Personal Finance & Money Asked on July 18, 2021
If I try enter a limit order for an options spread I am denied being able to make this trade due to not having a margin account. Why? I’m not borrowing any money to make the trade, it’s all in cash. My understanding is that spreads have a limited risk (what I spend on the options) and reward, so why would I have to maintain any margin on them? For example, if I buy an ATM call and sell (write) an OTM call my equity in the former should always be greater than my exposure to the short call, so how could there ever be a margin call?
Even weirder still would be the case where if by some quirk in the market I would happen to get filled on a net credit limit order for a box spread. In this case it is arbitrage that is basically fixing a profit for me at the time of the trade, which my understand is would be risk free. Again, why would I need a margin account for this?
The spread is two trades, one of which opens up some risk one of which limits/cancels the risk. There is nothing stopping you from selling part of the spread opening the door to the risk. You're required to have a margin account to open risky positions, even if the specific spread trade you're attempting to open has a risk limiting/cancelling counterpart.
Answered by quid on July 18, 2021
Assignment risk. In your example, if someone exercises OTM call, your account could be assigned. In that case, if you do nothing, you could lose more money than there is in the account. The broker won't do it for you because there is more than one way to handle the assignment. For example, you might choose to exercise the long call, or buy a different call and exercise that. Selling the long call may be enough to satisfy any resulting margin call.
Answered by TainToTain on July 18, 2021
Most brokers require a margin account if you are selling options, even if they are part of a limited risk spread.
Interactive Brokers allows spreads (vertical, iron condor, butterfly) in a Cash account if they are European style options. they also allow cash secured puts in a Cash or IRA Cash account. Check with your broker to see what their trading permissions are.
Answered by Bob Baerker on July 18, 2021
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