Is it legal to hedge in another account?

[Optionpro007]

I don't understand. As an example, if I am short 10 contracts on a position I plan to hold for 2 weeks, and today in my intraday trading I get a signal to go long for a 30 min trade I would have to close the 10 short and add 10 long and again reverse with 20 short when it hits target to be 10 short again.

What I am missing?

 

[PocketChange]

Stick with your trade plan using two accounts.

Everything will net into your overall P&L and many believe trading two accounts is the same as projecting the net position in one account.

This projection assumes perfect execution and disallows benefits derived from controlling the open position.

If you trade two accounts independently and they happen to offset. Technically you are flat but there is much more to this picture.

Here is one example why this practice creates an issue with the NFA/CTFC.

Mind you exchange members and those who register the positions as a "bona fide" hedge have exception to the rules and can do the scenario below without recourse.

Account 1: Long 100 ES at 1000.00
Account 2: Short 100 ES at 999.50

Net Position is 0 at an unrealized loss of $2500.

Net Margin to hold control of these contracts is Zero. Provided your account has $2500 and you direct your broker to hold the position open you control 200 contracts for $2500.

Now why would you want to have control of 200 contracts for $2500 and how could you possibly profit and unwind this trade?

Technically you can Write 200 Covered Options.

Sell 100 ES 1010 Calls @ 10.00
Sell 100 ES 990 Puts @ 10.00

Each of the above options fetch around $500 premium x 200 = $100K Gross on a $2500 bet.

Obviously all sorts of flags are going off
because the exchange is the surety of all counterparty risk and the trader has no skin in the game.

Another danger is after writing these options and pocketing the premiums.
The trader drops either of the legs exposing the exchange to huge risk.

This game is blessed to be played by exchange members and those that register their sub account positions for "bona fide" hedging.

Quote from Optionpro007:

I don't understand. As an example, if I am short 10 contracts on a position I plan to hold for 2 weeks, and today in my intraday trading I get a signal to go long for a 30 min trade I would have to close the 10 short and add 10 long and again reverse with 20 short when it hits target to be 10 short again.

What I am missing?

 

[Optionpro007]

Quote from PocketChange:


Account 1: Long 100 ES at 1000.00
Account 2: Short 100 ES at 999.50

Net Position is 0 at an unrealized loss of $2500.

Net Margin to hold control of these contracts is Zero. \

Thanks. I understand your point. My experience has been that each position in each account has to have it's own margin requirements. That's why they are separate accounts. But I think you are referring to sub accounts which I have no experience with.

 

[cstfx]

What PocketChange talks about is futures trading which allows some sort of hedge trading in accounts/sub accounts which has different margining requirements than that put forth by the recent NFA rule change concerning hedging in spot currencies. PocketChange's example allows a gross margining for all sub-accounts, but the new NFA rules have it that all accounts which trade spot currencies must be magined separately, i.e. your two accounts at FXCM can't be used to determine the overall exposure of your position if you are net zero. You would need to have 2x the margin. The same would hold true for brokers with separate sub account margining, like Oanda.

Some brokers, like IB, give the user the ability to create sub-accounts, but their setup has all positions margined against the main account, not the individual subaccounts, so this type of spot hedging would not be allowed there. Only allowed if you have separately funded trading accounts.

 

[PocketChange]

Correct my example was for Futures.
Also FSA regulated dealers are not handcuffed by the NFA rules.

ie. Gain UK allows for net margining and hedging of sub accounts for Spot FX.

Quote from cstfx:

What PocketChange talks about is futures trading which allows some sort of hedge trading in accounts/sub accounts which has different margining requirements than that put forth by the recent NFA rule change concerning hedging in spot currencies. PocketChange's example allows a gross margining for all sub-accounts, but the new NFA rules have it that all accounts which trade spot currencies must be magined separately, i.e. your two accounts at FXCM can't be used to determine the overall exposure of your position if you are net zero. You would need to have 2x the margin. The same would hold true for brokers with separate sub account margining, like Oanda.

Some brokers, like IB, give the user the ability to create sub-accounts, but their setup has all positions margined against the main account, not the individual subaccounts, so this type of spot hedging would not be allowed there. Only allowed if you have separately funded trading accounts.

 

[oraclewizard77]

The only reason to hedge is to either protect against stop hunting or do a short term scalp in one account while staying long in another account.

 

[TerminatorXit]

I just cannot understand the mentality of a trader who says they want to be long one and short one and actually think they have a position. This is just dumb.

 

[FredBloggs]

Quote from clambill:

If I wanted to be long in one account and short in another account with the same currency pair, would I be able to get away with it if I were in separate accounts?

yes.

havent bothered to read the rest of the the thread because the answer will always be 'yes' as long as your 'broker' is a 'broker'/dealer and their business is the spread, not trading against you.

your buisness is your business, theirs is theirs. you manage your book, they manage theirs.

a good dealer/broker will be indifferent. just make sure you are trading against a dealer with a good reliable credit line - hard in these times, so you may be better trading on globex/cme where there is a central clearing party...

 

[PocketChange]

Never stated you have a position... 100 long and 100 short = Flat Net 0. You do however have control of 200 contracts allowing you to write covered options.

If you try to do this in one account you would be writing naked options.

Quote from TerminatorXit:

I just cannot understand the mentality of a trader who says they want to be long one and short one and actually think they have a position. This is just dumb.

 

[FredBloggs]

Quote from TerminatorXit:

I just cannot understand the mentality of a trader who says they want to be long one and short one and actually think they have a position. This is just dumb.

no, its taking advantage of the differential between the two contracts:

long summer gas, short winter gas because there is more demand for gasoline in the summer.

tax season - eurodolllar expiry

corn/wheat: old crop - new crop

soy crush - 3 beans = 1 oil, 2.5 pulp etc


generally, you have a lower margin for such a position which could be less volatile than an out right, and have a higher degree of certainty due to human need/behaviour.

that doesnt sound dumb to me!

stocks?

well if we all buy pc's, why not buy qcom sell apple? jpm-gs, wmrt-urbn? etc

etfs....

are margin offsets available in equities? dunno, im derivatives only....