IB EFP. what IB doesn't tell you about.

Quote from stock777:

OLD TRADER, I ran a martingale simulation on EFP sales that shows that 1 in 375 times, your account will be blown out, your home seized, and a black mark placed next to your nick , all within a 20 minute period on a very quiet day in the market.

You asked.
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HaHaHaHa. I know you're just kidding around, and I thought it was funny. But just in case there is someone reading this who thinks you're actually serious......there is absolutely nothing that can happen that will blow your account out, not 1 in 375, not ever. Why? You're long the stock, short the future. What that means is that whether the stock rises or falls, the future will offset it. The gain in one is offset by a loss in the other. What you will earn (over the life of the SSF) is the PREMIUM in the SSF...ie the amount it trades over the value of the stock, plus maybe a dividend payment if there is one. It's really that simple. Just pick out an EFP of let's say a month, using the scanner. A month later you will deliver your stock to satify the short future. And you will have earned the PREMIUM, which will be somewhat in excess of the market interest rate.

OldTrader
 
Quote from OldTrader:

HaHaHaHa. I know you're just kidding around, and I thought it was funny. But just in case there is someone reading this who thinks you're actually serious......there is absolutely nothing that can happen that will blow your account out, not 1 in 375, not ever. Why? You're long the stock, short the future. What that means is that whether the stock rises or falls, the future will offset it. The gain in one is offset by a loss in the other. What you will earn (over the life of the SSF) is the PREMIUM in the SSF...ie the amount it trades over the value of the stock, plus maybe a dividend payment if there is one. It's really that simple. Just pick out an EFP of let's say a month, using the scanner. A month later you will deliver your stock to satify the short future. And you will have earned the PREMIUM, which will be somewhat in excess of the market interest rate.

OldTrader
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To be technically correct:

Bec of the increase in cash required in the interim if the underlying stock rises (we can debate who's precisely right on why that's the case, but I think there's now consensus it can happen even with not too great moves.... or at least that's how I read jimrockford's comments and I revised my thinking to match that).... Unless you adjust the positions to correct for the negative cash, of course.

You may lose some $ in terms of unexpected interest charges if you don't adjust your position. Not a blow out by any means.

I guess an insolvency of the OCC *can* result in a blowout, but that's much much less than 1 in 375, I hope. :-)

And make sure you don't pick stocks that you intend to hold positions in outside of your EFP strategy, else, you will create a major tax compliance hassle between sec 1259 constructive sale and sec 1092 straddle rules (and lost of any possible long term treatment in those other positions).
 
Yes, well as Nassim would say, no one expects the Spanish Inquisition. Or was that Monty?

A new thread on this posits that an instantaneous move from 100 to 1000 in a stock would widen the spread to 50 points from 5 on a 1 year contract.

If you somehow got into a forced liquidation situation, maybe you could lose some $.

Very unlikely scenario I admit.
 
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