What to do with cash from short options on futures?

Discussion in 'Options' started by heech, Aug 24, 2009.

  1. heech


    Hi there,

    I don't really fully grasp all of the rules behind margin in the commodity world. (Or let's be honest, in the equity world.)

    What can I do with the cash from short commodity options... ? I have a very large cash balance (offset by net short option value). Obviously some of this has to be on hand for exchange margin requirements...

    But in any case, can I direct my FCM to purchase treasuries with most/all of this cash, or anything else that would give me a little more extra interest?
  2. depends on your broker/FCM. Some of them these days require more than others (and more than exchange) for short options positions. As far as cash balance left over, just call them to see if they offer a way to put them into a t-bill or something. Some of the private brokers pay around a certain % of the going 3 month T-bill rate on resting cash...just depends who you are with.

    Also, if you are having that much difficulty figuring out your margin when placing a trade, and you don't want to call/email your broker's RM department before each trade, you can get the SPAN program from CME...although it is costly.
  3. Have you considered a Columbian (coffee) cartel?

  4. This brings me to a question...

    Are peeps here of the opinion that the correct funding rate to be used to price options is the rate at which you're able to lend out your cash balances, to be all consistent-like?

    If I am revisiting an old and tired debate, pls just ignore...
  5. dmo


    Traditionally, in a futures and options-on-futures account, you can have margin money held in T-bills. That's why pricing models used for options on futures differ from models used for options on equities.

    In equities, the risk-free interest rate or cost of carry input is used by your model to calculate a forward price for the underlying, which is what the model uses as the underlying price. Pricing models for options on futures, on the other hand, assume a cost of carry for the options, but do not calculate a forward price for the underlying. That is because the cost of carry of a futures contract is assumed to be zero, since you can keep your margin money in T-bills earning the risk-free interest rate.

    That said, I suppose a broker could have different rules, so check with yours.

    As for Martin's question - it's an old debate, but I never turn down the opportunity to repeat myself. IMHO the correct rate to use is YOUR rate. It should be what that money would be earning if you hadn't used it to buy options, or the rate that money is earning if it came from the sale of options. If it's sometimes one sometimes the other, I would use a number halfway in between.
  6. To provide a wee bit of context. This debate between self-consistency and mk-to-mkt is one that I'm actively having with peeps regarding OTC trades in the world of rates,. Thus I was curious how people address these issues in the world of equity options...
  7. dmo


    When I was in T-bond options and carrying big positions against hundreds of futures, my variation margin could change drastically with a big move even if I was delta and gamma neutral.

    So if I was long for example 500 98 calls, short 500 98 puts, and short 500 futures, I was actually NOT delta neutral. Why? because if the futures went up a point I would have to come up with $500,000 in variation margin on those short futures, and pay interest on it. My clearing firm was more than happy to lend me the money on this essentially risk-free position, but it cost me.

    So to calculate a TRULY delta neutral position, I had to input the actual interest rate my clearing firm was charging me. Then my model would tell me how many futures I had to be short - maybe 490 or so depending - in order to offset the effect of the interest I had to pay.

    To complicate things, if the futures went down, then money would flow into my account, which my clearing firm would pay me interest on. But of course, it was a lower rate of interest than it would charge me if I were borrowing money from them. So I just used an interest rate halfway between my borrow rate and my lend rate.

    Anyway, that's how I became so convinced that using YOUR interest rate is the way to go. In my situation, it's the only thing I could have done that would make any sense.
  8. I heard the coffe buying business is very dangerous these days
  9. But did you know that there are fabulous opportunities in the white coffee trade?

  10. Forget all this coffee malarkey...

    If you peeps here have extra cash, lemme know, as I got some sh1t that needs a-repoing.

    #10     Aug 25, 2009