Can I set a maximum dollar exposure for my account?
Unless an account holds solely long stock, bond, option or forex positions which have been paid for in full (i.e., no margin) and/or contains limited risk derivative positions such as option spreads, it is at risk of losing more than the original investment.
In the case of portfolios where the risk is indeterminable, there is no mechanism whereby the account holder can specify, at the portfolio level, a maximum dollar threshold of losses which, if reached, would limit their liability. IB does, however, provide a variety of tools and settings designed to assist account holders with managing and monitoring their exposure, including specialized order types, alerts and the Risk Navigator. A brief overview of each is provided below:
Order Types
Account holders may manage exposure on an individual trade level through several order types designed to limit risk. These order types include, but are not limited to: Stop, Adjustable Stop, Stop Limit, Trailing Stop and Trailing Stop Limit Orders. All of these order types allow you to specify an exit level for your individual positions based on your risk tolerance. For example, an account holder long 200 shares of hypothetical stock XYZ at an average price of $20.00 seeking to limit their loss to $500.00 could create a Stop Limit order having a Stop Price of $18.00 (the price at which a limit sell order is triggered) and a Limit Price of $17.50 (the lowest price at which the shares would be sold). It's important to note, however, that while a Stop Limit eliminates the price risk associated with a Stop order where the execution price is not guaranteed, it exposes the account holder to the risk that the order may never be filled even if the Stop Price is reached. For instructions on creating a Stop Limit order, click here.
Alerts
Alerts provide account holders the ability to specify events or conditions which, if met, trigger an action. The conditions can be based on time, trades that occur in the account, price levels, trade volume, or a margin cushion. For example, if the account holder wanted to be notified if their account was nearing a margin deficiency and forced liquidation, an alert could be set up to send an email if the margin cushion fell to some desired percentage, say 10% of equity. The action may consist of an email or text notification or the triggering of a risk reducing trade. For instructions on creating an Alert, click here.
Risk Navigator
The Risk Navigator is a real-time market risk management platform contained within the TraderWorkstation, which provides the account holder with the ability to create 'what-if' scenarios to measure exposure given user-defined changes to positions, prices, date and volatility variables which may impact their risk profile. For information on using an Risk Navigator, click here.
Liquidations Involving Forward-Looking Events
Background:
In addition to the policy of force liquidating client positions in the event of a real-time margin deficiency, IB will also liquidate positions based upon certain forward-looking events which, after giving effect to, would create undue risk and/or operational concerns. Examples of such events are outlined below.
Option Exercise
IB reserves the right to prohibit the exercise of stock options and/or close short options if the effect of the exercise/assignment would be to place the account in or near margin deficit. While the purchase of an option generally requires no margin since the position is paid in full, once exercised the account holder is obligated to either pay for the ensuing long stock position in full (in the case of a call exercised in a cash account or stock subject to 100% margin) or finance the long/short stock position (in the case of a call/put exercised in a margin account). Accounts which do not have sufficient equity on hand prior to exercise introduce undue risk should an adverse price change in the underlying occur upon delivery. This uncollateralized risk can be especially pronounced and may far exceed any in-the-money value the long option may have held, particularly at expiration when clearinghouses automatically exercise options at in-the-money levels as low as $0.01 per share.
Take, for example, an account whose equity on Day 1 consists solely of 20 long $50 strike call options in hypothetical stock XYZ which have closed at expiration at $1 per contract with the underlying at $51. Assume under Scenario 1 that the options are all auto-exercised and XYZ opens at $51 on Day 2. Assume under Scenario 2 that the options are all auto-exercised and XYZ opens at $48 on Day 2.
| Account Balance | Pre-Expiration | Scenario 1 | Scenario 2 |
| Cash |
$0.00 | ($100,000.00) | ($100,000.00) |
| Long Stock | $0.00 | $102,000.00 | $96,000.00 |
|
Long Option* |
$2,000.00 | $0.00 | $0.00 |
| Net Liquidating Equity/(Deficit) | $2,000.00 | $2,000.00 | ($4,000.00) |
| Margin Requirement |
$0.00 | $25,500.00 | $25,500.00 |
| Margin Excess/(Deficiency) | $0.00 | ($23,500.00) | ($29,500.00) |
*Long option has no loan value.
