That's a very good point. Calendar spreads are treated separately in order to avoid such confusion but I am not sure regarding different strikes...
You guys from IB can bet your asses that if any of these scenarios happen you will get threads here on ET ruining your reputation, I will certainly make one and I will be pretty loud about it. So you might want to factor in reputational and collapse of the brokerage division into the calculations of the profitability of this 'auto-liquidation' BS
Yes, they can, as the posts in that thread showed quite clearly. All kinds of assumptions about what constitutes maximum realizable risk have a common underlying assumption - namely, that liquidity hasn't disappeared. For a while, yesterday, it did, and the auto liquifier did what it was supposed to do, make decisions on the ACTUAL market and not on the THEORETICAL one. What you are in effect asking for is for IB to take on more risk so customers can "safely" take on more leverage. I'm sorry, but that does not strike me as a rational request. And in fact suggests a great many folks have learned exactly nothing from the events of the past two years. Cheers.
I have been on the receiving end of auto liquidation which is why any large positions are always hedged by far OTM long dated options which are not traded and there is no margin involved as I am just talking about long options not verticals. Under the $1M cash port scenario it would just be my cost of doing business.
I see. Is that why in this thread IB sold the long puts first and then gave the poor guy 10 minutes (well, kind of - what's a few minutes here and there out of a whole 10 minutes?) and then bought in the short puts of a fully paid for debit put vertical?
What are you talking about? If you are long 119 puts and short the 114 put on the same expiry what does the risk of that position has to do with liquidity? You already paid for it when you put that vertical on. That's your max. risk. Ever. Even if SPY get's delisted. Even if it goes to 0. Even if it goes to 1000. Assignment risk? Someone assigns you on that 114 put? Just turn around assign some sucker on that 119 put. Yes, you would lose the $500 that would be the value of that vertical. but that's only if you actually get assigned. It's like saying on the road I might get run over by a car, so I might as well jump under one and get it over with.
You are assuming rational bid for one leg, and rational ask for the other. There is no guarantee you will get that at all times, as hopefully everybody learned yesterday. To repeat - the market does NOT owe you a "reasonable" bid or ask - and without that, you cannot make ANY rock-solid assumptions about maximum risk on ANY trading vehicle that implies leverage (eg, the short leg of a vertical). That is part of the price for cheap, near-instantaneous access to the markets. If you want actual reasonable humans making actual reasonable decisions on all trades/positions at times like this, you better be ready to fork over a lot more money in commissions and give up a lot of execution speed.
Okay heres a thought exercise: Maybe the problem was he didn't have the $11400 required to become exercised per option? For example for the SPy option, The program calculated he needed 16*11400 is 160k+ and maybe he had only 50k in his account, and when the bid just disappeared it was as if he bought 160k worth of stock with 50k (3x leverage then loaned 100k) that was based on a regular bid 160k, but on the no liquidity bid worth 90k, which put him -10k negative on margin. Then the auto-liquidating may be based on that. This is just a wild guess though.