Is there any MTM associated with spreads?

For example, one has created a debit spread and paid whatever the requisite margin is for entering such a spread. Now suppose, short option side begins to give loss. Of course, the long option side would also give profit. Then, is MTM applicable on the short option side or is it like MTM won’t be charged cause it’s a spread ultimately and the risk is defined beforehand? Please answer to this query.

Would suggest you check out this thread. It has been discussed in detail: MTM Margin calculations in options spreads

Hmmmm… I had been through that thread already but couldn’t understand a thing at first. Now that I went through it again, I understand a bit more. So, for the sake of confirmation, two things can be established I believe -

  1. If a debit spread is created for example, MTM won’t deducted for the loss in short option side.

  2. Penalty won’t be charged on the loss resulting from the short option side.

Am I right?

It will be.

There won’t be any penalty. Do check out this response: MTM Margin calculations in options spreads - #11 by Sam

So, it’s like MTM will be deducted from the free margin available in the client’s account but let’s just say this deduction results in emptying the client’s free margin and results in a shortfall, there will be no penalty and there will be no squaring off of positions. Is that how it is? Please reply, @ShubhS9.