DeCarley Trading's Carley Garner (Senior Strategist/Broker) - Ask Me Anything (AMA) - futures io
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DeCarley Trading's Carley Garner (Senior Strategist/Broker) - Ask Me Anything (AMA)

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 Big Mike 
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Carley Garner, Senior Strategist and Broker at DeCarleyTrading, will be monitoring this thread so that she may answer any questions that you post here relating to DeCarleyTrading products and services or Options Trading in general.

Please keep in mind that some customer service/technical support issues are best handled through proper channels at DeCarleyTrading.

Carley Garner has extensive experience with Options Trading and her brokerage firm also specializes in trading Options on Futures, specifically short option selling with competitive rates. DeCarleyTrading offers self-directed trading as well as broker assisted trading and a wide variety of trading platforms to choose from. DeCarleyTrading is a member of the Zaner Group which means they have access to multiple FCM's to find the right clearing relationship best for your needs.

In addition to this thread, I will also be asking Carley Garner to stop by on occasion for a casual webinar where she can answer questions via audio while also sharing her screen to visually demonstrate any points as needed. The date/time of those sessions will be announced here in this thread. These sessions will be limited to questions only, there is no prepared presentation. After the session ends, the recording will be posted in this thread.

You can find more on their website:
- Commodity Broker Redefined

Feel free to ask any questions below and we'll do our best to get them answered.

The futures.io (formerly BMT) "AMA" (Ask Me Anything) series is by invitation only. It is part of a new program we are launching shortly called "Certified Trustworthy", something that has been months in the making. I will provide all the details of this new program as soon as it is ready for launch.

Mike

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 Devil Man 
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@Big Mike sounds like Carley is very popular here on futures.io (formerly BMT), I can personally attest to her knowledge and high standard of professionalism.

Happy I made the introduction!

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 Big Mike 
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@decarleytrading,

Hi Carley, in this thread started by @ron99 (a great options guy whom I've asked to do a webinar soon):



There are about 1,000 posts and it is a popular place for some option guys to hang out. In that thread there is recent discussion of a seasonal drop in Crude around April/May. Do you agree with this and if so, what option play would you consider for this type of trade, especially given the recent moves lower in crude?

Mike

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 Big Mike 
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Carley, one additional question:

I see a lot of discussion about SPAN margin:

SPAN Overview

Margins vary greatly from firm to firm. For example, Interactive Brokers vs optionsXpress. I assume your firm as well.

Is an options trader expected to download PC-SPAN to calculate margins? Or is there some online tool that can do it? Is there some pre-defined ratio of SPAN margin that you would set for an account when it is opened?

Mike

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 Big Mike 
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Devil Man View Post
@Big Mike sounds like Carley is very popular here on futures.io (formerly BMT), I can personally attest to her knowledge and high standard of professionalism.

Happy I made the introduction!

Thx @Devil Man. You can feel free to leave a review based on your experiences in the main review thread here:



Mike

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@Big Mike @ron99 I haven't gotten a chance to go through the entire feed, but I can certainly comment on crude oil seasonals

It is true, in recent years crude oil has had a tendency to see sharp declines in May. However, when looking at longer-term data, the May dip has been shallow with most of the sharp selling occurring in June. I suspect the stronger correlation with equities has played a part in shifting the seasonal weakness into May (after all, the stock market mantra is "sell in May and go away").

Obviously, seasonals are a great tool but it is imperative that your trading decisions are dependent on multiple forms of analysis. In other words, I believe that seasonals is a big piece of the puzzle but it isn't the only one

Knowing these seasonal tendencies, traders might look to the May and June window as a time to be on stand by to sell calls into price strength and volatility (which is when options are most valuable).

Crude oil options can see painfully quick Theta (time value erosion), so I tend to not favor a long option strategy in this market.

*There is substantial risk of loss in trading futures and options.

*There is substantial risk of loss in trading futures and options.

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@Big Mike There are a lot of advantages to trading options on futures, relative to options on stocks...and SPAN margin for all accounts regardless of size or trader experience is one of them. However, there is a minor drawback in that it can be difficult to determine SPAN margin levels intraday. Most trading platforms cannot accurately calculate SPAN margin, thus leaving the trader guessing at the exact requirement until they can reference their official statement that evening.

The biggest obstacle in providing traders with this information is the secrecy of the CME's mathematical formula for SPAN. The CME charges licensing fees for access to SPAN so most platform vendors and brokers find that it isn't cost effective to provide to all clients free of charge. Other platforms have mimicked SPAN so that clients can get a pretty accurate estimate, but again...the official reading won't be available until the statements are cut.

