Growing pains

[sails]

Hi Sails,

Yep that iron fly i was describing i've used in real time so selling the credit spread works the way that's expected and you end up with a short position.

It also worked when i was building a put backspread on an equity position, initially i entered the legs as buy more/sell less, got negative pricing then deleted that combo, set it up as sell more/buy less and it worked beautifully.

Thanks Cutz - that's good to know. I am a bit paranoid when selling spreads with IB as that's where it can go so wrong. Buying poses no problems as no MM is going to let you buy something for a negative price - but they will let you sell something for a debit.

That's good to hear M. Much more important than any stinking option.

Best wishes for continued improvement.

I've no idea M, but it is definitely annoying.
If only they could replicate TOS execution platform, they would be perfect
btw, great to hear the family situation is improving. May it continue!!!

Thanks for the encouragement, guys! Yeah, I miss the option trading, but in the bigger scheme of things, we seem to be making a difference. Hasn't been smooth sailing this week, but when looking back to what we faced 12 months ago, the improvement is very clear.

 

[Fox]

Do you know why it's done, Mazza?

Could this be a reason?

• Timberhill Australia Pty Limited - Broker code AU940 is an ASX approved MM.
• Timberhill Australia Pty Limited is also known as Interactive Brokers.
• MMs handle spread orders.
• Fat finger errors of debit instead of credit spreads due to negative pricing are snapped up by the MM.
• If the platform provider (ie. broker) and the MM are one and the same, then logically fat finger errors would not be discouraged.

 

[sails]

Could this be a reason?

• Timberhill Australia Pty Limited - Broker code AU940 is an ASX approved MM.
• Timberhill Australia Pty Limited is also known as Interactive Brokers.
• MMs handle spread orders.
• Fat finger errors of debit instead of credit spreads due to negative pricing are snapped up by the MM.
• If the platform provider (ie. broker) and the MM are one and the same, then logically fat finger errors would not be discouraged.

lol - my sentiments exactly...
Not saying it is, but it certainly begs the question...

 

[Fox]

Bungle #7: Obsession with expiry

Before I found ASF, the end game to me was always last Thursday of the month ie. expiry date. There were two reasons for this.

The first was the indoctrination from introductory options trading books which equate the value of a strategy with the P&L profile at expiry. I suspect that books do that because it is easier to describe something static, as opposed to something that is dynamic. P&L profiles at expiry is as static as they come. No other variables like time and volatility to consider. Just straight lines with huge profits to boot.

The second reason for being obsessive with expiry is due to the high fees charged by Oz brokers. The idea of forking out huge sums to close your position early just did not seem justified.

Over time, that just became gospel to me. I recall posting a question in ASF as to why professional traders exit their butterfly so early, while it appears as if there is so much potential profit left to harvest. The seasoned ASF members were too polite to point out the folly (euphemism for stupidity) of my thinking. Instead gentle hints like "risk/reward ratio is no longer attractive" were floated nonchalantly.

Too nonchalantly. It slipped over my head. I read better books to search for answers. "Risk/reward ratio" and "would you put on this trade today if you did not already have this position" was bandied about in other forum posts. At long last, after weeks of mulling over this, the lights FINALLY came on!

Aaahhhhhh! Asodaska! There is no end game. Every instant in our lives is merely a closing of our current position and reopening of that same position in the next instant. That's what the guys meant when they talk about "risk/reward ratio". I should be constantly evaluating my risk/reward ratio at every instant and determine if it is still worth my while to hold that position.

Then, a bigger realisation hit me. This philosophy applies to all aspects of our lives. It applies equally to long term blue chip portfolios. Perhaps even our associations with shady characters. What about our flirtations with risky but pleasurable extra-curricular activities? At some point, the R/R just doesn't cut it anymore.

Now I know why the butterfly is exited early. Simply put, the risk outweighs the reward as expiry approaches. But like a fluorescent lamp that draws moths in a hypnotic flight to their death, novices are drawn to those fat profits of static P&L diagrams, much to their own detriment.

Lessons learnt:
1. Reassess you risk/reward ratio on a continuous basis.
2. Switch to a better risk/reward profile when prudent to do so.
3. P&L profiles only tell half the truth. Risk is not apparent in those diagrams.

 

[Fox]

Bungle #8: Margins

Boy, the lessons keep coming, hard and fast. I just got whacked today by a forced liquidation. I did not even see it coming.

I'm with Interactive Brokers and have what they call a Reg-T Margin account. How margins are calculated are a bit of a mystery me. To avoid any margin problems, all I have done was to ensure that I have lots of cash and ensure that the initial and maintenance margin were well below the cash I had. Until today's unfortunate incident, I had not experienced any problems whatsoever with margins.

