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Selling Options on Futures?


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Selling Options on Futures?

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  #7341 (permalink)
henry86401
Hong Kong China
 
 
Posts: 3 since May 2022
Thanks: 0 given, 4 received

Thanks for the reply Symple.

I wanted to try sell an option but hedged.

This is on a commodities future so it should use the SPAN methodology ? I can also delta hedge it buying / selling the underlying future but that doesn't reduce the margin but actually increase the margin.

I don't understand why ib is not doing "risk based" margin according to some of their website instructions.


Symple View Post
@henry86401

If you sell options, call or put, unprotected, no matter if they are against stocks, futures or in your case ETF, you expose yourself and the broker to the highest possible risk.

Thus, every broker, no matter where, will protect itself by charging you the full margin that it can.

If you want to have a smaller margin, then you must sell the options protected, that is you make a hedge by having the underlying value in your portfolio.

Example in your case: You first buy your "Horizons Emerging Markets Equity Index ETF" and after it is in the trading account you sell your options against it.

Depending on the delta you sell, the number of options you sell can vary.

If you want to lower the margin even more, then you can buy the underlying value first, wait until it has increased in value and at the next significant correction you sell the calls.

But as I said before: As long as you sell unprotected options every broker will give you the full margin and with the examples I have shown here, if it is not clear, you have to check in advance with the brokerage house if they even include this kind of trade in their margin calculations.

Symple


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  #7342 (permalink)
Symple
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@henry86401

You then may move to an other broker house if IB is not able to work with you in this matter. Before I went to any broker house I checked in advance about this topic. Some told me directly they do not use special margins calculations when it comes to hedges. So it was clear to me not to work together with this houses, even they had god reputations.

Hope you will find your way through the matter and wish you further good success.

Symple

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  #7343 (permalink)
 myrrdin 
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henry86401 View Post
Thanks for the reply Symple.

I wanted to try sell an option but hedged.

This is on a commodities future so it should use the SPAN methodology ? I can also delta hedge it buying / selling the underlying future but that doesn't reduce the margin but actually increase the margin.

I don't understand why ib is not doing "risk based" margin according to some of their website instructions.

For clarification: SPAN margin is the minimum margin that has to be applied by all brokers. But they are free to apply higher margins.

Interactive Brokers tries to keep risk low, and applies higher margins and forced liquidation (instead of margin calls). Of course there are advantages and disadvantages.

Best regards, Myrrdin

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  #7344 (permalink)
 josh 
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Many (most?) brokers simply do not apply SPAN margin. It's a shame, and anyone doing more than very casual premium selling should find a broker that calculates margin using SPAN.

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  #7345 (permalink)
 SMCJB 
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@henry86401, Interactive Brokers have an industry wide reputation for high margin requirements and a reputation for abrupt and aggressive liquidations for margin reasons. This will happen intra-day as well, not just at end of day based upon end of day levels. This is a shame as IB are one of the few (only?) places you can actually trade Equities, Futures and FX in the same account.

As @Symple and @josh implied, many brokers simply do not apply SPAN margin especially for options, although I would say that it is not most - especially for futures. When it comes to option selling, there are a lot of brokers that just aren't interested in that type of business, and as such increase margins to make it more difficult to do it ~ in effect they are sending the business somewhere else.

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