What happens to US security options if the underlying becomes the subject of a full cash merger?

 

In the case of any stock option associated with a merger in which the underlying security has been converted to 100% cash after December 31, 2007, the OCC will accelerate its expiration.  The new expiration date for such options will be accelerated to the nearest standard equity expiration, unless the cash conversion takes place after the Tuesday within an expiration week, in which case the expiration date for all contracts not already expiring that week will be deferred until the following month’s expiration.

 

Note that this acceleration does not impact the automatic exercise threshold, through which all options having a strike price that is in-the-money by at least $0.01 will be automatically exercised by OCC.  Nor does it impact the date of the cash settlement attributable to the exercise which remains at T+3.

 

Also note that this acceleration does not affect options which were converted to cash on or before December 31, 2007 which will remain valid series until their original expiration date has been reached.

What is the margin on a Butterfly option strategy?

Übersicht: 

In order for the software utilized by IB to recognize a position as a Butterfly, it must match the definition of a Butterfly exactly.  These are the 3 different types of Butterfly spreads recognized by IB, and the margin calculation on each:

 

Background: 

Long Butterfly:

Two short options of the same series (class, multiplier, strike price, expiration) offset by one long option of the same type (put or call) with a higher strike price, and one long option of the same type with a lower strike price.  All component options must have the same expiration, same underlying, and intervals between exercise prices must be equal. 

There is no margin requirement on this position.  The long option cost is subtracted from cash and the short option proceeds are applied to cash.

Short Butterfly Put:

Two long put options of the same series offset by one short put option with a higher strike price and one short put option with a lower strike price.  All component options must have the same expiration, same underlying, and intervals between exercise prices must be equal. 

The margin requirement for this position is (Aggregate put option highest exercise price - aggregate put option second highest exercise price). Long put cost is subtracted from cash and short put proceeds are applied to cash.

Short Butterfly Call:

Two long call options of the same series offset by one short call option with a higher strike price and one short call option with a lower strike price. All component options must have the same expiration, same underlying, and intervals between exercise prices must be equal.

The margin requirement for this position is (Aggregate call option second lowest exercise price - aggregate call option lowest exercise price). Long option cost is subtracted from cash and short option proceeds are applied to cash.

*Please note that Interactive Brokers utilizes option margin optimization software to try to create the minimum margin requirement. However, due to the system requirements required to determine the optimal solution, we cannot always guarantee the optimal combination in all cases.  Other option positions in the account could cause the software to create a strategy you didn't originally intend, and therefore would be subject to a different margin equation. 

What is the margin on an Iron Condor option strategy?

Übersicht: 

 

If an iron condor strategy exists in the account, the margin requirement will be the short put strike - the long put strike.

Background: 

Example:

 10 SPY Dec13 160P

-10 SPY Dec13 170P

-10 SPY Dec13 180C

 10 SPY Dec13 190C

The margin requirement is determined by taking the strike of the short put (170) and subtracting the strike of the long put (160) 

170-160 = 10 

Take the difference and multiply by the number of contracts (10) and the multiplier (100)

10*10*100 = 10,000 

In order for an iron condor to be recognized under exchange rules, the options must all be on the same underlying instrument and have the same expiration date, have different strike prices and the strike distance between the puts and the calls must be equal.  If the distance between the puts and calls is different the position will be margined as two separate spreads with two separate margin requirements. 

*Please note that Interactive Brokers utilizes option margin optimization software to try to create the minimum margin requirement.  However, due to the system requirements required to determine the optimal solution, we cannot always guarantee the optimal combination in all cases.  It is possible that given the option positions in the account, the iron condor you are trying to create will not be recognized as such. 

What formulas do you use to calculate the margin on options?

