Can mutual funds be purchased on margin?

By regulation, brokers may not allow clients to purchase mutual funds on margin. However, once purchased and held as fully-paid for a period of 30 days, the mutual fund shares have loan value which may be used to extend margin credit against subsequent stock purchases.

Preview Order / Check Margin

Overview: 

The Preview Order/Check Margin feature offers the ability to review the projected cost, commission and margin impact of an order prior to its transmission.  This feature is made available in both the TWS and WebTrader, with the TWS version providing greater detail.

Trader Workstation (TWS)

The TWS Check Margin feature provides the ability to isolate the margin impact of the proposed order from one's existing positions and also displays the new margin requirement on the assumption the order is executed. Key margin balances including the Initial and Maintenance Requirements are reported as is the Equity With Loan Value. To use this feature, place your cursor on the order line, right-click on the mouse button and select Check Margin from the drop-down menu.

Example: Buy 1 ES June 2012 Future @ 1387.25

 

The first section of the Order Preview displays the bid, ask, and last trade price for the security.

 

The second section displays the basic order details

 

The Amount section shows the value of the order as well as the applicable commission estimate.

 

The Margin Impact section displays a breakdown of the following;

Current = The current account values, excluding the order being transmitted.

Change = The effect of the order being submitted ignoring any positions in the account.

Post-Trade = The anticipated account values when the order being transmitted has been executed and incorporated into the account portfolio.

  

WebTrader

The WebTrader order preview displays the equivalent of the TWS Post-Trade values only.

 

What is the margin on a Butterfly option strategy?

Overview: 

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?

Overview: 

 

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. 

Overview of the SPAN margining system

 

The Standard Portfolio Analysis of Risk (SPAN) is a methodology developed by the CME and used by many clearinghouses and exchanges around the world to calculate the Performance Bond (i.e., margin requirement) on futures and options on futures which the clearinghouse collects from the carrying FCM and the FCM, in turn, from the customer. 

 

SPAN establishes margin by determining what the potential worst case loss a portfolio will sustain over a given time frame (typically set to one day), using a set of 16 hypothetical market scenarios which reflect changes to the underlying price of the future or option contract and, in the case of options, time decay and a change in implied volatility. 

 

The first step in calculating the SPAN requirement is to organize all positions which share the same ultimate underlying into grouping referred to as a Combined Commodity group. Next, SPAN calculates and aggregates, by like scenario, the risk of each position within a Combined Commodity, with that scenario generating the maximum theoretical loss being the Scan Risk. The 16 scenarios are determined based upon that Combined Commodity’s Price Scan Range (the maximum underlying price movement likely to occur for the given timeframe) and Volatility Scan Range (the maximum implied volatility change likely to occur for options). 

 

Assume a hypothetical portfolio having one long future and a one long put on stock index ABC having an underlying price of $1,000, a multiplier of 100 and a Price Scan Range of 6%.  For this given portfolio, the Scan Risk would be $1,125 scenario 14.

 

 

 

#

1 Long Future

1 Long Put

Sum

Scenario Description

1

$0

$20

$20

Price unchanged; Volatility up the Scan Range

2

$0

($18)

($18)

Price unchanged; Volatility down the Scan Range

3

$2,000

($1,290)

$710

Price up 1/3 Price Scan Range; Volatility up the Scan Range

4

$2,000

($1,155)

$845

Price up 1/3 Price Scan Range; Volatility down the Scan Range

5

($2,000)

$1,600

($400)

Price down 1/3 Price Scan Range; Volatility up the Scan Range

6

($2,000)

$1,375

($625)

Price down 1/3 Price Scan Range; Volatility down the Scan Range

7

$4,000

($2,100)

$1,900

Price up 2/3 Price Scan Range; Volatility up the Scan Range

8

$4,000

($2,330)

$1,670

Price up 2/3 Price Scan Range; Volatility down the Scan Range

9

($4,000)

$3,350

($650)

Price down 2/3 Price Scan Range; Volatility up the Scan Range

10

($4,000)

$3,100

($900)

Price down 2/3 Price Scan Range; Volatility down the Scan Range

11

$6,000

($3,100)

$2,900

Price up 3/3 Price Scan Range; Volatility up the Scan Range

12

$6,000

($3,375)

$2,625

Price up 3/3 Price Scan Range; Volatility down the Scan Range

13

($6,000)

$5,150

($850)

Price down 3/3 Price Scan Range; Volatility up the Scan Range

14

($6,000)

$4,875

($1,125)

Price down 3/3 Price Scan Range; Volatility down the Scan Range

15

$5,760

($3,680)

$2,080

Price up extreme (3 times the Price Scan Range) * 32%

16

($5,760)

$5,400

($360)

Price down extreme (3 times the Price Scan Range) * 32%

 .

