You're absolutely right of course. Just shining through with my overwhelming ignorance 
Can't see a time I will have access to risk-based haircut myself 
Can't see a time I will have access to risk-based haircut myself 
SPX Credit Spread Trader
- Thread starter El OchoCinco
- Start date
Strong support lines held today so the bulls are still winning. Tomorrow is a potential break or confirm day since as the chart below shows we are sitting on the line. 2 more days to option expiration.
ALL JANUARY HOLDERS WHO DO NOT UNDERSTANT "SET" AND HOW SPX OPTIONS ARE SETTLED PLEASE STAND UP SO WE CAN LET YOU KNOW THE RISKS.
ALL JANUARY HOLDERS WHO DO NOT UNDERSTANT "SET" AND HOW SPX OPTIONS ARE SETTLED PLEASE STAND UP SO WE CAN LET YOU KNOW THE RISKS.
Boy!
I make a post this morning, hop on a plane, and within 4 to 5 hours there's another 7 pages of what looks like really interesting information on the pregnant fly to digest.
Two questions:
1) What is a haircut and a risk-based haircut.
2) Coach, I haven't had time to digest the pregant fly, but do you think it would be useful in a black swan event (> 10% drop). As you already know, this is my greatest fear with credit spreads because it could be unmanageable.
I make a post this morning, hop on a plane, and within 4 to 5 hours there's another 7 pages of what looks like really interesting information on the pregnant fly to digest.
Two questions:
1) What is a haircut and a risk-based haircut.
2) Coach, I haven't had time to digest the pregant fly, but do you think it would be useful in a black swan event (> 10% drop). As you already know, this is my greatest fear with credit spreads because it could be unmanageable.
Rdemyan:
Serves you right for leaving the thread for a few hours lol. Answers to your questions:
1). Risk-based haircut was best answered by Maverick and here is a paste of his post (haircut is another way to refer to your margin or capital requirement):
"Haircuts usually consist of using the max loss your pos would incur today with a 15% up move and 15% down move in a stock. With indexes it's 10% for nasdaq and for the dow and s&p it's 8% to the downside and 6% to the upside. This is all you put up. Everyday your haircut changes as the underlying moves.
The biggest advantage to haircuts is not the initial leverage, for lack of better word, but rather the fact that when you make adjustments to your position, rather then having to put up more capital, you put up less capital. This allows you to trade the underlying at will, trade synthetics, and lay out premium at no cost.
When one is long gamma, since there usually is no risk outside of daily decay, the exchange makes you put up a minimum of $25 per contract on equities and 1$ per contract for indexes.
So an example. If I bought 100k worth of long NDX premium today, at IB, I would have to put up 100k in cash, with a haircut account I might have to put up 1k. That's it. It's a huge difference."
2) The answer to whether this could deal with black swan event, I give you the famous, it depends. First a 10% move in one day is unlikely as that would be 128 points which might translate to 500 points in the dow or more. While possible as with anything I doubt it will gap down 10% overnight. So yes you could slap this on and take a limited loss versus the full loss of the actual credit spread you put on.
It is hard to say exactly because I would need to see the pricing conditions and how far the market ran past your credit spread. This works better if your spread is STILL OTM.
Let me repeat...... THIS WILL WORK PROPERLY IF YOUR SPREAD IS STILL OTM. Once it is deep ITM, well you will be close to maximum loss unlss the time value premium keeps it less than that. So this works if you were 60 points OTM and in a day or so you are now 20 points OTM and fear even more drops.
It is just one hedging tool to become familiar with and use, not THE answer. Why? Because in all honesty there cannot be an answer to the black swan completely unexpected event. But everything else this is very good way to clamp down on the position and perhaps make even more money.
Serves you right for leaving the thread for a few hours lol. Answers to your questions:
1). Risk-based haircut was best answered by Maverick and here is a paste of his post (haircut is another way to refer to your margin or capital requirement):
"Haircuts usually consist of using the max loss your pos would incur today with a 15% up move and 15% down move in a stock. With indexes it's 10% for nasdaq and for the dow and s&p it's 8% to the downside and 6% to the upside. This is all you put up. Everyday your haircut changes as the underlying moves.
The biggest advantage to haircuts is not the initial leverage, for lack of better word, but rather the fact that when you make adjustments to your position, rather then having to put up more capital, you put up less capital. This allows you to trade the underlying at will, trade synthetics, and lay out premium at no cost.
When one is long gamma, since there usually is no risk outside of daily decay, the exchange makes you put up a minimum of $25 per contract on equities and 1$ per contract for indexes.
So an example. If I bought 100k worth of long NDX premium today, at IB, I would have to put up 100k in cash, with a haircut account I might have to put up 1k. That's it. It's a huge difference."
2) The answer to whether this could deal with black swan event, I give you the famous, it depends. First a 10% move in one day is unlikely as that would be 128 points which might translate to 500 points in the dow or more. While possible as with anything I doubt it will gap down 10% overnight. So yes you could slap this on and take a limited loss versus the full loss of the actual credit spread you put on.