I called IB customer support to figure out what happened. I had lots of cash, and was puzzled why I had problems with margins. Their reply was that my Special Memorandum Account (SMA) fell below zero. Huh? What the hell is an SMA?

I could not understand the customer support officer's explanation. She said that there were two methods for calculating margins. One was based on the ASX (during the day) and another was based on the US Reg-T Margin requirements (for overnight positions). I was told that the US Reg-T Margins were higher that the ASX margins and that could have triggered the margin call.

I read up how US Reg-T Margins were calculated from IB's website. A computer algorithm works out your margins depending on your positions/strategies. I still can't figure out how they calculate your margin if you have some sort of hybrid strategy such as a BWB etc.

Anyhow, I suspect I know the problem now. Since I was essentially writing credit spreads, my cash and initial/maintenance margins my appear sound. But a parameter called RegT Margin shown in my Accounts page, was large. It was larger than my cash amount. I suspect RegTMargin is a better description of your overall margin obligations.

But I was still baffled as to what SMA meant. Reading the help docos and googling IB did not help. I found bits and pieces of info on SMA, but I just don't understand what it is and how it is determined. Anyone able to shed some light on SMA and RegT Margin?

Bottom line is that 1 short call and 1 short put was forcibly closed at the MM's ask price . I could not reinstate those two positions because of margin requirements. I other words, I locked in a loss and was forced to close my positions at the worst possible price. That really sucks.

Lessons learnt
1. Just because you have lots of cash does not mean that a margin call is not looming.
2. Always check you special memorandum account and make sure that it is above zero.
3. Credit spreads may appear to be great, but margins lurk quietly and dangerously in the background.

 

[cutz]

Hi Fox,

Suggest printing out a yesterdays margin report to determine what went wrong but for oz equity options the margin for one 12/10 put credit spread is $2000.

 

[Fox]

Suggest printing out a yesterdays margin report to determine what went wrong but for oz equity options the margin for one 12/10 put credit spread is $2000.

Good idea, Cutz. I printed out the Margin Report and true enough, the SMA was below zero ie. negative. This accounts for the forced liquidation to be triggered.

The only reason I can see for the SMA to go negative is due to the Reg T Margin Requirement jumping overnight by 50%. I have queried IB but not got a response yet.

According to IB's web page, "US Reg T Margin requirements are also applied at the end of each trading day". This means that while ASX margins are low, the US Reg T Margins being much higher, will be determine your margin obligation.

In my case, the US Reg T Margin requirements jumped from 22K to 34K overnight without me taking on additional positions. Something does not smell right and it is making me very nervous.

 

[Fox]

Just a quick update. IB did reply to my query but did not explain why the Reg T margin jumped overnight by 50%.

What I did get from their reply was that Reg T margins applied to me because of my XJO options. This explains why I did not have problems with Reg T margins before, as I was trading equity options only then.

The important thing to take note is that if you intend to trade XJO options, then the Reg T margin applies and it is much, much, much larger than ASX margins. And by the looks of it, Reg T margins fluctuate wildly as well. So, you need to really cash up to play XJO .

My records showed that the only change in my XJO positions was increasing the distance between the sold and bought strike of my bull put by 150 points. I can't believe that such an action would increase the margin by 50%!

 

[Fox]

My records showed that the only change in my XJO positions was increasing the distance between the sold and bought strike of my bull put by 150 points. I can't believe that such an action would increase the margin by 50%!

I have finally solved my RegT margin puzzle. This is a real gotcha for newbies. Take the case of RegT margins for IB vs a BWIB.

An IB being "balanced" (ie. the call vertical and put vertical being equal in risk), the RegT margin is the difference in the sold and bought strikes of the vertical. Take the example of a 10/20/30 IB. The call vertical's margin is 10 and the put vertical's margin is also 10. But when combined as an IB, the total Reg T margin is only 10 (NOT 20).

A BWIB being "unbalanced" has the RegT margin being the sum of margins of both verticals. For example, a 10/25/30 BWIB will have a call vertical Reg T margin of 15, and a put vertical margin of 5. The BWIB as a whole will incur a RegT margin of 15+5=20!

By morphing the above IB to a BWIB, the Reg T margin jumped from 10 to 20 . That was precisely what happened to me. I adjusted my IB to a BWIB without realising that the RegT balloons for "unbalanced" spreads. Scary stuff.

It has implications for your rate of return as trading in "unbalanced" spreads will require significantly larger margins. A fact to pay large attention to!