning stages. If my understand is correct... pretty much any hedging strategy is basically just another way of lessening the leverge right? At the end, you're still have to decide on a direction..That also means, you're doubling up (or more) on commission and spread costs if you use hedging strategies
not correct. hedging and leverage are two different concepts. i.e if you short a naked call, you have unlimited risk. if it is a long call, your max loss would be the premium.
This is what I have been reading in the books as well.... but if say your brokerage company puts a margin requirement...like say IB... then what good is this since they automatically close your postions out even when you know there is still time for it to bounce back up?
maybe u also need to brush up on margin. unless u plan to only keep the minimum margin requirements to maintain ur position, i don't see why u should have to worry about forced liquidations.
Can someone who understands how the margin works in interactive brokers...please correct me if I am misunderstanding... with reference to specifically buying call options... will IB let the position go all the way down to $0 in my account and still have the chance to bounce back... or do they have margin requirements that prevent the account from doing that?
if u are buying call options, they will let your position go to zero since u have paid fully for those options. think of it as buying stock with 100% cash. if the stock tanks, they are not going to help u exit the position just because u are losing money. they are only concerned when they have money at risk, like if a stock position is margined and u can't meet a margin call.
Welcome. __________________ Please, I'm not a daytrader, I'm an "Intraday Liquidity Provider" IF YOU HAVE TO ASK THAT, YOU SHOULD NOT BE TRADING OPTIONS!!
I believe when setting up your account initially, you can select either cash or margin account... I selected margin. How do I know if I'm either buying an option in cash or in margin?