With that said, most traders can effectively trade without knowing the exact SPAN margin on an intraday basis by simply following generalities. For instance, as a rule of thumb...most near the money options will be charged a SPAN equivalent to about half of the stated futures margin. Moderately out of the money options will be charge at about a third of the futures margin. If you need more precise figures than this before entering your order, you are probably being too aggressive with your trading by over-leveraging.

*There is substantial risk of loss in trading futures and options.

*There is substantial risk of loss in trading futures and options.

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 eudamonia 
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@decarleytrading,

Any suggestions on how to play Corn options at this time? There is a strong seasonal tendency for the market to retrace somewhat between March and April before moving up mid-June-July, but the fundamentals are pretty mixed for grains this year.

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I prefer bullish trades in corn simply because this is one of the few markets that tends to move higher faster than it retreats. Also, traders like stories...and every year there is some type of weather related story that gets things moving. However, there is a USDA report tomorrow and that is always good for some unpredictable price action. It is possible we test the 660 range before recovering (May contract).

Volatility is incredibly low in this market, it seems the best play is a simple long option strategy. For instance, long May calls at strikes of 740 and higher. Post USDA, and preferably from lower prices, we might consider a synthetic (long put and long futures contract).

*There is substantial risk of loss in trading futures and options.

*There is substantial risk of loss in trading futures and options.

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 Big Mike 
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decarleytrading View Post
@Big Mike There are a lot of advantages to trading options on futures, relative to options on stocks...and SPAN margin for all accounts regardless of size or trader experience is one of them.

But isn't this margin level different depending on your broker? So for example at your brokerage you say you are offering SPAN margin, but it would seem many other brokers do not or use multiples of SPAN margin. Even big guys like optionsXpress and Interactive Brokers, as an example.

I've seen discussions in that thread I linked to by @ron99 that indicate a general "nervousness" or even an unwillingness to extend competitive margin to option sellers. How or why is it that you treat this differently?

I know that when you look at regular overnight futures margins set by CME for instance, and then look at the intraday margins quoted by some brokers (ie: $500 on ES), it is ridiculous amounts of leverage. Too much leverage. No one should be trading 1 contract on ES with just $500 of margin. I am trying to figure out how to apply this to the options world.

For regular futures trading, I would know my maximum risk on any given trade is for example 2% of my account size. Let's keep it simple and say $10k account so 2% = $200 risk maximum per trade. So if the market dictates I need to trade with a 10 tick stop, that's $125.00 + commission for my risk and therefore within my 2%. But it also means my maximum position size is 1 lot, if I wanted to trade 2 lots I would exceed my 2% threshold.

Still working this out as to how to apply the same to short options.

Please excuse the newbie questions, you know I am still wet behind the ears when it comes to options, but I am trying to learn

Mike

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Yes, many brokerage firms charge higher margin than the SPAN minimum. SPAN is the exchange required margin; no broker has the authority to offer margin rates at a discount to SPAN but they have the freedom to charge rates in excess of SPAN...and many do. Also, many brokerage firms take it a step further by simply forbidding option selling.

It is the view of many brokerage firms, particularly discount brokers, that option selling clients are too much risk for the expected minimal reward. Option sellers trade far less volume (which equates to less revenue to the broker) than a typical futures trader, yet they are facing the same theoretically unlimited risk. Similarly, option selling accounts are much more difficult to monitor for risk than futures trading accounts are. This is because options aren't liquid during off hours, stop orders aren't accepted on options, and because options trade far less than futures it can be more time consuming to determine accurate account balances for option traders. Simply put, many brokers believe the risk and manpower outweigh the reward for offering service to this type of trading account.

We look at things differently than most brokerage firms. Because we like the long-term prospects of an option selling strategy, we cater to this group. In our opinion, option selling accounts have the potential to be trading with us several years down the road, whereas futures traders are less likely to be doing so. Also, because I've been a broker specializing in options since the spring of 2004, I'm comfortable in our ability to manage the risk our clients pose to us.

With an option selling account, it is probably necessary to give your trades a little more room than 2% of the account balance. This is because with option selling, the odds of success on any given trade are much higher than they are on futures. Statistically (but not guaranteed), short option traders should make money on somewhere between 70 to 90% of their trades. Accordingly, they can afford to risk 5 to 10% on a particular option selling venture. However, the danger in this is letting the losers get out of hand.

It is not possible to place stop orders on options on futures, so you must place mental stops and be quick to adjust or react. A rule of thumb is to at least adjust a position once you have lost as much as you originally collected for the option. For instance, if you sell an option for $500, and it is now worth $1000, it is probably a good time to admit defeat. This doesn't necessarily mean you should pull the plug entirely, but you should probably reduce risk by adjusting the trade.