 

The Scan Risk charge is then added to any Intra-Commodity Spread Charges (an amount that accounts for the basis risk of futures calendar spreads) and Spot Charges (A charge that covers the increased risk of positions in deliverable instruments near expiration) and is reduced by any offset from an Inter-Commodity Spread Credit (a margin credit for offsetting positions between correlated products).  This sum is then compared to the Short Option Minimum Requirement (ensures that a minimum margin is collected for portfolios containing deep-out-of-the-money options) with the greater of the two being the risk of the Combined Commodity.  .These calculations are performed for all Combined Commodities with the Total Margin Requirement for a portfolio equal to the sum of the risk of all Combined Commodities less any credit for risk offsets provided between the different Combined Commodities.

 

The software for computing SPAN margin requirements, known as PC-SPAN is made available by the CME via its website.

Are the funds I deposited today considered for buying power calculations?

Overview: 

The answer is yes.  To calculate buying power IB compares Current Equity with Loan Value to Previous Day Equity with Loan Value.  Whichever figure is lesser is used.  From the lesser of these two figures, the Initial Margin Requirement on the positions you currently hold in the account is subtracted.  The difference is then multiplied by the current leverage amount (at present 4:1), which results in your intraday buying power.  Funds deposited today are now considered as part of Previous Day ELV. 

Please understand that funds deposited today will not be considered until they have cleared all appropriate funds and banking channels and are officially in the account. 

Also note that this calculation of buying power applies to Regulation T margin type accounts and not to Portfolio Margin type accounts. 

The Previous Day ELV check is done once an account is labeled as a "Pattern Day Trader" account.  This occurs when the account has completed 4 day trades in a 5 day period.  If the account is not labeled as a PDT, then the Previous Day ELV check doesn't apply. 

Background: 

The equation used is:

 

((Lesser of: Equity With Loan Value or Previous Day Equity With Loan Value) - Initial Margin)*4 for accounts labeled as PDT accounts.

(Equity With Loan Value - Initial Margin)*4 for accounts not labeled as PDT accounts.

Does IB provide for a dormant or inactive account status?

 

As the IB business model, by design, is oriented towards active traders, there is no provision for dormant or inactive account status.  As long as an account remains funded it will be subject to the monthly minimum activity fee of USD 10 if the account balance is above USD 2,000 (or equivalent) and USD 20 once the account balance falls below USD 2,000 (this minimum activity fee is set at USD 3 for account holders age 25 and under).   Also, should the account balance falls below USD 2,000 IB is precluded, by regulation, from affording margin treatment to securities positions.   In addition, account holders will also be billed for any market data subscriptions maintained and, as a matter of policy, will have subscriptions terminated automatically when the account balance falls below USD 500.

Also note that the monthly minimum activity fee will continue to be assessed until such time the account no longer has equity, at which point it will be automatically closed. Any request to re-open a closed account will require that the account be funded with the minimum account opening deposit of US 10,000, or equivalent. Customers should be aware that the minimum monthly activity fee will be applied even if the minimum opening deposit is not received.

Individuals seeking to close an account are encouraged to refer to the section on our website under the menu items Accounts and then Close an Account to familiarize themselves with the steps and prerequisites for taking this action.

Will IB delay liquidation while I deposit funds in my account?

Overview: 

IB's margin compliance policy does not allow for transfers or other deposits if there is a margin violation/deficit in the account.  In the case of a margin violation/deficit, the account in deficit is immediately subject to liquidation.  Automated liquidations are accomplished with market orders, and any/all positions in the account can be liquidated.   There are cases where, due to specific market conditions, a deficit is better addressed via a manual liquidation.

Funds deposited or wired into the account are not taken into consideration from a risk standpoint until those funds have cleared all the appropriate funds and banking channels and are officially in the account.  The liquidation system is automated and programmed to act immediately if there is a margin violation/deficit. 

Note for Prime Clients: Executing away is not a means to resolve real time deficits as away trades will not be taken into consideration for beneficial margin purposes until 9 pm ET on Trade Date or when the trades have been reported and matched with external confirms, whichever is later. Trading away for expiring options, on expiration day, is also discouraged due to the potential for late or inaccurate reporting which can lead to erroneous margin calculations or incorrect exercise and assignment activity. Clients who wish to trade expiring options on expiration day and away from IB, must load their FTP file no later than 2:50 pm ET, and do so at their own risk.

What is Interactive Broker's margin rules for stocks below $5?

Overview: 

Interactive Brokers does not have a special rule regarding stocks that trade below $5.   Although other brokerage firms may have a house rule regarding stocks trading below $5, IB does not employ such a rule.

Background: 

There are other IB-specific rules to consider in this scenario, however.  In general, IB would not have a special rule for long positions in stock trading below $5, as long as they are exchange-listed.  Once a stock is delisted from one of the exchanges and moved to the OTC market, it would be subject to a 100% margin requirement, since the stock would no longer be considered marginable. 

 

Also for long positions, the maintenance margin requirement is 30% of the stock value or $2,000, whichever is greater.

 

For short positions, the maintenance requirement on stock greater than $5, is $5 per share or 30% of the stock value, whichever is greater.  For short positions in stock where the last sale price/share is less than $5, then the maintenance margin requirement is $2.50 per share or 100% of the stock value, whichever is greater. 

 

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

Overview: 

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”. 

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