Why would successful traders join/stay in a prop firm?

boze_man · Jan 25, 2006

what not just trade CME SP500 futures options and emini options? the futures margining seems almost as good?? i know the index options are european and cash settled but what other advantage/disadvantge??

also what firms offer a risk based 'haircut' for equity/index options?? are they all LLC's ??

thanks

cstu · Jan 25, 2006

Sorry guys, but now I am totally confused. Haircuts are determined by an exchange? I have never heard the NYSE setting any "haircut requirements" for listed stocks. Maybe this exercise would be best, and most easily understood if we just focused on a basket of NYSE equity securities.

I have $100,000 invested at the retail broker. In retail I pay interest (margin) on $100,000 if I am maxed out at 2-1 or $200,000.

At a prop firm that levers me, I put up the same $100,000. They provide me with buying power based on

anyway, assuming i go overnight with $1,500,000. What is the haircut? and is it correct I am paying on $1,400,000 of holdings?

And what formula is used? Certainly is would seem it would have to be based on the volatility of the portfolio but how is this determined?

Also, how does this differ for the VAR calculations BAC used to do for me in their internal risk management area when I was using thier money? I know what a 10-sigma day would have cost my portfolio and believe me it is much less than what these prop firms would charge on a haircut.

Maverick74 · Jan 25, 2006

Quote from boze_man:

what not just trade CME SP500 futures options and emini options? the futures margining seems almost as good?? i know the index options are european and cash settled but what other advantage/disadvantage??

also what firms offer a risk based 'haircut' for equity/index options?? are they all LLC's ??

thanks

The cash index options are screen traded for one and more liquid with tighter markets. And again, I've said this before, when you are dealing with span margin, you need to be prepared to have the exchange raise the margins at the worst possible time possibly forcing you into a liquidation. Murphy's law can get really ugly.

I'll PM you about haircuts. Yes, they are all LLC's.

Maverick74 · Jan 25, 2006

Quote from cstu:

Sorry guys, but now I am totally confused. Haircuts are determined by an exchange? I have never heard the NYSE setting any "haircut requirements" for listed stocks. Maybe this exercise would be best, and most easily understood if we just focused on a basket of NYSE equity securities.

I have $100,000 invested at the retail broker. In retail I pay interest (margin) on $100,000 if I am maxed out at 2-1 or $200,000.

At a prop firm that levers me, I put up the same $100,000. They provide me with buying power based on anyway, assuming i go overnight with $1,500,000. What is the haircut? and is it correct I am paying on $1,400,000 of holdings?

And what formula is used? Certainly is would seem it would have to be based on the volatility of the portfolio but how is this determined?

Also, how does this differ for the VAR calculations BAC used to do for me in their internal risk management area when I was using their money? I know what a 10-sigma day would have cost my portfolio and believe me it is much less than what these prop firms would charge on a haircut.

Yes, haircuts are issued by the exchange. The NYSE doesn't have haircuts, it trades listed stocks, not options. Haircuts deal only with options, not stocks!!!!!!!

If you hold stock outright overnight you put up 15% of the value of the stock. I have not the foggiest clue what you are talking about a 10 sigma move, Jesus. LOL. You don't pay a haircut charge unless you go over your haircut. You pay a debit rate on any debit balance and you earn a credit rate on your credit balances.

lescor · Jan 25, 2006

Haircut is not applied the same at all firms. Usually you can leverage up 6.7x with no haircut charge. Some firms charge you an annualized percentage on amounts over that on a sliding scale, like 7-10x at 6%, 10-20x at 8%, etc. Some firms have complicated formulas that are hard to decipher, and some don't charge any haircut at all.

Interest paid on debits/collected on credits is in addition to haircut charges.

Quote from cstu:

Sorry guys, but now I am totally confused. Haircuts are determined by an exchange? I have never heard the NYSE setting any "haircut requirements" for listed stocks. Maybe this exercise would be best, and most easily understood if we just focused on a basket of NYSE equity securities.

I have $100,000 invested at the retail broker. In retail I pay interest (margin) on $100,000 if I am maxed out at 2-1 or $200,000.

