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I am not sure you want to be trading at IB. I checked them out a couple of years ago and they were not friendly to option sellers.
Number one, when I called and asked about margin required, it was far higher than exchange minimum. They were the highest of any that I checked out. By far. Some FCMs do that. Some charge a little extra. Some don't charge any extra. That will severely cut ROI.
Since you already have an account there can you check on that? Pick a couple of options and find out the margin required. I have the PC-SPAN program that all exchanges use to calculate the minimum. We can then compare.
Number two, and this is a big one. I believe that if you get to the dreaded margin call that IB will automatically trade you out of the position (auto-liquidation) with a market order. You do not want that to happen. Huge unnecessary losses could result.
I just checked IB margins on the following contracts:
July Corn 5.00 put 1323
July Crude 75 put 1338
June ES 1000 put 1464
July KC 250 CALL 919
June GC 1300 put 3535
Are you able to check them against your broker?
Also, I just confirmed with IB by phone that you are 100% correct with the auto liquidation of your position instead of issuing a margin call....that's not good at all.
Initial Margin for Apr 16, 2012.
............................PC_SPAN..OX........IB
July Corn 5.00 put 343.00 411.48 1323
July Crude 75 put 323.00 354.92 1338
June ES 1000 put 341.25 341.25 1464
July KC 250 CALL 228.00 228.00 919
June GC 1300 put 564.00 564.30 3535
I see that IB is a lot higher than PC-SPAN (the minimum) and OX. Almost 7 times higher in gold!
Thank you for answering my recent questions in the private message section and as you requested, I will now continue our previous conversation in the open forum for all to enjoy and hopefully learn from.
I previously mentioned that I bought my first option in the silver market. You asked what lead me to that purchase.....it is one of the financial astrologers that I am currently testing out right now that has predicted $42.00 silver by the end of May....so we shall see! I agree with your comment otherwise, the margin requirements in that market are relatively high that I, too, avoid selling there as it seems to bring down the returns.
I mentioned that I have my account with PFG Best. You are correct, they do not charge a fee for options expiring. With my comission structure of $15 each way per contract, I prefer to sell the options and try to let them expire as it takes a much smaller chuck out of my profits....its like turning the commission structure in to $7.50 each way.
Here is one question and response I am having a little trouble understanding from our private message post:
"You mentioned you try to make 3% ROI on a 30 day basis.
How do you calculate this with selling options?
Are you looking at the amount of premium you will receive in relation to the amount of margin you need to put up for that option?
I take premium of the option minus fees divided by (margin required plus the excess cash I keep on hand for that position). But that ROI is low because as the margin decreases I am reinvesting that unneeded margin and selling new positions. The 3% assumes that I am keeping the same margin and excess until expiration, which isn't true. But I don't know any other way to calculate it. But it does give me a way to compare options and pick the ones to sell."
I understand the "premium of the option minus fees divided by margin" part, but how do you determine what exactly is the amount of excess cash that you will keep on hand for that position?
Do you revert back to the 66% cash reserve? Could you give me a simple example...using some arbitrary numbers? Maybe $115 in premium with $15 in fees and comminssion and $1,000 in margin to keep things simple.....
When you continue to add postions in this example, do you generally add at the same strike price or do you start you evaluation all over again?
Yes Scott, that is exactly how I calculate it. I have been using a spreadsheet with those calculations for years.
One thing I would caution is that you can't set a minimum or hurdle and strictly stick to it. You have to go with what the market gives you.
Sometimes the market will only give you 1-2% monthly ROI. Other times 5-6%. You just never know when. Don't try force to trades. Don't make trades to just have something on. Sitting on your hands is sometimes the best thing to do. And revenge trading (trying to force trades to get back money you lost) is always bad.
I have made all of these mistakes. Hopefully you won't have to learn the hard way too.