Übersicht: 

There are many different formulas used to calculate the margin requirement on options.  Which formula is used will depend on the option type or strategy determined by the system.  There are a significant number of detailed formulas that are applied to various strategies.  To find this information go to the IB home page at www.interactivebrokers.com.  Go to the Trading menu and click on Margin.  From the Margin Requirements page, click on the Options tab.  There is a table on this page which will list all possible strategies, and the various formulas used to calculate margin on each.

Background: 

The information above applies to equity options and index options.  Options on futures employ an entirely different method known as SPAN margining.  For information on SPAN margining, conduct a search on this page for “SPAN” or “Futures options margin”. 

How do you calculate margin requirements on futures and futures options?

Übersicht: 

Futures options, as well as futures margins, are governed by the exchange through a calculation algorithm known as SPAN margining.  For information on SPAN and how it works, please research the exchange web site for the CME Group, www.cmegroup.com.  From their web site you can run a search for SPAN, which will take you to a wealth of information on the subject and how it works.  The Standard Portfolio Analysis of Risk system is a highly sophisticated methodology that calculates performance bond requirements by analyzing the “what-ifs” of virtually any market scenario.

Background: 

 

In general, this is how SPAN works:

SPAN evaluates overall portfolio risk by calculating the worst possible loss that a portfolio of derivative and physical instruments might reasonably incur over a specified time period (typically one trading day.) This is done by computing the gains and losses that the portfolio would incur under different market conditions.  At the core of the methodology is the SPAN risk array, a set of numeric values that indicate how a particular contract will gain or lose value under various conditions. Each condition is called a risk scenario. The numeric value for each risk scenario represents the gain or loss that that particular contract will experience for a particular combination of price (or underlying price) change, volatility change, and decrease in time to expiration.

 

The SPAN margin files are sent to IB at specific intervals throughout the day by the exchange, and are plugged into a SPAN margin calculator.  All futures options will continue to be calculated as having risk until they are expired out of the account, or are closed.  The fact that they might be out-of-the-money does not matter.  All scenarios must take into account what could happen in extreme market volatility, and as such the margin impact of these futures options will be considered until the option position ceases to exist.  The SPAN margin requirements are compared against IB's pre-defined extreme market move scenarios and the greater of the two are utilized as margin requirement.

What happens if I’m assigned stock at expiration, and my account doesn’t have the funds necessary to satisfy the margin requirement?

Übersicht: 

If an expired USD option position results in an automatic exercise (the Options Clearing Corporation will automatically exercise any stock option which expired 0.01 or more in-the-money), and the resulting stock position causes a margin deficit in your account, the account would become subject to immediate liquidation.  Given that the OCC processes the exercise and assignment after the expiration Friday close, liquidations in USD equities usually occur shortly after the open of regular trading hours (09:30 EST) on Monday or the next trading day.  Please be aware that any positions could be liquidated as a result of the account being in margin violation—the liquidation is not confined to only the shares that resulted from the option position.  For example, if the account holds currency, futures, future options positions, or any non-USD positions, such products may begin trading prior to Monday morning and, as such, liquidation of any of these positions could occur in order to meet the margin deficit which resulted from an options exercise.

Background: 

Account holders should refer to the Characteristics and Risks of Standardized Options disclosure document which is provided by IB to every option eligible customer at the point of application and which clearly spells out the risks of assignment.  This document is also available online at OCC's web site.

What happens to the USD equity option that I am long at expiration?

Übersicht: 

There are two scenarios which could occur if a long option is taken to expiration.  If the option is out-of-the-money at expiration and you do not choose to exercise it, the option will expire worthless, and your losses will consist of the premium that was paid to acquire the option.  If the option is in-the-money at expiration by 0.01 or more, it will be automatically exercised on your behalf (unless you previously chose to lapse the option) by the Options Clearing Corporation (OCC).  The OCC processes monthly expiration options on the third Saturday of the month, or the day after Friday expiration.  The resulting long or short position will be put into the account, effective on the Friday trade date.  If the account has sufficient margin to satisfy the requirement on the resulting position, it will then be up to the account holder to decide what they want to do with the position.  If the resulting position causes a margin deficit, the account will be subject to liquidation at a time which is defined by the holdings within the account.  Please be aware that any positions could be liquidated as a result of the account being in margin violation—the liquidation is not confined to only the shares that resulted from the option position.  For example, if the account holds currency, futures, future options positions or and non-USD product, the account may begin to liquidate to meet the margin deficit as soon as a corresponding market opens.

