IB - Yield Enhancement Program Question

[ET180]

I am considering enrolling in IB's Yield Enhancement Program. One question that I have is how do lent out shares appear in WebTrader? I do most of my trading through WebTrader and I frequently sell covered calls and short puts against short stock positions. So if I have 500 shares of XOP and 200 are being lent out, what will that look like in WebTrader? How will it affect my displayed position? Will I see only 300 shares plus some extra cash in my account or will I still see 500 shares under the position column? I'm hoping that Yield Enhancement won't change my displayed positions in WebTrader.

http://ibkb.interactivebrokers.com/node/1838

 

[HappyTrader]

The yield enhancement program will *not* change your displayed positions. Nor will it effect any P&L or any account summaries/performance analysis you do on your account.

You can think of it as being lent out but not being told to you except on one small section in the full account report that lists what has been leant out.

Note: You will still collect dividends, and still have the same account value for margin purposes.

 

[FSU]

If you are doing buywrites (selling covered calls) you are far better off simply selling the corresponding put instead of doing the buywrite. This way you will get the extra implied rate in hard to borrow stock automatically as it is written into the price of the put. This is a bit easier than participating in the Yield enhancement program in which you share the hard to borrow rate with IB.

This assumes it doesn't adversely effect your margin or tax situation.

 

[Sig]

If you are doing buywrites (selling covered calls) you are far better off simply selling the corresponding put instead of doing the buywrite. This way you will get the extra implied rate in hard to borrow stock automatically as it is written into the price of the put. This is a bit easier than participating in the Yield enhancement program in which you share the hard to borrow rate with IB.

This assumes it doesn't adversely effect your margin or tax situation.

Good advice. Also keep in mind that IB keeps half of the money with their yield enhancement program and nothing says they're actually going to lend out your particular stock so you could participate for months with stocks that could theoretically be lent but aren't and you'll get nothing. You also essentially can't be trading on margin for this to work, because they won't lend out a stock you bought on margin.

 

[HappyTrader]

I understand it gives a small amount of return... but given *how* small it is, I wonder what the benefit really is. There is only one downside that I noticed: Technically you don't own the stock and should something bad happen to IB and you have to claim your stock you might not be able to.

(At least, that was my understanding).

 

[ET180]

If you are doing buywrites (selling covered calls) you are far better off simply selling the corresponding put instead of doing the buywrite. This way you will get the extra implied rate in hard to borrow stock automatically as it is written into the price of the put. This is a bit easier than participating in the Yield enhancement program in which you share the hard to borrow rate with IB.

This assumes it doesn't adversely effect your margin or tax situation.

That's true. The only time I do buy-write is when I am more confident that the asset will increase in value and want to capture some appreciation before the call limits my gains. Basically, my order strategy is this:

<Really bearish>
Buy puts
Short stock
Short stock, sell put / sell ITM call
<Neutral bearish>
sell call
<Neutral bullish>
sell put
buy stock sell call / sell ITM put
buy stock
buy calls
<Really bullish>

 

[ET180]

I understand it gives a small amount of return... but given *how* small it is, I wonder what the benefit really is. There is only one downside that I noticed: Technically you don't own the stock and should something bad happen to IB and you have to claim your stock you might not be able to.

(At least, that was my understanding).

Can that really happen? Does IB carry insurance against that kind of event? I know money market accounts are insured starting around 2008 if I recall:

https://www.fdic.gov/deposit/covered/insured.html

I guess one solution would be to stop doing the yield enhancement program during period of high volatility.

 

[FSU]

Depending on the stock forgoing the value of long stock can be significant. I just shorted some SCTY and am being charged a 70% rate! If you are long stock, you are literally giving that rate to someone else.

 

[HappyTrader]

Can that really happen? Does IB carry insurance against that kind of event? I know money market accounts are insured starting around 2008 if I recall:

https://www.fdic.gov/deposit/covered/insured.html

I guess one solution would be to stop doing the yield enhancement program during period of high volatility.

I *THINK* and I can be wrong here:
You are 100% FDIC/SIPC covered for stock positions up to 500k.

I *THINK* you are NOT covered for the positions that are LENT OUT.

Note: There should be little concern about a company like IB going bust and loosing the ability to reclaim your lent out stocks. But still risk... ergo, I wonder why one would do this.

 

[IB-AN]

I understand it gives a small amount of return... but given *how* small it is, I wonder what the benefit really is. There is only one downside that I noticed: Technically you don't own the stock and should something bad happen to IB and you have to claim your stock you might not be able to.

(At least, that was my understanding).

To be clear, the lending of securities through this program does not introduce unsecured credit risk. As is industry convention, the borrower of the stock has to deposit cash collateral (often originating from the proceeds of a short sale) with the lender to secure the return of the stock. The actual amount of cash required is equal to 102% of the stock value, rounded up to the nearest whole dollar. For example, a loan of 100 shares of a stock which closes at $59.24 would be equal to $6,100 ($59.24 * 1.02 = $60.4248; round to $61, multiply by 100).

In addition, the loan is marked to the market daily with the cash collateral adjusted between the lender and borrower accordingly. Moreover, the cash is deposited in a segregated bank account.