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

  #21 (permalink)
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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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  #22 (permalink)
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No margin on long options


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.

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

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  #23 (permalink)
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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.


Last edited by Jura; May 7th, 2013 at 10:40 AM. Reason: Added info
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  #24 (permalink)
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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.

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

If you have any questions about the products or services provided by DeCarleyTrading, please send me a Private Message or use the futures.io "Ask Me Anything" thread.
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LEAP option on Silver scenario....

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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  #26 (permalink)
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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.


Last edited by TFOpts; June 2nd, 2017 at 01:00 PM. Reason: Modified the "Protective Long" formula
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  #27 (permalink)
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Option Margin

@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.

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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.

If you have any questions about the products or services provided by DeCarleyTrading, please send me a Private Message or use the futures.io "Ask Me Anything" thread.
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  #28 (permalink)
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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.

Please register on futures.io to view futures trading content such as post attachment(s), image(s), and screenshot(s).


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)
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@TFOpts

Yes, your equation is correct

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

If you have any questions about the products or services provided by DeCarleyTrading, please send me a Private Message or use the futures.io "Ask Me Anything" thread.
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