IB Interest Rates w/ Portfolio Margin

F

fxdm70

I have a question.

I have a portfolio margin account with TOS but their rates are too high. Probably going to IB.

But please tell me if I have any holes in this idea.

Married Put Strategy
Buy 1000 shares / buy 10 puts.. If underlying goes down, take PUT profit, buy more shrares and more puts...

Now the question - totally about the interest and dividends.

Assume my account balance is $200K and I place this hypothetical trade:

I buy 5000 shares of MCD @ 88 and 50 Married Puts at 3.50

Tell me if this is a "close" assumption

5000 shares $440,000 - less 200K in cash. So Portfolio Margining 240k at 1.3683 (blended rate from IB's site) Total $3284 interest divide that by 12: $ 273 interest per month.

MCD pays (lately) .70 per share so $3500 per qtr dividends.

To make this strategy work - I need the dividends to cover the cost of the interest.

Again, as the market goes down, cash in puts and buy more shares and puts - when it goes up (eventually) but more ATM puts w/ profits.

Do I have the numbers right, or close at least for the interest payments ???

Feel free to add comments as well. My plan for this account is to buy a ton of stock w/ portfolio margin and allowing the dividends to offset the interest and maybe make a buck or two.

Thanks in advance!!
 
PM doesn't affect the interest paid on debits or received on credit balances. It's the same payout schedule as regular accounts.
 
It looks like your strategy is basically creating synthetic call options and borrowing to pay for it. You're going to also have to account for the theta on the long puts in addition to the interest.
 
I guess another spin would be this:

Purchase the day before the ex-div date and hold until day after record date - and simply collect the dividend.

The puts protect from the downside and even factoring in max down side you could still profit with the dividend.. of course the risk is the company not paying dividends..

Just seems too easy... and NOTHING is easy in the markets :)
 
Your calculations are correct, except that you forgot to add the $17,500 cost of the put options. Adding this back into the cost and using the margin rate you quoted, gives you yearly interest payments of $3524. This is an approximation (but a decent one) since, if I recall correctly, margin interest is accrued daily and paid monthly. This makes the effective annualized payments higher than $3524.

Regardless of the above, I see some pretty big flaws in the strategy you outlined. As Traveler stated, the theta cost of the put option is what kills the profitability of the strategy. Think about what happens if the put expires worthless with the stock remaining around $88 at the end of the life of the put. In this scenario, you lose $3.50.

At the end of the day, the strategy is equivalent to buying call options on the stock (which can be mathematically proven using put-call parity). It has the same risk-to-return profile as a long call option position. The use of margin only serves to magnify this profile, but it doesn't fundamentally change the risk-to-return ratio.

-Jay
 
Quote from fxdm70:

I have a question.

I have a portfolio margin account with TOS but their rates are too high. Probably going to IB.

But please tell me if I have any holes in this idea.

Married Put Strategy
Buy 1000 shares / buy 10 puts.. If underlying goes down, take PUT profit, buy more shrares and more puts...

Now the question - totally about the interest and dividends.

Assume my account balance is $200K and I place this hypothetical trade:

I buy 5000 shares of MCD @ 88 and 50 Married Puts at 3.50

Tell me if this is a "close" assumption

5000 shares $440,000 - less 200K in cash. So Portfolio Margining 240k at 1.3683 (blended rate from IB's site) Total $3284 interest divide that by 12: $ 273 interest per month.

MCD pays (lately) .70 per share so $3500 per qtr dividends.

To make this strategy work - I need the dividends to cover the cost of the interest.

Again, as the market goes down, cash in puts and buy more shares and puts - when it goes up (eventually) but more ATM puts w/ profits.

Do I have the numbers right, or close at least for the interest payments ???

Feel free to add comments as well. My plan for this account is to buy a ton of stock w/ portfolio margin and allowing the dividends to offset the interest and maybe make a buck or two.

Thanks in advance!!
More...

Please don't hate me, but this is not a good strategy. Options are meant to be sold. You paying so much in time decay is, well, something you need to think through. Regardless of whether IB or (even better) MBTrading, gives you zero fees for haircut etc.

On the various options floors, we would jump on any public order asking for married puts. And, that was over 30 years ago, by now they're probably dancing in the pits.

Please think this all the way through. It's a safe strategy that firms like since you are not giving them any risk. No risk, no reward.

FWIW,

Don
 
Quote from Don Bright:

Please don't hate me, but this is not a good strategy. Options are meant to be sold. You paying so much in time decay is, well, something you need to think through. Regardless of whether IB or (even better) MBTrading, gives you zero fees for haircut etc.

On the various options floors, we would jump on any public order asking for married puts. And, that was over 30 years ago, by now they're probably dancing in the pits.

Please think this all the way through. It's a safe strategy that firms like since you are not giving them any risk. No risk, no reward.

FWIW,

Don
More...

Good that someone else also thought this strategy does not really make sense. I thought that it is only me.
 
Quote from sellindexvol66:

Don, I would have to disagree with you that options are meant to be sold, even worse is saying that to an inexperienced crowd.
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Not trying to start a feud or anything, but since 75% or more of all options expire worthless, then it makes sense to sell them. We want time decay working on our side (theta's) not against us.

The reason many like the idea of "limited risk" (only 100% of whatever they paid for options) with the hope that the underlying moves so much that the OTM option will be ITM is, like buying extra insurance on your house hoping a fire would come (bad analogy of course, sorry).

Floor traders end up net short, retail types buy options that go out worthless.

Don
 
Quote from hajimow:

Good that someone else also thought this strategy does not really make sense. I thought that it is only me.
More...

Right, pretty basic understanding of options.


Don
 
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