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

Overview: 

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 IBKR 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 IBKR's pre-defined extreme market move scenarios and the greater of the two are utilized as margin requirement.

Does IBKR offer trading on Forex products other than futures?

Background: 

Yes, IBKR does offer trading on multiple Forex products.  The most heavily traded market is Forex cash, which is commonly known as the Spot Market.  This is an unregulated, decentralized market that does not have an exchange or standardized contracts.  It is a system of banks and interbank dealers that offer prices (liquidity) for various institutions and individuals to access and trade.  IBKR has access to numerous liquidity providers, including several of the largest in the world, through our IdealPro trading platform.  Since there are no standardized contracts in the Forex cash market, traders can place orders for various cash amounts, provided they use only whole numbers.  The minimum order size to access the Ideal Pro system is USD 25,000 or the equivalent in other currencies.   

IBKR also offers trading in Forex futures and options as well as a number of currency related products listed on the US securities option markets.

Why am I receiving notifications concerning the number of messages being sent to the CME’s Globex trading platform?

 

Based upon the premise that the Globex platform is negatively affected when clients send excessive messages (e.g., orders, modifies and cancels) that do not provide market value, the CME imposes monetary penalties upon clearing members submitting orders on behalf of its clients in excess of benchmark volume ratios for a given product.   IBKR, in turn, maintains the right to pass these charges on to clients and will send a warning message when a violation appears imminent. Clients who receive this notice and continue to send excessive messages may be subject to surcharge fee of $2,000 each time a product benchmark is violated. Additional information regarding the CME Globex messaging policy can be found on the CME Group web site. 

Are there commissions associated with option exercise or assignment?

The answer depends upon the option type and its region of listing.  There is no IBKR 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 Pricing section of the website for details.

What is the exchange minimum margin requirement on SSF positions?

Overview: 

In the case of a long or short SSF, the exchange margin requirement is equal 20% of the underlying value of the contract (initial and maintenance margin)

In the case of a hedged position (e.g., High or Low Synthetic strategy) in which a clilent is long (short) a security futures contract and short (long) the underlying security, the required maintenance margin would be equal to 5% of the instrument having the higher current market value.

Will a long SSF ever trade at a discount to the underlying stock?

Overview: 

 

When a large dividend payment is forthcoming or if the underlying stock is difficult to borrow, the futures price may trade at a discount to the actual cash price.

Why does a long SSF typically trade at a premium to the underlying stock?

Overview: 

 

Single Stock Futures will typically trade at a premium to the stock price because of an adjustment for interest rates. The premium reflects the interest earned on the capital saved by not posting the full value of the underlying stock (adjusted for any dividends expected to be received prior to expiration).

How are SSFs priced?

Overview: 

 

Single Stock Futures (SSF) may be priced using the following formula:

 

Futures Price = Stock Price * (1 + (Annualized Interest Rate * Days to Expiration/365)) – Present Value of Dividends due prior to expiration.

 

Example: On 12/12/07 MSFT closed at $35.31 and has an expected dividend of $0.11 with an ex-date of 2/12/07 (61 days).  Assuming an interest rate factor of 4.5%, what is the 12/12/07 settlement price for the MSFT March 2008 SSF (97 days to maturity)?

 

$35.62 = $35.31 * (1 + (.045 * 97/365)) – ($0.11/(1 + (.045 * 61/365)))

Is a US Single Stock Future a security or commodity product?

Overview: 

US Single tock Futures (SSF) are a hybrid product, regulated jointly by the SEC and CFTC and allowed to be carried in either a securities account or commodities account.  IBKR elects to carry all SSFs in the security side of an account as this is the only way that margin offset can be provided against other security products (i.e., stock, options). 

US SSFs are listed at the OneChicago exchange and are cleared through OCC.

What happens to a single stock future EFP at contract expiration?

Overview: 

 

In the case of an EFP purchase, one can let the long futures contract expire and take delivery of the long stock position at expiration, roll the futures contract prior to expiration or close the contract prior to expiration.

 

In the case of an EFP sale, one can let the short futures contract expire and take delivery of the short stock position at expiration, roll the futures contract prior to expiration or close the contract prior to expiration.

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