One thing I noticed with SSF is that, as non american, they can help you get around the dividend tax withholding in my long-term positions. The bad thing is you cant control your position size very well. Your forced to use the standard contracts and if you dont have a lot of money this will force you to take too big of a positions(plus not a lot of stocks have SSFs). Still pretty interesting innovation. Keep your posts coming jim
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IB no interest on first 10K rule, what do you do with the money?
- Thread starter Daal
- Start date
Quote from jimrockford:
I forgot to mention certain things. Like I said, if you are going to hold positions, in addition to your cash, then you should liquidate enough EFPs to cover those additional positions, so that you will not be charged margin interest on the additional positions. Margin interest charged by a broker will generally always be greater than any amount of interest you can earn on the same money, via an EFP or any other vehicle.
BUT there is an important exception. If your additional position is a short or long of a stock which has a corresponding SSF, THEN you can use an EFP to finance your additional long or short position, and be in a better position than you would otherwise.
If you are going long a stock for which there is an SSF, then you need not liquidate your EFPs to free up cash. You can instead first purchase the stock, and then buy EFPs. The result will replace your long stock with long SSFs, until the SSFs expire, at which time your long stock will be replaced. The amount of money you lose on the EFP spread, between shorting your stock at a lower price and buying the SSF at a higher price, will be less than the amount any broker would have charged you for a margin loan to finance the stock purchase. So you can use the EFP to avoid paying margin interest to your broker, and instead pay a substantially lower equivalent interest rate using EFPs as a financing mechanism instead of a margin loan extended by your broker.
I did not understand in this example how could you have opened a EFP position(which is basically a long SSF) and held it without ANY cash left on your account(because they are all tied up on other EFPs) without being charged margin interest for overnight positions.
Please explain
Quote from Daal:
I did not understand in this example how could you have opened a EFP position(which is basically a long SSF) and held it without ANY cash left on your account(because they are all tied up on other EFPs) without being charged margin interest for overnight positions.
Please explain
I need to acknowledge an error I made, which has been brought to my attention by Daal. Let me explain.
If your settled cash balance is zero because of existing positions, and then you want to open an additional long position, you would either need to close some of your existing positions to increase your cash balance, or you would need to pay margin interest, to the broker, on the negative cash balance created by the new long position. I commented that in such a situation, it would be better to long the stock, and then to buy an EFP transforming the long stock to a long SSF, for two reasons. The first is that buying the resulting long SSF would eliminate the need to pay margin interest to the broker, and it would replace that margin interest with the cost of paying an EFP interest rate substantially less than the broker margin rate charged by any broker. This would make it possible to avoid incurring any negative cash balance resulting in margin interest charges, while still avoiding the need to liquidate previously existing positions sufficient to cover the value of the new long position.
I forgot to mention, however, that the new long SSF position will require that you have, in your account, a positive cash balance of at least 20% of the SSF's value, as a performance bond. So if your account, as a result of previously existing positions, had a zero cash balance, and you wanted to avoid paying margin interest to the broker, you would need to liquidate previously existing positions so as to free up an amount of cash equal to 20% of the value of the new long SSF position. This is much better than needing to liquidate 100% of the new long position's value, which would be required if the new long were stock instead of an EFP. It is better when you only need to come up with 20%, instead of 100% of the new position's value, in order to avoid paying margin interest to the broker. My mistake was that I failed to mention that you would still need to come up with the 20%, in order to avoid the broker's margin interest charges on that 20%.
Sorry for my mistake and any resulting confusion.
Quote from Daal:
One thing I noticed with SSF is that, as non american, they can help you get around the dividend tax withholding in my long-term positions. The bad thing is you cant control your position size very well. Your forced to use the standard contracts and if you dont have a lot of money this will force you to take too big of a positions(plus not a lot of stocks have SSFs). Still pretty interesting innovation. Keep your posts coming jim
This is not true. If you are investing available cash in EFPs, you can control your position size easily and cheaply. You would invest mostly in EFPs with high priced stocks, ranging in value from $50 per share on up, so as to minimize commissions. You will then have a small amount left, which you cannot invest in any high priced stock, because the amount is too small. You would then simply choose some lower priced stock's EFP to accomodate this remaining loose end. If, for example, you had an extra remainder of $3000, you would look for an EFP on a stock with a price close to $30 per share.
You will also frequently find situations where it pays to put larger quantities of cash into EFPs on lower priced stocks, when a lower-priced stock's EFP offers a particularly lucrative interest rate, one justifying the extra commissions involved. This is quite possible, because the commissions on EFPs are extremely small. They are only 50 cents per contract, including expiration for no additional charge. This comes out half a penny per share.
Quote from jimrockford:
This is not true. If you are investing available cash in EFPs, you can control your position size easily and cheaply.
Im talking about SSFs. Lets say you have $3000 and decide to go long MSFT. Through stocks you can buy an odd lot of around say $300(or whatever amount) to control your risks. SSFs are standarized just like futures and you might endup taking too much risk for your money maybe im wrong
Btw, is there any hope the SSFs market will expand?
Quote from Daal:
as I understand the EFP's expires when the SSFs expire and it closes it self right?I just sold one for AUG and now Im wondering if this thing will close it self
Yes. IB will, after the close on expiration date, remove the short SSF and the long stock leg from your account, and replace it with cash debit or credit so that you will have received the price, for the stock, at which you shorted the SSF. It is automatic. You will not be charged any commission for the expiration. You do not need to tender any exercise notice, as you would for expiration of an option contract. The EFP simply disappears overnite after its expiration day.
If you want to continue investing this newly free cash in another EFP, you should sell short the new EFP on the same day the old one expires, even though you will, for the rest of that day, have a double EFP position. This way, your new EFP will continue to earn interest over the weekend, after the old EFP ceases to exist; and the cash from the new EFP will finance the expiring EFP, so as to avoid your incurring any margin interest fees charged by the broker.
You should not buy back the expiring EFP, because this will incur a totally unnecessary extra commission cost, and also a totally unnecessary bid-ask spread cost. Just let the old EFP expire on its own, and sell short a new one on expiration day.
I red through the whole thread, and what I don't understand is why index ETF's / futures are never mentioned.
Why not just use the very liquid QQQQ (buy) and NQ (sell)? (SPY / ES or DIA / YM also possible but these ETF's pay much higher dividends).
Why not use the worlds most liquid instruments instead of EFP's?
Why not just use the very liquid QQQQ (buy) and NQ (sell)? (SPY / ES or DIA / YM also possible but these ETF's pay much higher dividends).
Why not use the worlds most liquid instruments instead of EFP's?