Overnight leverage

[Maverick74]

Quote from Don Bright:

(Still smiling)...."are we reading the same post?" Where do you see 18% anywhere? (Maybe it's here, and I'm going senile, who knows, LOL...but, 12% is Max for the most risky "naked" positions. The 30 times and above are for hedged positions. Our traders don't sell naked puts period.

We've been doing this for 28 years, and I do appreciate your interest and concern, but without going into financial details or specifics, we have no concerns about our risk control. 10,000 shares down $30 wouldn't make a hiccup, and even if 100 guys had the same position, we wouldn't be happy, but no where near "critical mass"....

We expect our traders, who have signed agreements, to stick to the rules in place, which protect the firm from "airport trades" - and we feel very comfortable with the rest of the possibilities. Even with 500 traders, we have never even had a question from Goldman about any risk whatsoever, and, again, since it's our money, we are pretty careful with it.

All the best,

Don

Don, I was getting the 18% number from the 12% plus the haircut charges (+2%,+4%,+6%).

Don, you need a refresher course in risk. Selling naked puts is exactly the same thing as being long stock. In fact, theoretically naked puts are actually less risky in that the short strike could be deep OTM. Where as long stock acts as a short put ATM. Also, you don't get any premium from buying long stock as you do from the short put. Your firm would actually be taking less risk by allowing naked put sales and not allowing long stock. Think about it, very simple math.

I am always deeply amazed at the number of firms out there that are clueless about these very simple concepts in risk and quite frankly surprised that so many are still around. I guess like Taleb says, the black swan is always around the corner.

Another thing Bob, the fact that you have been doing this for 28 years has nothing to do with risk controls. Barings Bank was in business for 150 years before Nick Leeson took them down in one trade. Usually it's the firms that think they are immune to risk that blow up the hardest. I hope this is not the case with you guys Don.

But do me a favor, don't tell me naked puts are riskier then long stock. I'm too smart for that Don.

 

[cstu]

I think the thing I would be most interested in is the fact that Bright is not using the traders money for "net capital".

It's pretty scarey to me that a guy puts up $10,000 and that has to go into a LLC to get more leverage for the LLC.

 

[Maverick74]

Quote from cstu:

I think the thing I would be most interested in is the fact that Bright is not using the traders money for "net capital".

It's pretty scarey to me that a guy puts up $10,000 and that has to go into a LLC to get more leverage for the LLC.

Most firms do not use traders capital for "net capital".

 

[cstu]

I can't keep up with all the shenanigans anyway but what does it mean to "join the LLC"?

Why is a guy that has no education and no experience and is willing to put up $5000 more valuable than someone who has a record of making money? Why is a capital contribution so important? Geez, a guy with no experience putting up money with no questions asked, very little due diligence, no financials and he is going to make money? I wouldn't want anyone to be so cavalier with my money but then again somehow with the costs and limited leverage hell would have to freeze over before the broker were at risk.

 

[Traveler]

Did we ever get an answer to the question? What fees are involved in holding 500k stock outright overnight or for a few days? And at what degree of leverage to the traders equity?

Traveler

 

[RedManPlus]

Quote from zenith:

What is the risk dealing with a prop firm?

The risk is that by signing a "prop agreement" you are no longer a "customer"...
But rather become a "partner" in that Firm.

You money is no longer segregated... but is comingled with the Firm's capital and becomes part of the Firm's Net capital.
You are doing this as a way of ** evading ** Reg T and all other regulations designed to protect "customers"...
In return for leverage.

In the event of a serious dispute... your only recourse may well be the court system.
Hope you had a lawyer read that 30 page Partnership Agreement you signed.

In terms of Bright... I have no reason to believe that they are not reputable and safe to do business with.

The problem is that if Refco can go bankrupt... so can any firm you sign with.
They will not show you Audited Financials... which may be fraudulent like Refco's anyway.
I was a "customer" at Refco and got 100% of my money because it was segregated.

