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Ib Efp
- Thread starter jmz2
- Start date
EFPs are a way to refinance your position. If you are carrying a long stock position on margin it may be possible to BUY the EFP which is a two legged trade consisting of :
-Buying the Single Stock Future
-Buying the Single Stock Future
EFPs are a way to refinance your position. If you are carrying a long stock position on margin it may be possible to BUY the EFP which is a two legged trade consisting of :
-Buying the Single Stock Future
-sell the underlying Stock.
The resulting position is a flat stock position and a long SSF.
What the Low Syn table illustrates is SSF values that are actually trading at a lower interest rate than buying the stock outright.
With regards to NYT ... without knowing it looks like the Apr contract .... what the negative 'offer' quote is indicating is that the SSF is actually trading at a negative basis. That is it the forward value is trading under the present value. Now NYT does not pay a dividend before the APR contract so that doesn't explain the negative basis. Interest rates are still positive and time till expiration is positive so there must be some other pricing force in play to cause this anomaly.
What you are witnessing is the REBATE rate that is charged by the brokerage firms to customers looking to sell NYT short. NYT is a Hard To Borrow stock and therefore the brokers actually charge a fee on top of not paying any interest on the credit balance created by the sale. This is one of the ways that brokerages make money. Off of customers long positions.
You can capture this fee yourself if you do a little bit of homework. The mechanics of the trade is that a marketmaker is willing to sell the forward value under parity so that he can buy the underlying stock and loan it out to collect the Borrow Fee. Since the market maker would be long stock/ short SSF they would have a hedged delta neutral position and the profit on the trade for them would be the income from the loan of the long stock.
For customers long these hard to borrows you must understand that your long stock is being loaned out for profits that you will never see. Using the EFP to buy the SSF forward at a discount to the cash price you are effectively flipping into a highly correlated SSF position that will flip back into a long stock position at expiry but you will be doing it at a price that is below the current market.
Sort of like like selling a $100 stock and buying it back for $99 at expiration.
With a little bit of homework the profits from the stock loan world may be available to you as customer as well by utilizing SSF to establish positions or the EFP process to flip between the long stock and the long SSF to collect the spread.
Best
-Buying the Single Stock Future
-sell the underlying Stock.
The resulting position is a flat stock position and a long SSF.
What the Low Syn table illustrates is SSF values that are actually trading at a lower interest rate than buying the stock outright.
With regards to NYT ... without knowing it looks like the Apr contract .... what the negative 'offer' quote is indicating is that the SSF is actually trading at a negative basis. That is it the forward value is trading under the present value. Now NYT does not pay a dividend before the APR contract so that doesn't explain the negative basis. Interest rates are still positive and time till expiration is positive so there must be some other pricing force in play to cause this anomaly.
What you are witnessing is the REBATE rate that is charged by the brokerage firms to customers looking to sell NYT short. NYT is a Hard To Borrow stock and therefore the brokers actually charge a fee on top of not paying any interest on the credit balance created by the sale. This is one of the ways that brokerages make money. Off of customers long positions.
You can capture this fee yourself if you do a little bit of homework. The mechanics of the trade is that a marketmaker is willing to sell the forward value under parity so that he can buy the underlying stock and loan it out to collect the Borrow Fee. Since the market maker would be long stock/ short SSF they would have a hedged delta neutral position and the profit on the trade for them would be the income from the loan of the long stock.
For customers long these hard to borrows you must understand that your long stock is being loaned out for profits that you will never see. Using the EFP to buy the SSF forward at a discount to the cash price you are effectively flipping into a highly correlated SSF position that will flip back into a long stock position at expiry but you will be doing it at a price that is below the current market.
Sort of like like selling a $100 stock and buying it back for $99 at expiration.
With a little bit of homework the profits from the stock loan world may be available to you as customer as well by utilizing SSF to establish positions or the EFP process to flip between the long stock and the long SSF to collect the spread.
Best
At the very least it should be looked at as a way to improve your financing of your equity positions by understanding the mechanics of brokerage operations and using all the tools available to you to achieve the highest possible returns and take the lowest possible risks.
Please....everyone....a little bit of homework will help your investing. Think of it as tuition.
Best.
Please....everyone....a little bit of homework will help your investing. Think of it as tuition.
Best.
I must say. I sit here stunned and that doesn't happen often.