To protect against these scenarios as expiration nears, IB will simulate the effect of expiration assuming plausible underlying price scenarios and evaluating the exposure of each account assuming stock delivery. Notification regarding excessive exposure will be communicated to clients on a best efforts basis, when identified well in advance of the close so that they may take the necessary actions to mitigate the risk. If, however, the exposure remains excessive, IB reserves the right to either: 1) liquidate options prior to expiration; 2) allow the options to lapse; and/or 3) allow delivery and liquidate the underlying immediately thereafter. In addition, the account may be restricted from opening new positions to prevent an increase in exposure.
Physically Delivered Futures
With the exception of certain futures contracts having currencies as their underlying, IB generally does not allow clients to make or receive delivery of the underlying for physically settled futures or futures option contracts. To avoid deliveries in an expiring contract, clients must either roll the contract forward or close the position prior to the Close-Out Deadline specific to that contract (a list of which is provided on the website under the Trading and then Delivery, Exercise & Actions menu options).
Note that it is the client’s responsibility to be aware of the Close-Out Deadline and physically delivered contracts which are not closed out within the specified time frame may be liquidated by IB without prior notification.
IB CFD Corporate Actions
In certain cases where a corporate action impacts a security which is the underlying to an IB issued CFD, IB may elect to close out the CFD positions prior to the ex-date. As a general rule, this action will only be taken when the nature of the corporate action is sufficiently complex such that a fair and transparent cash equivalent for the corporate action cannot readily be determined. Examples of these types of corporate actions may include spin-offs, mergers & acquisitions and statutory consolidations.
Equity & Index Option Position Limits
Overview:
Equity option exchanges define position limits for designated equity options classes. These limits define position quantity limitations in terms of the equivalent number of underlying shares (described below) which cannot be exceeded at any time on either the bullish or bearish side of the market. Account positions in excess of defined position limits may be subject to trade restriction or liquidation at any time without prior notification.
Background:
Position limits are defined on regulatory websites and may change periodically. Some contracts also have near-term limit requirements (near-term position limits are applied to the side of the market for those contracts that are in the closest expiring month issued). Traders are responsible for monitoring their positions as well as the defined limit quantities to ensure compliance. The following information defines how position limits are calculated;
Option position limits are determined as follows:
- Bullish market direction -- long call & short put positions are aggregated and quantified in terms of equivalent shares of stock.
- Bearish market direction -- long put & short call positions are aggregated and quantified in terms of equivalent shares of stock.
The following examples, using the 25,000 option contract limit, illustrate the operation of position limits:
- Customer A, who is long 25,000 XYZ calls, may at the same time be short 25,000 XYZ calls, since long and short positions in the same class of options (i.e., in calls only or in puts only) are on opposite sides of the market and are not aggregated
- Customer B, who is long 25,000 XYZ calls, may at the same time be long 25,000 XYZ puts. Rule 4.11 does not require the aggregation of long call and long put (or short call and short put) positions, since they are on opposite sides of the market.
- Customer C, who is long 20,000 XYZ calls, may not at the same time be short more than 5,000 XYZ puts, since the 25,000 contract limit applies to the aggregate position of long calls and short puts in options covering the same underlying security. Similarly, if Customer C is also short 20,000 XYZ calls, he may not at the same time have a long position of more than 5,000 XYZ puts, since the 25,000 contract limit applies separately to the aggregation of short call and long put positions in options covering the same underlying security.
Notifications and restrictions:
IB will send notifications to customers regarding the option position limits at the following times:
- When a client exceeds 70% of the allowed limit IB will send a notification indicating this threshold has been exceeded
- When a client exceeds 95% of the allowed limit IB will place the account in closing only. This state will be maintained until the account falls below 70% of the allowed limit. New orders placed that would increase the position will be rejected.
Notes:
Position limits are set on the long and short side of the market separately (and not netted out).
Traders can use an underlying stock position as a "hedge" if they are over the limit on the long or short side (index options are reviewed on a case by case basis for purposes of determining which securities constitute a hedge).
