IB no interest on first 10K rule, what do you do with the money?

Quote from mwerbe:

I'm having trouble conceptualizing how I could figure out how to get a negative debit balance back to exactly zero, wouldn't I be using a margin loan to buy the extra EFP? Thanks.

Mark
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My understanding is, for yield vehicle (sell EFP starting flat):

This will not be the case if you are long stock, short future (and the stock is fully paid for).

If you buy the stock on margin, then it is whatever you borrowed for the stock. The maint margin is 5% of stock price.

Though I think you unintentionally phrased your question in the opposite direction, but in that case:

If you are short stock / long future, then you earn short sale interest + pay stock borrowing costs (btw, I never figured out which stocks cost what to borrow at IB, but since I so seldomly sell short stocks, I never bothered to get to the bottom of that).
 
Quote from jimrockford:

This might be a problem. You need to consult with a tax professional who is actually knowledgeable about trading. This requirement rules out most tax professionals.
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Such a simple thing EFP's, and 1000 gotya's waiting in the bushes.


I'm more concerned with what IB might do if cash went negative one day. I assume they might auto liquidate some of the EFP's to bring it back into compliance.

Also assuming a tight spread, this should not be costly event.

Any chance they might simply sell the stock side and leave you exposed with a short future? (This case being in an IRA, I don't envision that happening in a margin acct)
 
Quote from stock777:

Such a simple thing EFP's, and 1000 gotya's waiting in the bushes.


I'm more concerned with what IB might do if cash went negative one day. I assume they might auto liquidate some of the EFP's to bring it back into compliance.

Also assuming a tight spread, this should not be costly event.

Any chance they might simply sell the stock side and leave you exposed with a short future? (This case being in an IRA, I don't envision that happening in a margin acct)
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Oooh.... For IRAs, you don't get spread margining:

http://www.interactivebrokers.com/e...ts/singleStockFuturesMargin.php?ib_entity=llc

(1)Not allowed in an IRA account. Each combination component will be margined separately.
 
Good catch.

Does this mean EFP's cant be used to gather interest on all or most of the account??

Say a 30k account in an IRA.

If I buy 30k of stock, then theres no $ left to short the Future. Should have thought of that.

You'd only be able to do 25k.

25k long stock

25k short stock future (5k margin at 20%)

Does that look right to you guys?

Even if thats right. you still could have the problem of a stock rising in price and
having to come up with cash to cover the rise.

It may be that EFP's are problematic in IRA/Roth accounts. No need to point out that this would also leave you with zero buying power., so I won't
 
BTW, I want to correct an earlier post on no risk of margin issues if you've paid for 100% stock w/corresponding short futures (short EFP from flat). Technically there's a 5% of stock price margin requirement so if the stock goes up 20X in the <= 6 month, then yes, you do need to put up more margin. But as there really aren't microcaps w/SSFs, this is not at all that likely.

The margin requirements are much higher for IRAs since the legs are margined individually so you need 20% on the SSF leg additionally.
 
I want to clarify my previous comments about paying margin interest when your EFP stocks increase in value to the point where your cash balance goes negative. I commented that one should limit the frequency of adjustments to EFP positions, intended to return the cash balance to zero, so that the cost of the adjustments will be balanced by the benefits of the adjustments. The benefits of resetting a negative cash balance to zero involve avoiding the payment of roughly 1.5% interest on the negative cash balance. This rate is the net difference between the EFP interest you will earn on that negative cash balance, and the margin interest you will pay to the broker on that negative cash balance.

The figure of 1.5% is the relevant figure for purposes of balancing the cost of EFP portfolio adjustments against their benefits. The actual amount of margin interest which will be charged, and therefore lost, as a result of a negative cash balance, is much greater than this figure of 1.5%. It is currently about 6.8%. I don't have time to explain my math behind using these two different interest rates, for these two different purposes, so you'll have to form your own judgment about what you will do for your own account.

These figures of 1.5% and 6.8% step down to lower figures for larger negative cash balances, the largest of which will have rates of about 0.15% and (currently) 5.45%. See the IB website for details as to details on what IB charges for negative cash balances.

Keep in mind that in practice, the margin interest charged for negative cash balances generated by investing one's free cash in EFPs will be very small, at least if adjustments are performed when necessary, and the cost of such adjustments will also be very small.

Ways to help minimize the cost of margin interest on negative cash balances and adjustments include:

1) favor low-volatility stocks for your EFPs;

2) favor high-priced stocks because they require fewer EFPs and therefore less commissions to enter and to adjust;

3) diversify your EFP portfolio, preferring to use many different EFP stocks instead of just using one, because this will reduce the volatility of your overall EFP portfolio and thereby reduce negative cash balances, margin interest charges on them, and adjustments needed to reset them to zero.

Number 2) is a higher priority than number 3). You can figure out the reasoning behind this priority if you are good with probability math. I don't want to get into debates over it, so do whatever you want.

