CTS has added a new feature for risk management that incorporates option premium for available cash purposes. This feature only applies to accounts in byPortfolio mode, which is aimed at providing the most accurate margin for a portfolio. One downfall to this goal is that it ignores the real world cost of long option premium. In order to better protect the trader and the FCM, we've implemented an optional extra risk parameter that adds option premium.
When enabled, the account will still have a SPAN-like margin calculation for its portfolio that will take away buying power for the account, but it will also have total option premium removed from buying power. For example, if an account is long 1 deep in-the-money call it will have a margin requirement roughly equal to that of the underlying future, but the capital required to cover the premium might be substantially higher. With this new setting enabled, we would reduce the account's buying power by the margin required and by the option premium required. In contrast, if they account is short 1 deep in-the-money call it will have a margin requirement roughly equal to that of the underlying future, but there would not be a separate capital requirement to sell the option, so it would not incur an additional hit to buying power. More complex collections of long and short options will operate based on the total premium value. If the sum of premium paid and collected is a debit (net long premium) then the buying power will be reduced by that net value in addition to the calculated margin requirement. If the sum of premium paid and collected is a credit (net short premium) then the buying power will only be reduced by the calculated margin requirement.
The inclusion of margin as well as premium should prevent an account from continually selling options in order to afford buying options. Since the margin requirement should theoretically increase with each option sold, the buying power will decrease as the portfolio builds. Note that selling an option will not result in increased buying power per se, but it will afford more room for long option premium to be added before it becomes a contributing factor for buying power. Again, this threshold of negatively impacting buying power is hit when long option premium exceeds short option premium.
Total option premium is similar to net option value, but it differs in the fact that we calculate it based on fill price, not based on daily settlements. So if an account holds an option position overnight, we will continue calculating premium based on the original execution prices while the statement will typically update the net option value with the most recent settlement prices.
This setting in its current form is meant to be a more conservative tool for risk managers, but it is still a work in progress. Any additional feedback is more than welcome and will be considered for future iterations of our risk management tools.
To enable this setting for an account, go to the account setup page, check the box labelled “Include Premium in Available Cash,” and save the changes. The change will take effect immediately. Note that users may need to update their frontend to the latest version in order to see the correct Available Cash number on their platform, but the server will implement the change regardless of which frontend version the user is on.