I want to suggest some improvements for IB margin calculation. When try to sell Calendar (or Diagonal) spread, the IB TWS strategy builder calculates very high margin. The calendar spreads have limited losses so it shouldn’t be the same as if selling naked options. For example: Calendar SPX ,strike=3090 between DEC 13’19 and DEC 20’19 If sell calendar call (buy call 3090 DEC 13’19 and sell call DEC 20’19), the IB system calculates Margin=50829 USD. Why? This is a spread and the current max. theoretical loss is around $1080. /Almost the same margin calculation is with Diagonal spread./ Usually the Calendar spread is closed up to the expiration date of the front leg. Why IB system calculates the margin of the spread like margin of naked short option? When trade generic combo spread options (separate options as a spread composed by 2 highly correlated underlyings) then the IB system shouldn’t calculate the margin as naked options. I suggest the margin for such spreads to be decreased by the correlation percent. This calculation should be applied for option spreads (Vertical, Calendar, Diagonal or even more complex strategies like Iron Condor, Butterfly, BOX and etc.) based on pair trading underlyings. For example: GOOG and GOOGL – these underlyings are very high correlated because represent one company. If make a generic combo spread based on GOOG and GOOGL – buy GOOG call at strike1 & sell GOOGL call at strike2 (or buy GOOG puts at strike1 & sell GOOGL puts at strike2) then IB system should decrease the margin by the correlation percent since the risk of such spread is near to the standard vertical spread between strike1 and strike2 in one underlying. I also have a suggestion for improvement option assignments cases that do a lot of headaches of all options traders. It doesn’t matter if it’s an early assignment or expiration assignment – once the short leg is in option spread and it’s assigned, then automatically the long leg should be assigned too. The option trader use option spreads (or complex options strategies) as a hedge and wants the legs to cover each other. The most unwanted scenario is the IB auto liquidation algo to sell everything (at short option leg assignment case) and to bring huge losses instead to exercise the long option leg and to bring profits to IB users.
First, being short a time spread produces a much higher margin than being long one. There is not a theoretical max loss as you suggest. This is the same with all brokers, not just IB. If you want to greatly reduce your margin on a short time spread, you will need a Portfolio margin account. Second, again with highly correlated products the only way you will get margin relief is with a PM account again. No chance in a Reg T account at any broker. Third, your assignment idea is ridiculous. If I'm long a time spread, short a vertical, etc., the last thing I want is an automatic assignment of my long leg if my short is assigned. My long leg will generally have premium and it would create a huge loss. You will not know of the assignment until the next day anyway, so you will always have the option to exercise your long (or sell) if you want.
Thank you for your reply. But I can’t agree with you that there is not a theoretical max. loss in my 1st point. Please check it in the Performance Profile in the TWS when you create order. There you can find max profit and max. loss. Is it possible the IB to decrease the margin at least to the max. loss of the spread? I don’t know what conditions offer the other brokers. IB is my broker and I want my broker to offer the best conditions for trade. About the 3rd idea – I agree with you if in the account has enough fund to cover the short assigned leg everything will be as you say. But what will happens if the trader rely on the risk free option strategy and uses the all money from the account and in one moment some of the short legs is assigned? Then IB immediately will issue a Margin call and the IB Auto liquidate algo will sell everything and will break the risk free strategy and instead of profits IB will bring losses to his customers. To avoid that terrible scenario I suggested the 3rd idea. The 3rd idea could be optional. Like additional option in the Option Exercise window.
This is a nice tool, just fyi. I think most brokers would follow this guideline. http://www.cboe.com/trading-tools/calculators/margin-calculator
You have to understand there is no way to know the max loss in a short time spread. In your example you are short an SPX weekly call spread, the Dec 13 /Dec 20 3090 for 6.50 (about where it is now. On Dec 12 Trump announces he will make a major announcement on Dec 14th concerning a deal with China, and the index is near the strike. In this case you Dec 20 calls would be trading at a much higher vol then the Dec 12 calls which would expire before the announcement. There is no way to say there is a max loss, because you don't know what may happen to make your short calls more valuable. I'm not saying that Reg T margin is a good measure of risk for a short time spread, it isn't, but you don't know what your max loss is.
So if you are assigned on an option and as a result have a margin call that you can't meet, almost all the time you are better off doing other things then exercising your long option. You should simply buy/sell your stock and sell your long option. This will get you out of your position immediately and you will capture any premium that is left in your long option.
If you want to stay with IB and have the money, ($110,000) open a PM account and this will solve all three of the issues you mentioned. If you are assigned in a PM account and have options against the assigned stock, your margin requirement will be minimal. You will also get relief on short time spreads and closely matched securities such as GOOG vs GOOGL.
I understand your point about the unlimited losses. But after the expiration date of the front leg (Dec 13), this is no longer a Calendar spread but just a naked short option. Then I am agree the margin to be increased to around 50000, but before Dec 13 the spread has limited risk and the margin should be much less. (Most of the option strategies are closed before the first expiration date and could take advantages from the less margin). It’s almost the same if I have a simple vertical spread and sell the long leg. Then I will stay with naked short option and the margin will increase. Anyway, PM account is a solution.