One possible approach, which I don't recommend, is to leave some free cash available, in order to cover any increase in your EFP stock values, so that you can prevent any negative cash balance generating margin interest charges. I recommend against this approach, because my calculations convince me that on the average, in the long run, you will lose out on earning EFP interest on the free cash, and this amount of interest not earned will be larger than the margin interest you will save by avoiding negative cash balances. I believe it is always best, in the long run, when entering or adjusting EFPs for the purpose of earning interest on free cash, to keep the cash balance as close as possible to zero, to ignore very small margin interest charges for negative balances, and to readjust if those interest charges are getting too big. I don't have time to explain my math, so again, you'll have to decide for yourself how to handle things.
 
I follow most of your post jimrockford, except the part about 6.8% vs 1.5

When you have a chance, why not show why you think that is the case.

I assume you are saying that a $1000 negative cash balance would be paying $68 a year in margin fees and not $15.
 
Quote from stock777:

I follow most of your post jimrockford, except the part about 6.8% vs 1.5

When you have a chance, why not show why you think that is the case.

I assume you are saying that a $1000 negative cash balance would be paying $68 a year in margin fees and not $15.
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Yes, with current interest rates, you would be paying $68 a year, not $15; BUT for purposes of determining whether or not it is time to make an adjustment, to reset your negative cash balance to zero, you pay attention only to the $15 portion of the $68, and you ignore the $53 portion of the $68. This is because an adjustment will only benefit you by saving you the $15 portion of your $68 margin interest. The remaining $53 is already gone, whether you adjust or not.

It is gone because if the value of your stock goes up very quickly, then the value of your EFP also goes up. Greater stock value means greater principal amount, which in turn commands proportionately greater interest, which in turn proportionately increases the EFP's value. You are short the EFP (when investing free cash), so an increase in its value is a loss.

Let me repeat that in practice, we are talking about very small amounts of money, and adjustments that are far simpler and easier to do once you understand everything as second nature. I did discuss, at great length, the issue of margin interest charged on negative cash balances when EFP stocks increase in value, but really it amounts to obsessing over pennies. You will see what a trivial issue it is if you just get used to selling EFPs.
 
Quote from jimrockford:
If, for example, your EFP expires in one month, your negative settled cash would have to be about $857, on the average day, before the net margin interest you paid would amount even to just one dollar.
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Note that I was referring to net margin interest, not gross margin interest. Net margin interest is the amount relevant to determining whether it is time to adjust your negative cash balance back up to zero. Gross margin interest is the amount you lose when EFP stocks rise and cause you to incur a negative cash balance.

Note also that when you have a positive cash balance that gets too big, you should use the EFP interest rate to determine whether it is time to readjust your cash balance back down to zero, so that you can take full advantage of your free cash as an opportunity to earn greater interest.

The question is always: will the commission and spread costs of an adjustment back to zero be justified by the decreased margin interest I will pay to IB (for negative cash), or be justified by the increased EFP interest I will earn (for positive cash)?

My calculations convince me that if you are doing things right, you will spend about $1 in adjustment costs for every $2 spent either as a result of EFP interest foregone on positive cash balances, or as a result of NET margin interest (the 1.5%, NOT THE GROSS RATE OF 6.8%) paid to the broker on negative cash balances. I don't have time to explain my math, so you will have to make your own judgments on what you will do.

My final advice is: don't obsess over pennies. Just get used to selling EFPs, and then you will look back and wonder why you thought it was so difficult and questionable. It will be like learning to ride a bike. You will be able to brag that you are earning more interest on your free cash than clients at any other retail broker. You will be able to brag that you are earning more interest than any of your fellow IB customers, who weren't smart enough to understand EFPs or to invest the mental effort to master their use.
 
The following is identical to a post I made in another thread, where I had to correct the same mistake as the one I made in this thread:

I have to correct a mistake I made.

I said that in order to minimize EFP adjustment costs, you should prefer higher-priced stocks, because they involve fewer shares, and therefore less commissions incurred in the process of adjustments.

I was wrong. If you are doing adjustments correctly, then each adjustment will only involve buying and/or selling one or two or three EFPs at a time. Larger accounts will deviate further from a zero cash balance more than small accounts, and so larger accounts will adjust more frequently than smaller accounts, but no matter how big the account, adjustments will involve only one or two contracts at a time. Using higher-priced EFP stocks will have almost no impact on reducing adjustment costs. I had forgotten the fact that adjustments involve only one or two contracts, instead of the entire account, and this oversight led to my incorrect advice.

It is still good advice to do the following, in order to minimize EFP adjustment costs:

1) Avoid volatile stocks.

2) Reduce overall EFP portfolio volatility, by diversifying among as many EFP stock symbols as possible.

It is also still the case that higher-priced stocks will help to minimize EFP commissions when you establish an EFP portfolio; but this benefit will not be present in the context of adjusting EFPs, since adjustments are small compared to the overall portfolio.
 
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