Volatility Product Margin Increase
Interactive Brokers Client Services: August 4, 2017
VIX (the CBOE Volatility Index) has established new all-time lows over the course of the past month. The price dynamics of that product are such that it can have very large relative price increases over a very short period of time base on news and other market factors. In recognition of the special risk of sudden, large increases in market volatility, that is inherent in Volatility Products such as VIX, Interactive Brokers will put into place greater margin requirements for Volatility Products after expiration processing on Saturday, 19 August.
IB’s margin policy will be to consider market outcome scenarios under which VIX might rise to a price of 18 (even when it is currently priced much lower) and under which the other Volatility Products could rise to proportionately similar degrees. If you have positions in Volatility Products that have risk in large upward moves of market volatility, then your margin may increase significantly.
In the interim IB will with immediate effect increase its Initial Margin requirements on Volatility Products to a degree consistent with the upcoming 19 August increases in Maintenance Margin.
You can use IB’s Risk Navigator SM to understand how the Maintenance Margin will change for your current positions or to see what the Maintenance Margin will be for any portfolio that you would like to construct. Instructions are provided at the end of this email.
You should exercise care to plan your positions so that they will be in compliance with the new margin policy by the effective date of 19 August. Some of the factors that you should consider are listed below.
• A number of current contracts will expire between now and the effective date. Depending on the positions they may increase or reduce your upcoming margin requirement.
• Some Volatility Products have “ultra” and “inverse” characteristics. Ultra products are expected to have greater daily returns than normal products while inverse products are expected to have returns that are of the opposite sign to normal products. It is therefore expected that an increase in market volatility will result in a decrease in the price of an inverse volatility product. As a consequence, for example, under the new policy the margin on a naked short call will increase for a normal product while the margin for a naked short put will increase for an inverse product.
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