*There is substantial risk of loss in trading futures and options.

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 Big Mike 
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@decarleytrading,

A question came in today in another AMA that you would be better served to answer (the other trader is not an options trader):

Robert asked:

"What is the best way to enter an iron condor? Should I enter each leg separately asking halfway between bid/ask? If entering as a spread and my credit while evaluating the trade is 3.00, should I do a limit order of 3.00? I am confused as to how to enter an iron condor the best way"

Mike

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@Big Mike When trading Iron Condors traders are dealing with multiple "legs" to a trade which are ideally executed simultaneously. Whether or not it is best to enter the order as a package on a single ticket, or each leg individually, really depends on the market. In less liquid markets, it is usually a good idea to work a limit order on the condor as a package. This way you don't have the stress, risk and cost associated with not getting parts of the trade filled. However, spread tickets are a little more work for market makers to fill so in liquid markets you might actually have worse fill quality than you would have if you simply placed orders for each leg individually. This is because there is typically a much deeper market for individual strikes than their is spreads. After all, there are thousands of option spread possibilities so it is unlikely that many other retail traders will be trading the exact same spread...thus, leaving you to deal solely with the market makers.

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 Chipmunk 
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Hi Carley,

I never traded options on futures. Would like to ask you about trading short calendar spreads, when we sell back month and buy front month. Is there a big margin requirement because a back month short option is naked? I know that in equities the margin is huge for such spreads.

For example if CL price is at 97 and we sell May 97 put and buy Apr 97 put, what will be the profit and margin requirement for this spread? And how the margin would change if the price goes down deeper in the money (e.g. to 87), taking into account we have a front month long option.

As you know in short calendar we want the price to move away somewhere from the current strike. So it works better with volatile markets, I am not sure if CL is a good choice or not and how wide are the breakeven points in this spread, because my account does not support futures options I cannot test it.

 
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 eudamonia 
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@decarleytrading,

Does your firm allow options selling with an IRA account? Thanks.

Edward

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 Mozart 
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Carley, how do you approach calculating risk in an open credit position (open option writes) Is ther any recommended tool out there? Thanks

 
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Chipmunk View Post
Hi Carley,

I never traded options on futures. Would like to ask you about trading short calendar spreads, when we sell back month and buy front month. Is there a big margin requirement because a back month short option is naked? I know that in equities the margin is huge for such spreads.

For example if CL price is at 97 and we sell May 97 put and buy Apr 97 put, what will be the profit and margin requirement for this spread? And how the margin would change if the price goes down deeper in the money (e.g. to 87), taking into account we have a front month long option.

As you know in short calendar we want the price to move away somewhere from the current strike. So it works better with volatile markets, I am not sure if CL is a good choice or not and how wide are the breakeven points in this spread, because my account does not support futures options I cannot test it.

@Chipmunk

The margin on short futures options strategies tends to be much lighter than that of stocks. However, options on futures margin is rather complicated and somewhat mysterious. The margin requirements are constantly changing with price and volatility, so it isn't a black and white figure; instead there are plenty of gray areas.

There is a significant margin discount when buying the front month and selling the distant month. The current futures margin in crude oil is approximately $5,000; my guess is that a spread such as the one mentioned would carry a margin charge of about $1,400 (but again, it would all depend on market volatility, etc). It is likely even be less, but I'd rather high ball it than the opposite.

This strategy is quite a bit different than what we typically do. I'm not saying that it is better or worse, just that we don't have a lot of hands on experience with this exact strategy. We have more experience with similar strategies using out-of-the-money options. In the case of OTM options, it is fair to say that you should be prepared to bare the brunt of any spike in volatility (the front month won't keep up), so you will have the best prospects when expecting volatility to decrease. Also, the front month option will erode more quickly in a quiet market. So it can be tricky.

*There is substantial risk of loss in trading futures and options.

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eudamonia View Post
@decarleytrading,

Does your firm allow options selling with an IRA account? Thanks.

Edward

@eudamonia

We certainly allow clients to trade futures, and options on futures, in an IRA account. Doing so requires the use of a custodian (which isn't any different than any other retirement account). There is slightly more paperwork required relative to a traditional individual account, but once it is open there are no additional trading restrictions. You are free to sell options at exchange minimum margin requirements.

If you would like additional information/details, please send me a private message

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Mozart View Post
Carley, how do you approach calculating risk in an open credit position (open option writes) Is ther any recommended tool out there? Thanks

@Mozarrt

When selling options "naked" or "open" the risk of the trade AT EXPIRATION can be easily calculated by simply adding or subtracting the total premium collected to the strike price of the option. For instance, the equations below can r be used for short calls and puts, respectively.

