Deposit requirement for options

[Pessimist]

Hi everyone

This is my first proper post on here. I've done a search through but haven't found this issue discussed.

I have bought some options on IG index, who state "When you buy an option we will hold the full option premium (your maximum loss) as a deposit", and this is fair enough. However, what I don't get is when the option falls in value and goes into loss, the deposit stays the same - shouldn't it drop as the option price falls, thus keeping the same overall amount of 'available cash' in your account the same? Does this amount to 'double counting' the liability?

I recently had an option which had gone to zero value (and close to expiry), and by closing it manually I saw my total deposit requirement reduced by the full amout of the loss - isn't this illogical?

It may be that the available cash calculation excludes any running losses on options, to avoid any 'double counting'. I have too many other (non-option) positions open to manually work out my account totals and how they are calculated!

Any advice on this appreciated e.g. is it the same with other firms?

 

[scose-no-doubt]

The premium/deposit is the price you pay for having the right buy not the obligation to buy whatever underlying at whatever strike. Whether the premium later falls in value or not is irrelevant as you have paid for the option as it was valued by the market/your broker at that moment in time. That is your total and maximum and minimum cost if you leave the option to expire.
Insofar as the accounting for profits and losses, it's not a matter of double counting it's just that the losses are not actually realised unless you exercise the option but why would you want to do that if it was running at a loss?
If you buy an option on the opposite side (i.e a call to close a put and vice versa) with the same strike and expiry they should cancel each other out and the difference in premiums paid will be the max loss. Sounds like something like this happened in the trade where you saw your deposit requirement drop.
It will be the same with other firms.

Just to let you know, my experience (aside from losses lol ) with options is extremely basic and academic. Hopefully someone with a bit more knowledge will come along and correct my post if it needs it. I only replied because nobody else has lol.

 

[Pessimist]

Thanks SND for the reply but I think you've misunderstood my point.

I see options on IG simply as an index which varies in price - that is how IG treats them, regardless of what they represent in the 'real world'. When buying options, they margin on the full potential loss, which I accept no problem.

However, given that the price cannot go below zero, I'm asking why there should be any deposit requirement for a (long) position whose (sell) price has fallen to zero? I cant see why closing any position with no potential to go further into loss should free up more money to deal? (although admittedly I only saw the deposit figure change, wasn't looking at the 'available to deal' figure). I will do this next time I close one of my 'dead' options!

 

[scose-no-doubt]

Thanks SND for the reply but I think you've misunderstood my point.

I see options on IG simply as an index which varies in price - that is how IG treats them, regardless of what they represent in the 'real world'. When buying options, they margin on the full potential loss, which I accept no problem.

However, given that the price cannot go below zero, I'm asking why there should be any deposit requirement for a (long) position whose (sell) price has fallen to zero? I cant see why closing any position with no potential to go further into loss should free up more money to deal? (although admittedly I only saw the deposit figure change, wasn't looking at the 'available to deal' figure). I will do this next time I close one of my 'dead' options!

Oh okay then. I used IG CFD options but they obviously operate differently to the IG index from what you're saying.

I cant see why any extra money was freed up either in that case lol.

 

[Martinghoul]

Thanks SND for the reply but I think you've misunderstood my point.

I see options on IG simply as an index which varies in price - that is how IG treats them, regardless of what they represent in the 'real world'. When buying options, they margin on the full potential loss, which I accept no problem.

However, given that the price cannot go below zero, I'm asking why there should be any deposit requirement for a (long) position whose (sell) price has fallen to zero? I cant see why closing any position with no potential to go further into loss should free up more money to deal? (although admittedly I only saw the deposit figure change, wasn't looking at the 'available to deal' figure). I will do this next time I close one of my 'dead' options!

All I can tell you, sire, is that it's just the way things are. The whole industry does it as a way of overcollateralization. You should make your feelings known to IG and see what they say. My guess is that they would say that daily adjustment of your total margin based on end of day prices is impractical, so they just hold it constant from inception (unless fo course it goes the other way and you need to top up). That's just the way this particular cookie crumbles.