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IB no interest on first 10K rule, what do you do with the money?
- Thread starter Daal
- Start date
Just a little warning for those of you who intend to put 100% of their cash on hand into an EFP in search of a higher yield. If the stock you picked takes off your cash account will go debit and will start generating debit interest due to the SSF being settled to cash daily. Your cash account will go negative by the amount your stock value has gone up.
To illustrate this with an example: A 100% move up in the stock will cause you to pay debit interest on your entire account, assuming you put 100% of your cash into an EFP. In which case, you end up paying ib the spread between the yield you locked with the EFP and their debit rate. On the flip side, your cash goes up as the stock tanks.
Just something to keep in mind.
To illustrate this with an example: A 100% move up in the stock will cause you to pay debit interest on your entire account, assuming you put 100% of your cash into an EFP. In which case, you end up paying ib the spread between the yield you locked with the EFP and their debit rate. On the flip side, your cash goes up as the stock tanks.
Just something to keep in mind.
Quote from rallymode:
Just a little warning for those of you who intend to put 100% of their cash on hand into an EFP in search of a higher yield. If the stock you picked takes off your cash account will go debit and will start generating debit interest due to the SSF being settled to cash daily. Your cash account will go negative by the amount your stock value has gone up.
To illustrate this with an example: A 100% move up in the stock will cause you to pay debit interest on your entire account, assuming you put 100% of your cash into an EFP. In which case, you end up paying ib the spread between the yield you locked with the EFP and their debit rate. On the flip side, your cash goes up as the stock tanks.
Just something to keep in mind.
In relation to this point, I as the following question:
When you trade an EFP with IB, is the EFP it's own contract? In other words do you actually buy stock and sell the SSF, or do you just buy and sell the EFP only.
Quote from dj8899:
In relation to this point, I as the following question:
When you trade an EFP with IB, is the EFP it's own contract? In other words do you actually buy stock and sell the SSF, or do you just buy and sell the EFP only.
If i understand the q correctly, yes and no. To pay less in commission and get in at a better price you will have to place the order as an EFP order, just like you would place any other combo order consisting of more than 1 legs. You are welcome to leg in if you desire. However, regardless of how its placed, the position sits in your portfolio as a stock and a ssf contract not an EFP contract.
Quote from dj8899:
In relation to this point, I as the following question:
When you trade an EFP with IB, is the EFP it's own contract? In other words do you actually buy stock and sell the SSF, or do you just buy and sell the EFP only.
The EFP is not its own contract. It is a paired transaction w/the stock and SSF. IB has special pricing for executing EFPs. The other innovation is that of a market for quoting EFPs.
Quote from dj8899:
I've looked into the EFP's a little bit and here's some tax info that may be useful (if it hasn't been mentioned already)
1. All EFP income is considered short term gains and you'll get taxed at your applicable income tax rate.
2. The 60/40 rule does not apple to SSF's. That is one of the reasons why SSF's aren't very popular yet
3. You can't use an EFP with a high dividend and pay the 15% dividend tax rate instead of the regular income tax rate. This is because the position is perfectly hedged and the tax code specifically prohibits this.
Can you qualify as an identified straddle under sec 1092? If so, can you defer the gain by rolling over the SSF position only once you sell an EFP (starting from flat).
Quote from rayl:
Can you qualify as an identified straddle under sec 1092? If so, can you defer the gain by rolling over the SSF position only once you sell an EFP (starting from flat).
Let me rescind my statement as I just remembered that the straddle rules are one sided (deferring a loss, but not a gain), so it is irrelevant. Though you may still want to designate an identified straddle to avoid a hedged stock/SSF position from interfering (in terms of disallowing losses) with other transactions in that stock or SSF.
Quote from rallymode:
Just a little warning for those of you who intend to put 100% of their cash on hand into an EFP in search of a higher yield. If the stock you picked takes off your cash account will go debit and will start generating debit interest due to the SSF being settled to cash daily. Your cash account will go negative by the amount your stock value has gone up.
To illustrate this with an example: A 100% move up in the stock will cause you to pay debit interest on your entire account, assuming you put 100% of your cash into an EFP. In which case, you end up paying ib the spread between the yield you locked with the EFP and their debit rate. On the flip side, your cash goes up as the stock tanks.
Just something to keep in mind.
Not really.
If your EFP stocks increase in value and create a negative cash balance (debit) in your account, large enough to trigger substantial margin interest charges each night, then you would simply buy, and perhaps also sell, just a small number of EFPs, in order to re-adjust the total size of your EFPs so as to reset your cash balance to zero.
The total amount you spend, on margin interest charges, re-adjustment commissions for EFPs, and re-adjustment spread costs for EFPs, will be trivial and negligible. So this question gives no reason to turn away from using EFPs (if you are smart enough to use them).