Is there any MTM(Mark to market) associated with spreads? - futures io
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Is there any MTM(Mark to market) associated with spreads?


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Is there any MTM(Mark to market) associated with spreads?

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  #1 (permalink)
blackshugar
New Delhi, Delhi, India
 
 
Posts: 6 since Nov 2020
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So, let's just say someone has created an ITM credit spread wherein ATM option is bought and ITM option is sold. Herein, the individual would profit if both the options begin to lose value as the ITM option that is sold would lose more value than the ATM option that is bought. My question is specifically regarding the US options market. Let's just say the trade doesn't go as planned and both the options begin to gain value. The individual would then be in a net loss but the loss would be limited obviously. Now, the ITM option that is sold would then be losing of course. My question then is if MTM(which stands for mark to market) applicable on the losing short option. Because what's generally the case is that MTM is deducted from the free margin for losing short options whereas gains are not considered for winning long options. In this particular example however, the individual has created a credit spread wherein the loss is predefined. Then, would MTM be actively deducted from the free margin to compensate for the losing short option. Also, what would happen if we close the losing short option and thus book the loss in that position but we let the long option kept running?

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 SMCJB 
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My understanding is that (in the US)...

Options on Futures are marked to market daily from a cash perspective, and at year end from a tax perspective.

Options on Securities are not marked to market and are only taxed when positions are closed.

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blackshugar
New Delhi, Delhi, India
 
 
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SMCJB View Post
My understanding is that (in the US)...

Options on Futures are marked to market daily from a cash perspective, and at year end from a tax perspective.

Options on Securities are not marked to market and are only taxed when positions are closed.

OK. But regarding options on futures for instance, what if a spread has been created? The risk is defined in that case. Would MTM on short option be still applicable? Cause when you are shorting an option, you don't have obligation towards the buyer to pay for MTM. Only in case of a naked short option is MTM generally applicable cause that's where unlimited risk is. In the case of a spread though, your risk is always limited. So, I just kind of wanted to confirm what the case really is. Thanks.

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 SMCJB 
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Risk/Margin and Price/Profit are different things and you seem to be mixing them together.

Margin is the money you have to post to support a position. You are right the margin (and risk) required on a spread is very different than for a naked short option. For more information on this subject research SPAN Margining. Margin has nothing to do with Mark to Market.

With regards to price, it doesn't matter whether your XYZ Strike Call is a leg of a spread, or combination or an outright option, or whether you are long or short. The price/value is the same and this is marked to market.

So...
  • The value of your account, is marked to market every day using settlement prices.
  • The margin requirement of your account is calculated every day using that days SPAN margin parameters.
  • The liquidity of your account is then value minus margin requirement. If this falls below zero you get margined called (if your lucky) or liquidated (if your unlucky).

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blackshugar
New Delhi, Delhi, India
 
 
Posts: 6 since Nov 2020
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SMCJB View Post
Risk/Margin and Price/Profit are different things and you seem to be mixing them together.

Margin is the money you have to post to support a position. You are right the margin (and risk) required on a spread is very different than for a naked short option. For more information on this subject research SPAN Margining. Margin has nothing to do with Mark to Market.

With regards to price, it doesn't matter whether your XYZ Strike Call is a leg of a spread, or combination or an outright option, or whether you are long or short. The price/value is the same and this is marked to market.

So...
  • The value of your account, is marked to market every day using settlement prices.
  • The margin requirement of your account is calculated every day using that days SPAN margin parameters.
  • The liquidity of your account is then value minus margin requirement. If this falls below zero you get margined called (if your lucky) or liquidated (if your unlucky).

Hmmmmm... But this is not the case with equity options? I mean spreads specifically.

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 SMCJB 
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I'm not sure when it comes to equities. I'm a futures trader. Looking at Interactive Brokers site and Tradestations site it appears that
  • There are some Regulation T, industry standard margin requirements, which address very specifically defined option spreads.
  • Every broker has the ability to charge more than the Reg T minimum. While this is also true in the futures space, it's not that common.
Looking at the margin requirement for a covered call this system seems a lot less robust than the futures system. Also note: With equities, since stocks aren't marked to market, I believe the option margin requirements have to be met with cash balances. If your margin requirement is greater than your cash balance you will either have a margin loan (if your lucky) or liquidated (if your unlucky). So if you have $1 Million worth of stock, and no cash in the account, and you buy an option, then the cash required to buy the option will be treated as a margin loan against your $1 Million of stock.

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