Position information is aggregated across related accounts and accounts under common control.
Definition of related accounts:
IB considers related accounts to be any account in which an individual may be viewed as having influence over trading decisions. This includes, but is not limited to, aggregating an advisor sub-account with the advisor's account (and accounts under common control), joint accounts with individual accounts for the joint parties and organization accounts (where an individual is listed as an officer or trader) with other accounts for that individual.
Position limit exceptions:
Regulations permit clients to exceed a position limit if the positions under common control are hedged positions as specified by the relevant exchange. In general the hedges permitted by the US regulators that are recognized in the IB system include outright stock position hedges, conversions, reverse conversions and box spreads. Currently collar and reverse collar strategies are not supported hedges in the IB system. For more detail about the permissible hedge exemptions refer to the rules of the self regulatory organization for the relevant product.
OCC posts position limits defined by the option exchanges. They can be found here.
http://www.optionsclearing.com/webapps/position-limits
Do liquidation trades executed by IB count as day trades?
Overview:
Yes, if a position that is opened is subsequently closed in the same trading session (day), it is defined as a Pattern Day Trade. If an IB liquidation results in the closing of a position that was opened in that same session/day, it would be counted towards the Pattern Day Trade total. This could also result in the account being flagged as a Pattern Day Trade account.
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 conditiions, 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.
I want my liquidated position to be reinstated.
Overview:
IB employs a proprietary algorithm which identifies positions for liquidation. This is a complicated formula which seeks always to make the best possible liquidation. There are numerous factors involved in the liquidation algorithm which are taken into account prior to the creation of a liquidation trade.
Background:
Your liquidated securities, if part of a valid liquidation, will not be taken back, or reinstated. Going forward, I want to point you towards a feature that might be of help. In the Account Window, under Portfolio, you will have your positions listed. You can highlight a position that you would prefer not be liquidated prior to others in the account in the event of a liquidation, by left-clicking it. Once this position is highlighted, right-click on the line. In the box which appears choose “Set Liquidate Last”. This feature allows you to mark those positions which you would prefer to hold over others. IB will try to honor those requests, but this is merely a request and we cannot guarantee that the chosen position won’t be liquidated.
What happens if I’m assigned stock at expiration, and my account doesn’t have the funds necessary to satisfy the margin requirement?
Overview:
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 on Saturday, 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?
Overview:
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.
Why did IB force liquidate positions in my cash account?
Overview:
Position liquidations within a cash account generally result from one of the following two situations:
1. The account incurs a negative, or debit, cash balance due to the assessment of fees for items such as market data subscriptions or monthly minimums. As a cash account, by definition, is precluded from holding a negative cash balances in any currency, the existence of a negative balance will result in IB force liquidating positions in an amount sufficient to restore the cash balance to a credit.
2. A long equity call or put option was automatically exercised by the clearinghouse. In the case of US security options, the Options Clearing Corporation (OCC) will automatically exercise all equity options at expiration which are in-the-money by $0.01 or more (see OCC Rule 1804). If this is a long put exercise and you do not have an existing long stock position in your account, the short position delivered upon exercise will be closed out as cash accounts cannot maintain a short stock position
If this is a long call exercise (not offset by the simultaneous assignment of a short call which is part of a spread) and your account does not maintain sufficient settled cash to cover the cost of the stock plus commissions, a forced liquidation will take place typically upon the market open of the next business day. Again, this is due to the fact that a cash account may not hold a negative cash balances in any currency.
Positions in my account were liquidated at unfavorable prices.
Overview:
When an account is in margin deficit, it is subject to liquidation in real-time. Any and all positions can be immediately liquidated. Automated liquidations are accomplished with market orders, and any/all positions in the account can be liquidated. The system which determines whether an account is in margin violation is entirely automated, and governed by a mathematical algorithm. Once an account is determined to be in margin violation, either the system will automatically liquidate positions based on a proprietary algorithm or, if market conditions are better served by manual liquidations in specific instruments, then liquidation orders will be manually transmitted. Liquidations can occur at any market interval, whether positive or negative for the account holder.