Firms/hedge funds with "partnership agreements" with Refco were not so lucky...
And likely lost a lot... if not everything... and will spend many long years in court.

Again... there is no free lunch.
In order to get leverage... you can lose 100% in theory.

rm+

 

[heavy]

"You money is no longer segregated... but is comingled with the Firm's capital and becomes part of the Firm's Net capital"

Not true (at least the firms that I know). Trader's capital is NOT part the firm's Net Cap.
I'd be curious to hear if some firms really try to pull that off... I'd hate to be the FinOp during an audit there.

 

[Maverick74]

Don, where are you? Your silence is deafening.

 

[Hamlet]

Quote from Maverick74:

Don, where are you? Your silence is deafening.

I think if you read between the lines, you can see how Don protects himself from the scenario you described (a position leveraged 30 times gapping down 50%).

He gave an example of not being worried about a 10k share position gapping down 30 points. I read this as meaning that he imposes max share limits for any one position. If this is true, it means that while he allows 30 times leverage unhedged, he has rules in place restricting using the leverage in a concentrated way, thus forcing diversification for anyone who wants to max out the leverage. This still has some significant market risk (perhaps he has sector limits as well?), but it is manageable and nowhere near the risk level of using 30-1 one way with no restrictions. On top of that, they probably monitior the total net position of the firm, and can hedge if it gets too exposed to one side, and I'd bet that when the bias gets to an extreme that hedge will be a profitable trade.

 

[Don Bright]

Quote from Maverick74:

Don, I was getting the 18% number from the 12% plus the haircut charges (+2%,+4%,+6%).

Don, you need a refresher course in risk. Selling naked puts is exactly the same thing as being long stock. In fact, theoretically naked puts are actually less risky in that the short strike could be deep OTM. Where as long stock acts as a short put ATM. Also, you don't get any premium from buying long stock as you do from the short put. Your firm would actually be taking less risk by allowing naked put sales and not allowing long stock. Think about it, very simple math.

I am always deeply amazed at the number of firms out there that are clueless about these very simple concepts in risk and quite frankly surprised that so many are still around. I guess like Taleb says, the black swan is always around the corner.

Another thing Bob, the fact that you have been doing this for 28 years has nothing to do with risk controls. Barings Bank was in business for 150 years before Nick Leeson took them down in one trade. Usually it's the firms that think they are immune to risk that blow up the hardest. I hope this is not the case with you guys Don.

But do me a favor, don't tell me naked puts are riskier then long stock. I'm too smart for that Don.

OK, one more time (I think we're beating this to death, LOL)..however. Not 18%...it's Zero for up to 6 times your equity. It's 2% for 6-12 times equity, it's 4% (not total of 6, just plain 2 for some, 4 for some) 12-18 times.

18-30 times equity is 6%, so 2% for some, 4% for some, 6 for some, not added together. And this is for what 90% of our people do, have hedged positons within 20% of dollar value. "Naked" long or shorts "can" be charged as much as 1% per month (other numbers are annual). OK, I hope that's put to rest.

And, yes...naked puts = long stock, 100 delta, I don't think things have changed in 30 years, LOL.

Again, 90% of our traders "use" capital via "opening only orders" and pairs trading....with only a 20% or so "wiggle room" between long $$ and short $$...thus "market neutral"...so "things happen" but blowups of any sort are pretty rare...maybe 3 or 4 per year where someone will get hit for $30K or so (I checked the last couple of years, and $30K was about the biggest one day loss in a stock that I could find).

The rare trader who has an opinion (I guess not that rare, LOL), who wants to hold some naked shares overnight, they are willing to pay haircut for a night or two...no problem. Of course many have conversions, which are obviously fully "hedged" .....

To summarize: I think you and I have a good understanding of the overall market and risk...perhaps just a slight bit of a misunderstanding.....

I hope all is well...good trading!

Don