Changes in Option Margins
This fall, there was an important change for those who use the iron condor strategy and it is explained by option expert Marty Kearney.
Talking to Marty Kearney about margin requirements. Traders are always interested to know how little can I put up in exchange to take a position. There’s something interesting in the world of options right now.
Absolutely, and as I tell customers that, who are margins there to protect? The customers are thinking deep down that margins are there to protect them; they’re to protect their brokerage firm. Because if you have a bad position and it blows up, they want to know.
What are they going to get back, yeah.
Absolutely. They have recently, this was late October of 2012, they had a margin change where customers that are used to doing a trade called the iron condor where they’re selling an out-of-the-money spread and an out-of-the-money quick credit spread. You have to put up margin. If the two strike prices are equally distant meaning a ten-point put spread and ten-point cost spread, all is well. It’s a ten-point margin. Up until the end of October, if I did a ten-point spread and a five-point spread, I had to put up margin on 15 points. Of course, the question I always got was why and my answer was because.
That’s just the way we do it.
That’s the way we do it. Okay? We fought for years and we finally reached an agreement with FNRA and now that the CBOE mentions the FNRA rule and FNRA mentions the CBOE rule, but effective immediately it’s just the larger of the two. If I do a ten point and a five point, I only have to put up margin on the five.
Marty, what it sounds like this does is it frees up something for personal accounts, for personal traders to do that was previously only available to other types of traders.
Absolutely, because we have something like portfolio margining that’s available for those customers with an account of a certain size. I believe the minimum is $125,000. Not every firm allows portfolio margining as well. Now all of a sudden a person who has a smaller account can get some of the same benefits, absolutely, and lower margin and still have the limited risk.
It never made any sense to really distinguish between the two if it was the same type of trade.
Absolutely, absolutely. I think this new margin we’ve had wonderful response so far that people saying we wish you would have done this earlier, we did it as quickly as we could. The new lowering of margin requirements on spreads of sides of unequal size, I think, is something I’m very, very happy we’re doing.