Managing an /ES Straddle

margin-callThere has not been a dull moment today which started this morning with a margin call from TDAmeritrade. How could that even be possible since I still have buying power showing on my trading platform? Before I get into that, let’s first look at a new position that I put on yesterday – another /ES at-the-money straddle. With the S&P 500 futures trading at their highest point since August 20th, I sold the /ES Dec 15 2025 straddle. The details of the trade are shown below.

Trade Details:

SELL 1 /ES Dec 15 2025 Call @ 44.25
SELL 1 /ES Dec 15 2025 Put @ 46.75

Credit: 91.00 ($4,550 per contract)
Max Risk: Unlimited (Breakeven Prices: 1934 / 2116)
Margin Required: $3,630
Days to Expiration: 59

With the market showing signs of strength, I felt that having a straddle up at this level would complement the other /ES straddle that I currently have at 1950 and the inverted /ES 1875/1985 strangle. The risk profile for this new straddle is shown below.

Analyze_102115_ES2025

Trade Adjustments

In the Weekend Portfolio Analysis for October 10, I discussed in detail the adjustments that I made to the /ES Nov 1875 straddle. Since rolling up the untested put from 1875 to 1985, the position has continue to be tested as the 1875 call has become deeper in-the-money. The breakeven on the upper end of this adjusted position was 2028.50 which was clearly breached this week.

This morning I received a margin call from TDA. I was quite surprised since ThinkorSwim was showing that I still had quite a bit of buying power remaining. However, it seems that since TOS was updated several weeks ago, there is a bug in the way that TOS calculates the buying power. As a result, I did not have nearly as much buying power as I thought. Had I known this, I would not have opened the new /ES Dec 2025 straddle yesterday. I had a productive conversation with the Futures Margin Department at TDA and discussed the various alternatives to alleviating the margin call. The obvious solution was to just close out the trade I opened yesterday for a very minimal loss. However, as I have continued to feel pressure from the deep-in-the-money 1875 call, I decided it was time to close that position. Initially, I considered closing the entire position (1875 call and 1985 put). However, the 1985 put is currently profitable and, should the market remain above 1985 at expiration, will offset a good portion of the losses on the call. So, I chose to just buy back the short call. If I am able to hold the 1985 put to expiration, I will be able to scratch the entire position. Here is the history of the trade so far.

Original Trade
September 28, 2015

SELL 1 /ES Nov 15 1875 Call @ 62.75
SELL 1 /ES Nov 15 1875 Put @ 66.25

Adjustment #1
October 8, 2015

BUY 1 /ES Nov 15 1875 Put @ 13.75 – $2,625.00 Gain
SELL 1 /ES Nov 15 1985 Put @ 38.25

Adjustment #2
October 21, 2015

BUY 1 /ES Nov 15 1875 Call @ 153.50 – $4,537.50 Loss

At this point, the net loss of the closed portion of the position is $1,912.50. This is a hefty loss. However, the 1985 put is still open (and profitable). If the put is able to expire worthless, it will provide an additional $1,912.50 in premium to offset the loss resulting in a scratch. The risk graph for the remaining 1985 put is shown below. Keep in mind that all of the previous trades are incorporated into this risk graph. The P&L shown below is for the cumulative position with all adjustments.

Analyze_102115_ES1985P

When this is combined with the other November straddle (1950), the breakeven points are located at 1908.25 and 2068.25, which I think is manageable.

Analyze_102115_ESNov

Having your hand forced due to a margin call is never fun, particularly when it sneaks up on you the way this did today. However, I actually feel better about the overall position having substantially deleveraged to the upside. After making the adjustment, I decided to take the afternoon off and took my 4-year old daughter for her first airplane ride. It was a lot of fun for both of us and a great way to unwind after the early morning stress. When we landed, I checked my phone only to see that the market was over 20 points off of the earlier highs!

  • After the ugly day out there today in the SPX, I was wondering if you had done anything about the inverted strangle. Glad to see you peeled the call off yesterday to cut the upside risk.

    Also, I really enjoyed your interview on the Options Alpha podcast. It was interesting to hear more about Crude options, skew, and the comments about Oil having some floor or intrinsic value. Good stuff.

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