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2018issue C0140-41

Broker margin-upcharges can force an option-income exit

Editorial view: treat the commission schedule, the margin-upcharge, and forced-liquidation discretion as one execution filter for an option-income-process. Those account rules can close or resize a short-option book before the planned hold is finished.

  • Brokerage needs for selling commodity options differ from those for high-volume futures daytrading, and some firms forbid option selling or spreads that include an unprotected-leg.
  • A commission-filter that ranks firms by posted ticket cost can miss fill help and a large desk-fee in an outage, while a modestly higher commission can be smaller than a better fill in markets where a tick is worth 10 to 12 dollars.
  • A margin-upcharge of 130 percent to 300 percent of the exchange minimum makes calls more likely even when spare equity remains, and discount risk staff may use forced-liquidation without a client conversation.
  • A live desk can often apply a margin-adjustment with offsetting hedges instead of a cash wire or a flattened book, after a firm that allows the option-income-process has already been chosen.
Entries in this reading3 entries
Current trackMargin management68 readingsCommission analysis83 readingsOption income strategy85 readings

The firm is part of the order

Brokerage needs for selling commodity options can differ from those for high-volume futures daytrading. Some firms forbid option selling or spreads that include an unprotected-leg.

For selling options on futures or trading open-ended option spreads, the workable sequence is to pick a firm that allows that process, then use a platform that firm actually offers.

Ticket cost is only one part of the commission filter

Many commodity markets have a tick worth 10 to 12 dollars, so occasional better execution can exceed a modestly higher commission.

Discount firms often add a large desk-fee during platform outages, which can consume the commission saved on electronic tickets. Editorial reading: ranking a firm by posted ticket cost alone leaves fill help, support, and liquidation policy out of the choice.

How a margin-upcharge leads to forced liquidation

Deep-discount commodity firms run on thin leftover revenue and therefore tolerate little short-option risk in client accounts when volatility rises. Risk staff at discount firms may use forced-liquidation on option positions, sometimes without notifying the client, as soon as trouble appears.

Brokerages commonly set short-option and unprotected-spread margin at 130 percent to 300 percent of the exchange minimum. That margin-upcharge makes calls more likely even when spare equity is left in the account, and calls often produce early or forced exits of short-option trades at poor prices.

A knowledgeable live desk can often lower a margin requirement through a margin-adjustment, by adding offsetting option or futures hedges instead of wiring cash or closing the position.

Platform readouts can drift

Platform risk graphs and probability tools are built on current volatility, option demand, and time value, which can change and make those readouts misleading. Option delta can stand in as a rough expired-worthless guide.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
22 of 25 in the Margin management track
201914-19 pp.Next on Margin managementInspect execution cost and margin bounds before cycle timingA late-2018 broker table listed standard online stock commissions from no separate ticket charge at one firm to $6.95 at others, with options priced as a base ticket plus a per-contract add-on.
All readings on this track · 25 readings
  1. 1988When action-seeking replaces the decision process
  2. 1997Convert a market story into a testable decision process
  3. 2004Posted margin as the scarce input of an option-income write
  4. 2004Capping futures leverage to intended share exposure
  5. 2005Currency execution costs hide in spreads and margin
  6. 2006Daily margin as a leverage filter
  7. 2006A commodity sleeve is a contract-design choice
  8. 2007Bounding futures risk with stops, trails, and margin
  9. 2010Currency futures versus forex on spread, margin, and micros
  10. 2010Enforced margin as the real futures trade guarantee
  11. 2010Choose mini or standard futures before the first fill
  12. 2012Segregated margin is an incomplete exposure filter
  13. 2013Posted tickets hide margin and fill gates
  14. 2013Portfolio margin calls versus pair-hedge leverage locks
  15. 2015Forex execution checks for fills, margin, and leverage
  16. 2015Cheaper margin is not a currency leverage edge
  17. 2015Cheap daytrading margin is not a risk discount
  18. 2016Futures liquidity filter with equal-dollar size and effective margin
  19. 2016Cap futures leverage before margin turns into debt
  20. 2016Gold option income as a margin-sizing problem
  21. 2017Electronic matching changed what a futures account could carry
  22. 2018Broker margin-upcharges can force an option-income exit
  23. 2019Inspect execution cost and margin bounds before cycle timing
  24. 2020Treat automatic futures gearing as a pre-entry filter
  25. 2020Equal-dollar futures liquidity and an effective margin screen
By fieldOrder types and routing87 readingsBy year2018172 readings
All 68 readings tagged Margin management
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2004Retail forex tickets as implementation-cost contracts2005Currency execution costs hide in spreads and margin2010Currency futures versus forex on spread, margin, and micros2010A futures brokerage quote is an execution specification2012Forex and currency futures: pip-spread, deposit, and scalping size