Background: 

Account holders should refer to the Characteristics and Risks of Standardized Options disclosure document which is provided by IB to every option eligible customer at the point of application and which clearly spells out the risks of assignment.  This document is also available online at OCC's web site.

Add Remove Liquidity

Übersicht: 

The goal of this article is to provide proper understanding of exchange fees, add remove liquidity fees, for un-bundled commission schedule.

 

The concept of adding or removing liquidity is applicable to both stocks and stock/index options. Whether or not an order removes or adds liquidity is dependent on that order being marketable or non-marketable.

Marketable orders REMOVE liquidity.
Marketable orders are either market orders, OR buy/sell limit orders whose limit is at or above/below the current market.

1. For a marketable buy limit order, the limit price is at or above the Ask.

2. For a marketable sell limit order, the limit price is at or below the Bid.

Example:
XYZ’s stock current ASK (offer) size/price is 400 shrs at 46.00. You enter a buy limit order for 100 XYZ stock @ 46.01. This order will be considered marketable because an immediate execution will take place. If there is an exchange charge for removing liquidity, the customer will be charged that fee.


 

Non-Marketable orders ADD liquidity.
Non-marketable orders are buy/sell limit orders in which the limit price is below/above the current market.

1. For a non-marketable buy limit order, the limit price is below the Ask.

2. For a non-marketable sell limit order, the limit price is above the Bid.

Example:
XYZ’s stock current ASK (offer) size/price is 400 shrs at 46.00. You enter a buy limit order for 100 XYZ stock @ 45.99. This order will be considered non-marketable, because it will be posted to the market as the best bid, and instead of being immediately executed.
If and when someone else sends a marketable sell order that causes your buy limit order to be executed, you should receive a rebate (credit), if an add liquidity credit is available.

PLEASE NOTE:
1. All accounts trading options will be subject to any options exchanges’ remove/add liquidity fees or credits.
2. Per IB’s website, only negative numbers under the Remove Add Liquidity schedules are rebates (credits).

http://individuals.interactivebrokers.com/en/accounts/fees/commission.php?ib_entity=llc
Above link reference stocks and options commissions/fees

If I am assigned on the short leg of an option spread, will the long option leg be automatically exercised so as to offset the resulting stock position from the assignment?

 

The answer depends upon whether the assignment occurred at expiration or prior to expiration (i.e., an American Style option).  At expiration, many clearinghouses employ an exercise by exception process intended to ease the operational overhead associated with the provision of exercise instructions by clearing members.  In the case of US securities options, for example, the OCC will automatically exercise any equity or index option which is in-the-money by at least $0.01 unless contrary exercise instructions are provided by the client to the clearing member. Accordingly, if the long option has the same expiration date as the short and at expiration is in-the-money by a minimum of the stated exercise by exception threshold, the clearinghouse it will be automatically exercised, effectively offsetting the stock obligation on the assignment.  Depending upon the option strike prices, this may result in a net cash debit or credit to the account.

If the assignment takes place prior to expiration neither IB nor the clearinghouse will act to exercise a long option held in the account as neither party can presume the intentions of the long option holder and the exercise of the long option prior to expiration is likely result in the forfeiture of time value which could be realized via the sale of the option.

Are there commissions associated with option exercise or assignment?

The answer depends upon the option type and its region of listing.  There is no IB commission associated with US stock and index security options and out-of-the-money Non-US index options.  A commission is charged for an exercise or assignment of an in-the-money Non-US index option and for options on futures. Please refer to the Costs section of the website for details.

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