Break Even = Short Call Strike + Total Premium Collected

Break Even = Short Put Strike - Total Premium Collected

Unfortunately, the risk and reward that occurs at any point BEFORE expiration cannot be accurately predicted. This is because before expiration, the value of the options are still dependent on time and volatility. As we all know, we can't predict the future actions of humans (volatility), nor can we determine with absolute certainty the timing of these actions.

You can always estimate the value of your profit and loss by looking at the option delta each night...but the delta is dynamic (not static), so this too won't yield perfect figures. Nonetheless, it will give you a good idea of "what if" scenarios in the short run.

*There is substantial risk of loss in trading futures and options.

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 Chipmunk 
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Carley, do you require a maintenance margin for long options, for example when you simply buy put or call?

 
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Chipmunk View Post
Carley, do you require a maintenance margin for long options, for example when you simply buy put or call?

@Chipmunk We work with multiple clearing firms; none of which will charge margin for the purchase of an option. Some brokerage firms will to protect themselves from the potential exercise of the option, but we do not. As you know, the risk of loss in an option purchase is the amount of premium paid to purchase the call or put. Accordingly, there is no other capital requirement necessary.

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Carley, do you (or anyone else for that matter) know if there are exchange-traded daily Forex options available?

I found that ISE offers weekly options on forex pairs, but I couldn't find anything regarding daily options, for a large part since Googling only turns up the non-exchange traded stuff.

Edit: Since I'm a non-US citizen, the Nadex "exchange" isn't available for me.

 
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Jura View Post
Carley, do you (or anyone else for that matter) know if there are exchange-traded daily Forex options available?

I found that ISE offers weekly options on forex pairs, but I couldn't find anything regarding daily options, for a large part since Googling only turns up the non-exchange traded stuff.

Hi Jura

FOREX options, by definition, are not exchange traded....but there are currency options (which is what I'm assuming you are referring to) on futures traded on the Chicago Mercantile Exchange (CME) and some traded as equity products on various stock exchanges (which I am not as familiar with).

In my opinion, currency option traders are best off trading CME currency options due to the reliability and safeguards of an organized and regulated exchange. However, the CME does not offer options that expire daily. Instead they have the typical monthly and weekly expiration options.

There are binary options that expire daily (such as those traded on NADEX), but liquidity is a concern.

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  #25 (permalink)
 mdsvtr 
Memphis,TN
 
 
Posts: 232 since Sep 2010

Hi Carley, thanks for starting this thread. Very Informative. My question is in regards to LEAP options and the buying a LEAP option on Silver ( an ETF that mimics silver almost penny for penny ). Say I buy a LEAP on Silver and it costs me $2.50 for that option , with a Delta of .55 So, if Silver gets to the " normal " ratio of what it is to Gold ( that ratio being 12:1 ) , and let's assume that this happens in a year ( and we bought a 2 year LEAP ), How much could we assume that $2.50 option would be worth ? Right now, the ratio of silver to gold is around a 50:1 ratio . That in essence means that Silver could/should go higher by 3 times of what it is currently trading at. Anyways, just wanted to get fellom BM traders knowledge on the question and I look forward to getting insight. Thank you again - Michael

 
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TFOpts
Los Angeles, CA
 
 
Posts: 64 since May 2017
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@decarleytrading

I have a few questions on margin calls for option writers that you can hopefully clarify. I will describe how I think it works below, please correct any misunderstanding.

When a naked option is sold, you do not go on margin call if:
Margin Held + Initial Value > Maintenance Margin(t) + Option Value(t)
Where,
Margin Held = the cash margin you are holding for the position
Initial Value = the option premium when the position was opened (what you are hoping to gain from the trade)
Maintenance Margin(t) = the maintenance margin requirement at time t
Option Value(t) = the value of the option at time t
For a credit spread, it is very similar:
Margin Held + Init Short - Init Long > Maintenance Margin(t) + Short(t) - Long(t)
Where,
Init Short = the value of the short option when the position was opened
Init Long = the value of the long option when the position was opened (you hope to gain Init Short - Init Long from the trade)
Short(t) = the value of the short at time t
Long(t) = the value of the long at time t
Here's where the uncertainty build for me. If you purchase another long option as protection after the position was already opened, you avoid a margin call if:
Margin Held + Init Short - Init Long - Init ProtectiveLong > Maintenance Margin(t) + Short(t) - Long(t) - ProtectiveLong(t)
Where,
Init ProtectiveLong = the value of the long option when initially purchased.
ProtectiveLong(t) = the value of the long option purchased after at time t. The maintenance margin would also reflect the additional long
And now I'm shooting in the dark a bit; if you roll your initial short position, you avoid a margin call if:
Margin Held + Init Roll Short - Init Long > Maintenance Margin(t) + Roll Short(t) - Long(t)
Where,
Init Roll Short = the initial value of the short after the roll
Roll Short(t) = the value of the short after the roll at time t
Thanks for any clarification you can provide.