It is hard to say exactly because I would need to see the pricing conditions and how far the market ran past your credit spread. This works better if your spread is STILL OTM.
Let me repeat...... THIS WILL WORK PROPERLY IF YOUR SPREAD IS STILL OTM. Once it is deep ITM, well you will be close to maximum loss unlss the time value premium keeps it less than that. So this works if you were 60 points OTM and in a day or so you are now 20 points OTM and fear even more drops.
It is just one hedging tool to become familiar with and use, not THE answer. Why? Because in all honesty there cannot be an answer to the black swan completely unexpected event. But everything else this is very good way to clamp down on the position and perhaps make even more money.
Hi guys. Someone mentioned to me there was a lengthy discussion over here on haircuts. If anyone has any direct questions about haircuts, I can address them here. I am very familiar with the differences between Reg T margins and haircuts.
Gone 4 hours..... that's nothing,
You definitely can't afford to going skiing for three days and expect to keep up with the reading pace of this forum....
It sure keeps the wireless access providers happy though!
I, for one, would be interested in a group purchase or referral rate for the book.
Thanks Coach !
Murray
You definitely can't afford to going skiing for three days and expect to keep up with the reading pace of this forum....
It sure keeps the wireless access providers happy though!
I, for one, would be interested in a group purchase or referral rate for the book.
Thanks Coach !
Murray
I think I understand it and as a retail trader it doesn't seem that I could make use of this. Besides being able to put up less margin would probably get me into trouble eventually.
So how did they ever come up with the word "haircut" to describe this. I don't see any connection.
Thanks.
So how did they ever come up with the word "haircut" to describe this. I don't see any connection.
Thanks.
I still think very people really understand haircut. I know this, because even when we bring veteran traders into my firm, they have a hard time understanding haircut.
I have said this before and I will say it again. I do not believe it is possible to earn a living trading options in a retail account. Not that it's easy doing it in a professional account either. The real value of a haircut is not in the additional leverage it provides, as some have pointed out, leverage is a doubled edge sword, but rather in it's ability to help you remove risk. In other words, the very opposite of what leverage creates.
I know this is going to be very hard for some of you to get your hands around. But if you cannot manage risk, you cannot make money trading options. I'm not trying to make this black and white here, it's just that risk is what kills every trader.
Guys don't go broke because they have a bad strategy, or they have no edge, or their commissions are too high. They go broke because they can't manage risk or don't have the ability to.
A haircut allows you to manage risk without the outlay of additional capital. If MM's couldn't have haircuts on the floor, they could not make markets, end of story.
The word haircut derives from the hit a stock takes. For example, you will hear someone say, YHOO had earnings after the close, the stock got a 12% haircut. Which means the stock is down 12%. Or 12% of the price of YHOO was cutoff. So haircut refers to the amount a stock can drop and how much capital you have to put up. So with stocks, you have to put up a 15% haircut. In other words, you need to put up the money you would lose if the stock got a 15% haircut from it's current price. I hope this makes sense.
Excellent posts on haircuts. Margin and haircut are used interchangeably, but they are not. My post to Coach regarding the lack of relief from risk-haircut was isolated to the vertical and was not to imply any hedging. It had been my understanding that Coach rolled in lieu of taking many hedging plays.
As Mav alluded to, reduction of haircut through hedging activities is 99.997% of the logic behind joining a JBO. The only downside is the significant credit risk associated with pooled-risk. If you're a large trader in a JBO who is short puts and short shares you'll receive a dramatic reduction in haircut; unfortunately, a few upside sigmas can take the firm down with large volume trader. They don't have to go debit for you to lose a large portion of your stake.
It's one thing to lose money from your trading, quite another feeling to be successful and take a trimming from a fellow partner's activities.
All in all, I think the pros outweigh the cons. Wire-out as often as possible.
As Mav alluded to, reduction of haircut through hedging activities is 99.997% of the logic behind joining a JBO. The only downside is the significant credit risk associated with pooled-risk. If you're a large trader in a JBO who is short puts and short shares you'll receive a dramatic reduction in haircut; unfortunately, a few upside sigmas can take the firm down with large volume trader. They don't have to go debit for you to lose a large portion of your stake.
It's one thing to lose money from your trading, quite another feeling to be successful and take a trimming from a fellow partner's activities.
All in all, I think the pros outweigh the cons. Wire-out as often as possible.
Not only do I do it...as options as well as interest and dividends provide our current income, I know of at least one other retail customer (a friend/neighbor) who has been both trading options as well as daytrading quite successfully for over 10 years...yep he lost a couple of million in the 2000-2002 but has more than made up for it in the last 3 years (esp this last year) obviously it is not all he/they do (as far as investments) but he has been quite successful in options trading...in a retail account...as have we (in a much more modest way...but still making a living.)