Strangle Margins Question

[DallasSteve]

I have an account with Interactive Brokers and I thought I understood their margin requirements on option strangles, but now I don't think I do. I opened my paper trading account and it had $39,000 current available funds. I placed an order to sell 20 puts and sell 20 calls of SLV at prices of $30 and $32. I checked my account after they filled and my current available funds went down to $26,000. I thought the trades would be rejected for lack of available funds. Here's how I thought it was calculated:

$32 - strike price of calls
$3,200 - 1 contract (100 shares)
$64,000 - 20 contracts

$30 - strike price of puts
$3,000 - 1 contract (100 shares)
$60,000 - 20 contracts

$124,000 - total value of 40 contracts

So I thought I needed $124,000 of buying power to trade those 40 options, but it looks like they only hit me for 10% of that amount. I like that, but I don't understand why I'm getting off easy?

At that rate I think strangles look more profitable than iron condors, but I haven't done all of the math, because I'm not sure what the margin is on the iron condors. But I had 90 iron condor contracts in the paper trading account and it reduced the available about $25,000. That seems similar to the margin rate for the strangles.

Can someone please explain?

 

[Brumby]

I have an account with Interactive Brokers and I thought I understood their margin requirements on option strangles, but now I don't think I do. I opened my paper trading account and it had $39,000 current available funds. I placed an order to sell 20 puts and sell 20 calls of SLV at prices of $30 and $32. I checked my account after they filled and my current available funds went down to $26,000. I thought the trades would be rejected for lack of available funds. Here's how I thought it was calculated:

$32 - strike price of calls
$3,200 - 1 contract (100 shares)
$64,000 - 20 contracts

$30 - strike price of puts
$3,000 - 1 contract (100 shares)
$60,000 - 20 contracts

$124,000 - total value of 40 contracts

So I thought I needed $124,000 of buying power to trade those 40 options, but it looks like they only hit me for 10% of that amount. I like that, but I don't understand why I'm getting off easy?

At that rate I think strangles look more profitable than iron condors, but I haven't done all of the math, because I'm not sure what the margin is on the iron condors. But I had 90 iron condor contracts in the paper trading account and it reduced the available about $25,000. That seems similar to the margin rate for the strangles.

Can someone please explain?

Why don't you go directly to the source i.e. IB? If there is any screw up at least you can hold them accountable for giving wrong info.

 

[DallasSteve]

Brumby

My answer to you was going to be "Because it's very difficult to get answers from customer service at IB." But I decided to try. So I logged into my account. I waited for a chat window. I posted my question. I waited for a reply. All of that took 20 minutes. In the end they disconnected me without any reply and everything was lost. So I started over and posted a question in their message section. I'll probably get a reply in a few hours.

So, my answer still is "Because it's very difficult to get answers from customer service at IB. "

 

[thunderstruck]

Options on Exchange Traded Funds

Margin: Uncovered writers must deposit 100% of the options proceeds plus 15% or 20% of the aggregate contract value (current ETP price multiplied by $100) minus the amount by which the option is out-of-the-money, if any. Minimum margin is 100% of the option proceeds plus 10% of the aggregate contract value. Long puts or calls must be paid in full.

The margin is only 20% (minimum 10%)of the value of the contract

So its 64000$*2*20%=25600$ ---------> Actually minimum margin is 10% so its 12800$

Very risky strategy for real life

 

[DallasSteve]

thunderstruck

Thanks for the info. I'm still confused. When does the 20% come into play if you say the answer is actually 10%? It does appear in the paper account that it was 10%. Do I use the larger position (64,000) X 2 or were you just rounding? One side is 64,000 and one side 60,000 in my example.

Yes, it's a strategy with unlimited risk. I don't know if I would ever try it.

Steve

 

[thunderstruck]

thunderstruck

Thanks for the info. I'm still confused. When does the 20% come into play if you say the answer is actually 10%? It does appear in the paper account that it was 10%. Do I use the larger position (64,000) X 2 or were you just rounding? One side is 64,000 and one side 60,000 in my example.

I am confused too . The site says that the minimum margin is 10% but it also says that for uncovered positions the margin is 15-20% .

The position is uncovered so the margin should be 20% .

Maybe if you traded for real they could ask for additional margin .

 

[DallasSteve]

OH! That makes sense. Maybe the paper trading account is not programmed correctly, and with my live trading account it would require a 20% margin. BTW, I checked and they still haven't responded to this question that I posted in my account's message center this morning at 9:20. Maybe they'll get to it before Thanksgiving. Maybe not.

 

[rsh01]

the margin requirements are, not surprisingly, detailed on their website, eg:

Short Naked Call
Stock Options[1]
Call Price + Maximum ((20%[2] * Underlying Price - Out of the Money Amount),
(10% * Underlying Price))

Short Naked Put
Stock Options[1]
Put Price + Maximum ((20%[2] * Underlying Price - Out of the Money Amount),
(10% * Strike Price))


Short Call and Put

If Initial Margin Short Put > Initial Short Call,
then Initial Margin Short Put + Price Short Call

else

If Initial Margin Short Call >= Initial Short Put,
then Initial Margin Short Call + Price Short Put

https://gdcdyn.interactivebrokers.c...ticateSSO?action=ACCT_MGMT_MAIN&clt=1&mid=001

their cust service is crap i am now finding.

 

[rsh01]

btw dallas steve - you are aware that at expiry only one of your strangle legs can be ITM, hence why its not double the risk / double the premium etc....

 

[DallasSteve]

rsh01
Thanks. I think I understand the 20% now. The 20% appears to apply to the amount "in the money". So it's 10% of the strike price amount, or 20% of the in the money amount, whichever is greater. With the strike prices I'm studying it would usually be 10%.

Edit - Maybe not. The options I'm looking at aren't that far out of the money. Once again, maybe the paper trading account isn't tuned for those nuances.

 

[rsh01]

+ the price of the put / call.

Its pretty simple....replace the underlying, price of put/call, amt its otm, strike price into the formulas I posted, and then calculate.

Can you post that? Does it equal your margin?