Re: [TheOptionClub.com] Worst Case Margin

 

Not entirely correct...

First you need to know which margin you have. Portfolio Margin, or RegT margin.

With RegT the broker will take a conservative view and lock most of the needed cash. Usually starts at around 50%. If the spread comes near to being in the money the broker will lock up the entire amount.
With Portfolio margin the broker can lock up more or less. It becomes a tweaked VAR calculation.

However, and this is the big however. If the market is acting erratically the broker will lock more than the spread is worth. The reason has to do with liquidation. Under duress the liquidation of the spread might be worse.

You may say, but hey if you did the numbers then there should be no need for this. Well, sorry I have seen it time and time again that a broker will liquidate positions if you have enough positions. It seems that if you have position risk at times of unexpected volatility the broker will be more conservative. And even if you don't they will do things to keep it simple for them.

Yes it sounds illogical, but I have witnessed it first hand when a broker liquidates even though we left padding...

Christian

--- In OptionClub@yahoogroups.com, Murthy N <optionsmaya@...> wrote:
>
> Yes, that is correct. Once you enter the trade - in the scenario described
> below, no matter where the market is, you now have $7560 of trading capital
> available also called Buying Power effect (Reg-T margin calculations). The
> brokers "locks up" your max loss as margin.
>
> And this would a good example of why you may not want to be hold naked
> shorts.
>
> So you have no holes in your understanding but if this scenario does indeed
> happen, you sure will have a hole in your pocket :-).
>
> Murthy
>
>
>
> On Mon, Mar 8, 2010 at 12:04 PM, asdfffg1 <joshuas7@...> wrote:
>
> > I want to understand the details of a market crash as it relates to margin
> > requirements. Up until now, I only understand the concept of a crash. Below
> > is an example of what I 'believe' it means. For those who know, please fill
> > in the holes of my understanding.
> >
> > For Example
> > This past Friday, the June 2010 E-mini S&P contract had daily movement
> > around 1130 going into the close. In the last few hours of Friday's trading
> > hours, we sold a ES June 2010 credit spread consisting of one short June
> > 925put for $280, and the purchase of one June 900put for $220. This gave us
> > a $60 credit. Lets say tonight, the ES market will tumbles in the globex
> > session. Tomorrow morning, (Tuesday) we turn on the computer at 930AM where
> > we observe the S&P market has plummeted to 800. Our largest possible dollar
> > loss, after this devasting move, would be $2500, minus the $60 credit. If
> > the trade would have been placed last Friday, with a $10000 margin account,
> > what would be the absolute largest amount required for margin. It can't be
> > more than $2500 can it? Thanks for the help.
> >
> >
> >
> >
> > ------------------------------------
> >
> > The goal of TheOptionClub is to provide a forum for members to work
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