When you place a credit spread of any kind, you generally incur a maintenance requirement at your brokerage. Remember, a maintenance requirement is not a loan like a margin loan, but rather money that must be set aside and not used for buying other options or equities. Because it is not a loan it can be used in an IRA account.
Maintenance requirements come into existence when you sell an option at a different strike than the option you are holding as collateral for the short option. For example, if are long a 90 call option (regardless of which month it is as long as it is equal to or has more months of life than the short call you are selling), if you sold an 88 call against it, you could conceivably lose $2.00 ($200) if the underlying fell below $88. The broker requires that you set aside $200 in case this happens.
When you sell an iron condor spread, you create a maintenance requirement for a put spread as well as a call spread. As long as the difference in strike prices is the same for both the put and call spreads, the maintenance requirement is only charged for one of the spreads because you can't lose money on both of them.
At times, maintenance requirements are calculated that are difficult to understand because of the manner in which the broker's software matches up long and short positions. At thinkorswim, they have what is probably the absolutely best matching software of any broker. It is designed to create as low a maintenance requirement as possible so that you have as much free cash to invest as you can. The primary mechanism the software uses to minimize maintenance requirements is to establish butterfly spreads even if you did not specifically place a butterfly spread.
Oftentimes, the software creates weird butterfly spreads with partial options covering other options at different strikes. It becomes quite confusing at times.Fortunately, there is a way to see how the matching takes place.
On the Monitor Tab on the thinkorswim trading screen, click on the far-right number that is listed just under the BP Effect title under POSITION STATEMENT. That number is the maintenance requirement for that underlying in your account. When you click on it, a drop-down screen appears which is titled Explain Margin. If you scroll down this screen, you will see how everything is matched up.
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Terry
The escalating turmoil in Libya led to sharp declines throughout the holiday shortened week. Gaddafi's abhorrent, violent reactions to protesters led to a 14% spike in oil prices and broke the three week rally in the S&P. Libya produces roughly 2% of the global supply for crude oil.
The losses were broad as nine out of the ten major market sectors fell. As expected, the energy sector was the one gleaming sector this past week. The sector advanced 1.1% as crude oil prices spiked to $103.41, before settling at $98.27 on Friday.
Early in the week Saudi Arabia, the world's largest crude oil producer, stated that it would match output declines caused by Libya's unrest, but the prospect of production halts spreading to other major oil producers in the Middle East outweighed Saudi Arabia's pledge and continued the march higher in oil prices.
As we all know higher oil prices weigh on the U.S. economy by increasing the costs of moving goods and filling up gas tanks. According to economists at Goldman Sachs, a sustained $10 increase in the price of oil translates into a 0.2% cut in economic growth over 12 months.
The surge in crude oil hit drivers across the U.S., where gas prices are already at historical highs for this time of year. A gallon of regular climbed 11.6 cents over the last three trading days to a national average of $3.29. That includes a spike of nearly 6 cents on Friday, the largest one-day increase since Sept. 14, 2008.
"Everyone's a nervous wreck," PFGBest analyst Phil Flynn said. "What we're seeing is perhaps the greatest threat to global oil supply since the Persian Gulf War."
In economic news, 4th quarter GDP was revised downward to reflect growth of 2.8% after the advance reading showed a 3.2% growth rate. Economists polled by had anticipated growth of 3.3%.
Scott Brown, chief economist at Raymond James stated, "We anticipated the slight decline in consumer spending, but 4.1% is still pretty good".
"There are still signs the recovery is taking root, and it appears sustainable, but not strongly enough to significantly lower unemployment," he continues.
On the technical side of things, the major market benchmarks are back in a neutral state as we enter the end/beginning of a new month. Typically, the trading days during this period are bullish.
Another bullish short-term phenomena is the fact that the S&P just hit a 52-week high, then was witness to three straight declining days with each experiencing a smaller loss than the day prior. When this type of price action happened in the past the S&P was higher over 80% of the time over the next few trading days with a risk/reward of 3-to-1. The spike Friday was included in this so we shall see if the market can continue the short-term trend to the upside as we enter the first few trading days of March.
Andy
"My husband lost his job in December and we need to replace his income if we can without putting "all of the money into the market yet". I've recommended soooo many people to you, friends and family, I'm trying so hard to understand options and how they are affected by volatility. I love the Saturday Report, I look forward to it every week." Linda