I have never done the ratio calculation. I look at delta and monthly ROI.

Different people have different rules but must people risk 2%-5% of their account on one trade.

It depends on how much you lost on the open trade. It's possible that you could not only wipe out your entire account but also that your broker could require you to send them more money to cover your losses.

It sounds really scary:-(

If your allocating 20% of your account to a single trade I think its likely that you'll blow the account.

I won't do this ever again.

Remember that while the intent of margin is to cover potential losses on the position, it's not guaranteed to cover them. When excessive moves happen the daily PnL change can easily surpass the margin requirement.

Thanks for the clarification.

I have an IB account as well. I find that their margin requirements are very high compared to some other brokers, especially for options. Their liquidation process is rather harsh as well - market orders - hopefully there is a liquidate market when they liquidate. Given that they internalize a lot of their order flow to an affliate it's probably not surprising. There are lots of complaints that they will actually force liquidate BEFORE you actually run out of margin money. Did you know that you can go in an designate the order in which you would like them to liquidate.

Please pardon my error. But on average what would your ratio of (Initial Margin)/ (Premium Sold) be?

Please pardon my error. But on average what would your ratio of (Initial Margin)/ (Premium Sold) be?

I didn't know this. I will close my IB acct anyway.


I will be really cautious in option selling by managing risk closely, thanks for all the information and knowledge I learn in this thread so far.

If I were just starting with selling futures options, I think I'd stick with IB for a while. Reasons:

1. It's a large and very financially sound firm. They have a high excess capital ratio and on an absolute basis, it's a big number, too.

2. You'll get real time quotes, an options chain with real time IV and greeks (including a mouseover bid/ask IV) and a position manager to view your greeks and IV by individual option and the greeks in the aggregate.

3. A good margin reporting system that lets you know before you put on the trade how much it's going to take. Likewise it tells you how much you'll free up if you exit a position.

4. Commissions are 85 cents per side plus exchange fees. For $3/mo (waived if you meet the base commission requirement) you can get decent Reuters commodity news and limited analysis.

The downside, of course, is that some of their margins for short futures options are way higher than SPAN. I've written about this before as have others, and I included a comparison table with RJO. You can offset some of this with strangles or other spreads but here's the bigger issue: It sounds like you are new to selling options and getting the most bang for your margin buck should not be the priority at this stage.

Even at IB, selling options outright (no strangles or defined risk spreads), you'll have plenty of room to make outsized returns, or to hang yourself. I don't understand this, how to do that? for example, if I want to sell 1 ES put 1650 with 90 DTE, the IM will possible be $3000, if I use the 3x rule, I maybe only sell 2 at most in my 20K acct, it will be hard to have outsized returns. You are right, I am pretty new to option selling, but not very new to option. I started by day trading option buying in 2008 when I just started to trade (a very different beginning with most traders), I lost a fortunate by doing that. Now I am pretty conservative with the trading (lesson learned in a hard way). Thank you very much for the suggestions.
You can be more profitable by finding a firm with SPAN minimum margins, but first I think you should really understand what you're doing and knowing how price-time-IV affect the greeks and your risk:reward.

FWIW, my ratio is 5.3 over approx 340 trades over the last year. I have no idea if this is good or bad.

DayDayUp -

Re IB, it's going to depend on time of year, product and strategy, but in periodic checks, I've found them to be OK on the grain and lean hog options, and as noted above, especially if one employs a spread to offset some of the risk. The base contract size and the leverage is so much greater in futures (and short futures options) compared to equities, that there are plenty of opportunities to make or lose a good chunk of money at IB, even if you're not using SPAN minimum margins.

That said, perhaps IB is still not close to competitive with ES margins even if you were to buy a lower priced put (put vertical aka bull put spread) or sell a call (strangle). I stick to physical commodities and I've moved some of my crude oil and softs trades elsewhere because of the margin situation.

I think the Cordier book is pretty good (it also doesn't have a lot of competition). If I recall,

(1) a lot of his examples brought in $300 to $700 per option in credit, so they were probably less than 20% out of the money and more than 20 delta.

(2) he also suggested using up to 50-70% of Net Liquidating Value (NLV) as margin. I don't remember if that % was based on initial margin or maintenance margin.

Cordier offers one way to skin a cat, but his style is a lot more aggressive than the method Ron opened this thread with.