In all my years of trading on the floors, running a Market Maker operation, running a brokerage firm and now running a regulated exchange I have met thousands of traders.
It is my experience that the successful ones in the long term are those that work the hardest at improving their skills and constantly learning so that they can increase their returns without assuming unmanageable risks.
Education is not a wasting asset. It is an investment in yourself.
Best
In all my years of trading on the floors, running a Market Maker operation, running a brokerage firm and now running a regulated exchange I have met thousands of traders.
It is my experience that the successful ones in the long term are those that work the hardest at improving their skills and constantly learning so that they can increase their returns without assuming unmanageable risks.
Education is not a wasting asset. It is an investment in yourself.
Best
All trading contains risk.
The pricing of the SSF is as follows:
SSF=StockPrice + Interest-dividend
The SSF will behave very much like the Stock so you still have price risk.
Interest rates may change prior to expiration so the SSF theoretical value may change.
Dividends may be paid, increased or decreased which will all affect the price of the SSF either positively or negatively.
In addition the opaque pressures from the Stock Loan activity will fluctuate which will cause the SSF price to fluctuate accordingly.
However, if interest and dividends do not change prior to expiry then the SSF price will be equal to the underlying price upon expiry and the Long SSF will convert into long Stock if not offset prior.
Accordingly, the purchase of the SSF (the forward value) at a discount to the cash price could allow you to purchase the stock at a discount to it's present value.
Best
The pricing of the SSF is as follows:
SSF=StockPrice + Interest-dividend
The SSF will behave very much like the Stock so you still have price risk.
Interest rates may change prior to expiration so the SSF theoretical value may change.
Dividends may be paid, increased or decreased which will all affect the price of the SSF either positively or negatively.
In addition the opaque pressures from the Stock Loan activity will fluctuate which will cause the SSF price to fluctuate accordingly.
However, if interest and dividends do not change prior to expiry then the SSF price will be equal to the underlying price upon expiry and the Long SSF will convert into long Stock if not offset prior.
Accordingly, the purchase of the SSF (the forward value) at a discount to the cash price could allow you to purchase the stock at a discount to it's present value.
Best
SHAREHOLDER RIGHTS
Of course, isn't there another factor?
Owners of SSF, instead of the underlying stock (lets use BSC as an example for fun), would not have Shareholder Voting Rights.
So, SSF might also be discounted by the market value of the Shareholder Voting Rights.
Normally, i would agree that this value is non-material, but if there is a possibility of a Corporate Action Shareholder Vote would be announce to take place prior to expiration, then the owner of the SSF could suffer some serious losses on his hedge (eg. BSC).
Am i missing something? (thanx)
Of course, isn't there another factor?
Owners of SSF, instead of the underlying stock (lets use BSC as an example for fun), would not have Shareholder Voting Rights.
So, SSF might also be discounted by the market value of the Shareholder Voting Rights.
Normally, i would agree that this value is non-material, but if there is a possibility of a Corporate Action Shareholder Vote would be announce to take place prior to expiration, then the owner of the SSF could suffer some serious losses on his hedge (eg. BSC).
Am i missing something? (thanx)
SSF are an obligation to purchase the stock in the future if not offset prior to expiry.
This means that there is no voting right associated with holding the SSF. Just price exposure.
In your example...if there is a shareholder vote coming up that the holders of the long stock would like to participate in than they would not Loan their stock out to the Short Sellers. What this means is that the Price to borrow the stock will go up which means that the the marketmakers would make more if they had some to loan. Again, if they could sell the future and then buy the underlying they would be able to loan it out for profit.
If customers are not interested in the voting right this represents an opportunity to lower their net cost of purchase.
There is much debate about the value of the voting right. Each investor, large and small, makes their own decision. If it is of value to them they will take the appropriate path to market to assure they have the ability to participate.
Best
This means that there is no voting right associated with holding the SSF. Just price exposure.
In your example...if there is a shareholder vote coming up that the holders of the long stock would like to participate in than they would not Loan their stock out to the Short Sellers. What this means is that the Price to borrow the stock will go up which means that the the marketmakers would make more if they had some to loan. Again, if they could sell the future and then buy the underlying they would be able to loan it out for profit.
If customers are not interested in the voting right this represents an opportunity to lower their net cost of purchase.
There is much debate about the value of the voting right. Each investor, large and small, makes their own decision. If it is of value to them they will take the appropriate path to market to assure they have the ability to participate.
Best