At a prop firm that levers me, I put up the same $100,000. They provide me with buying power based on anyway, assuming i go overnight with $1,500,000. What is the haircut? and is it correct I am paying on $1,400,000 of holdings?

And what formula is used? Certainly is would seem it would have to be based on the volatility of the portfolio but how is this determined?

Also, how does this differ for the VAR calculations BAC used to do for me in their internal risk management area when I was using thier money? I know what a 10-sigma day would have cost my portfolio and believe me it is much less than what these prop firms would charge on a haircut.

lescor · Jan 25, 2006

Haircut is a term commonly used at many prop firms. Maybe their definition of it is different than yours.

Quote from Maverick74:

Yes, haircuts are issued by the exchange. The NYSE doesn't have haircuts, it trades listed stocks, not options. Haircuts deal only with options, not stocks!!!!!!!

If you hold stock outright overnight you put up 15% of the value of the stock. I have not the foggiest clue what you are talking about a 10 sigma move, Jesus. LOL. You don't pay a haircut charge unless you go over your haircut. You pay a debit rate on any debit balance and you earn a credit rate on your credit balances.

Maverick74 · Jan 25, 2006

Quote from lescor:

Haircut is a term commonly used at many prop firms. Maybe their definition of it is different than yours.

This is true. Haircuts are pretty much the same everywhere as they pertain to options in terms of definition. Some firms I guess you the word interchangeably with margin even though it is not margin.

cstu · Jan 25, 2006

I asked this question on a thread a long time ago and was told by all that even on equities it was a "haircut". Again, I had always had a margin charge or interest charge. Even Don Bright was here talking about the "haircut".

Thank you for your answer. I will ask though, if you put up money at a prop firm and are levered what is the going rate? Or is it risk based? and how is the risk determined? I am talking equities.

Using VAR, which is what I am familiar with you do stress testing on your assumptions. Different scenarios provide different results. Obviously, a ten-sigma event is way off the charts. With my portfolio 10 sigma event would lose 2.5 times what I would have been expected to lose in October 1987.

Where's Don Bright when you need him? I put up $100,000. I go home long $1,400,000. What are my charges? and what are my charges if I am long $1.4 and short $1.4?

Maverick74 · Jan 25, 2006

Quote from cstu:

I asked this question on a thread a long time ago and was told by all that even on equities it was a "haircut". Again, I had always had a margin charge or interest charge. Even Don Bright was here talking about the "haircut".

Thank you for your answer. I will ask though, if you put up money at a prop firm and are levered what is the going rate? Or is it risk based? and how is the risk determined? I am talking equities.

Using VAR, which is what I am familiar with you do stress testing on your assumptions. Different scenarios provide different results. Obviously, a ten-sigma event is way off the charts. With my portfolio 10 sigma event would lose 2.5 times what I would have been expected to lose in October 1987.

Where's Don Bright when you need him? I put up $100,000. I go home long $1,400,000. What are my charges? and what are my charges if I am long $1.4 and short $1.4?

OK, I'm going to try put this gently. If you are going home long 1.4 million in stock with no hedge with only 100k in your account, I would not leave my capital at your firm. That means a 6% move would wipe you out completely. And a 10% to 15% move could wipe out other traders capital as well.

Now if you are going home both long and short stock in equal amounts, I still don't like it, but it's a little bit safer. So before I go any further, I just want to make sure we are on the same page here. I cannot believe for the life of me that there is a firm out there stupid enough to let a guy carry 1.4 mil in only long stock exposure overnight with no hedges. You would have blown out last week when YHOO missed their numbers and the futures were down 30 handles overnight. Let's get this straightened out before I go further.

Edit: I missed the part where you said you were both long and short 1.4 million in stock. Sorry. I will follow up shortly.

Maverick74 · Jan 25, 2006

Quote from cstu:

Where's Don Bright when you need him? I put up $100,000. I go home long $1,400,000. What are my charges? and what are my charges if I am long $1.4 and short $1.4?

So let me get this straight. You have 2.8 million dollars in exposure with 100k in capital overnight? Am I reading you correctly. So a 300 basis pt move move would wipe out your account. I just want to make sure we are on the same page here.