 
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  #27 (permalink)
 decarleytrading   is a Vendor
 
 
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@TFOpts

I think you are complicating the math, even I had a hard time following that : ) Option margin can be confusing for many reasons, but primarily because there are actually two ways to quote it. There is a gross initial margin requirement which is used by most brokerage firms which include the margin requirement plus the short option premium. For purposes of measuring whether you have margin excess or a deficit in your account, you would compare this gross margin to the total cash balance (sometimes labeled account balance, or account equity). However, I prefer to use the net margin calculation (it does NOT include short option value). This figure can be compared to the net liquidation value of the account. Thus, it makes the math simpler. You simply subtract the net margin amount from your net liquidation value to determine the excess margin in the account. Then, when adjusting spreads (add more long options, buy/sell futures against a short option, etc) the math doesn't change. You sill simply subtract the net margin from the net liquidation value. Of course, the margin required will go down as you add more long options.



In this example, the net margin requirement is $2,457.00. This can be compared to the Net Liq of $10,463.14 which translates into a margin excess of $8,006.14. This client is currently short three naked options. If he purchased an option or two to convert them into credit spreads, his Net Liq will not change (except for commissions) but his margin will drop significantly. Assuming it drops to $800, the account would then have $9,663.14 in excess margin ($10,463.14 - $800). Using this method, there is no need to worry about adding or subtracting premium.

I hope this helps. BTW, the Zaner360 (the platform most of our brokerage clients use) displays both the net margin and the gross margin. The "Balance" section of the Account Summary window displays the net margin (does not include option premium), the "Portfolio Margining" section in the Account Summary window displays the gross margin (includes option premium). Let me know if there is anything else I can do to help.

*There is substantial risk of loss in trading futures and options.

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  #28 (permalink)
TFOpts
Los Angeles, CA
 
 
Posts: 64 since May 2017
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decarleytrading View Post
@TFOpts

I think you are complicating the math, even I had a hard time following that : ) Option margin can be confusing for many reasons, but primarily because there are actually two ways to quote it. There is a gross initial margin requirement which is used by most brokerage firms which include the margin requirement plus the short option premium. For purposes of measuring whether you have margin excess or a deficit in your account, you would compare this gross margin to the total cash balance (sometimes labeled account balance, or account equity). However, I prefer to use the net margin calculation (it does NOT include short option value). This figure can be compared to the net liquidation value of the account. Thus, it makes the math simpler. You simply subtract the net margin amount from your net liquidation value to determine the excess margin in the account. Then, when adjusting spreads (add more long options, buy/sell futures against a short option, etc) the math doesn't change. You sill simply subtract the net margin from the net liquidation value. Of course, the margin required will go down as you add more long options.



In this example, the net margin requirement is $2,457.00. This can be compared to the Net Liq of $10,463.14 which translates into a margin excess of $8,006.14. This client is currently short three naked options. If he purchased an option or two to convert them into credit spreads, his Net Liq will not change (except for commissions) but his margin will drop significantly. Assuming it drops to $800, the account would then have $9,663.14 in excess margin ($10,463.14 - $800). Using this method, there is no need to worry about adding or subtracting premium.

I hope this helps. BTW, the Zaner360 (the platform most of our brokerage clients use) displays both the net margin and the gross margin. The "Balance" section of the Account Summary window displays the net margin (does not include option premium), the "Portfolio Margining" section in the Account Summary window displays the gross margin (includes option premium). Let me know if there is anything else I can do to help.

Thanks Carely, I was going into details to make sure margin calls behaved correctly in a back-testing model. I am not able to see your image; but from what I gather, in any situation the net liquidity value is the cash on the account plus the Gain / Loss on the open option positions. The net margin is then simply the margin requirement at the time. Using a formula again (sorry), a margin call would occur if:
Margin Requirement > Cash + G/L on Options(t)
If that's the case it simplifies things a lot.

 
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  #29 (permalink)
 decarleytrading   is a Vendor
 
 
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Posts: 29 since Mar 2013
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@TFOpts

Yes, your equation is correct

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  #30 (permalink)
 Big Mike 
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Hi guys,

This thread is now closed. These days, we reserve AMA threads only for site sponsors.

Mike

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