New Trading Strategy

[cwelsh 1,549]

On 6/15/2023 at 5:05 AM, SlayTrader said:

TDA portfolio margin does not charge any interest unless the buying power becomes negative.

This is not at all accurate -- unless we're talking about different things.

 

If I open an account with $100,000 and am long $2m in stock with each position only eating up $100 on margin (yes I know it'll be higher), you'll be charged interest on $1.9m.  

[cwelsh 1,549]

57 minutes ago, SSP said:

Hi Chris & Kim:

When you expect to start this strategy and what would be subscription price and are there any bundles available?  I have already participated in your poll and have a margin account with Fidelity and have been using margin for the past several years.

 

I am putting up the threads on the strategy right now.  I'm trying to get a couple of posts up daily.

 

My plan is to have them all done by this week (hopefully).  The most important ones I still have left are:

 

1.  Finding the trades

2.  Trade adjustments

3.  Risk considerations

4.  Risk management

5.  3-4 actual trades already done by me

 

Then I want to answer member's questions for a week or so (I'm on vacation next week, so just spending the week answering those questions here and there will be perfect for me).

 

After that, we'll start trading.  I haven't talked to Kim about start date for fees and the like, but it likely will be either Aug 1 or Sep 1.

 

[cwelsh 1,549]

On 6/21/2023 at 10:22 AM, Ringandpinion said:

Yeah, like when the trade goes against you and your broker begins raising the percentage, if you don't watch your margin when that happens, you get a big surprise when you see it.  That said, PM is certainly a big advantage, just remember to babysit the margin requirements if your underlying, or the market as a whole, begins to move.

Absolutely the case, and something we'll hit in the risk consideration posts very heavily.

[Ringandpinion 1,657]

1 minute ago, cwelsh said:

This is not at all accurate -- unless we're talking about different things.

 

If I open an account with $100,000 and am long $2m in stock with each position only eating up $100 on margin (yes I know it'll be higher), you'll be charged interest on $1.9m.  

I intend to get a better understanding of how it works, but TDA told me a few days ago somewhat the same thing.  They didn't say buying power, they said the cash and sweep vehicle, if it was not negative then you were charged no interest.  That said, I just read some of their PM literature and there is a small automatic interest charged for PM accounts even if you are not using any.

[cwelsh 1,549]

On 6/15/2023 at 5:05 AM, gabbox said:

Unfortunately PM is unavailable for EU customers. However the strategy could be interesting anyway...

Are you sure about this?  Post-brexit, all continental EU countries should have PM through IB.  (I pesonally know of at least two that do).

[Ringandpinion 1,657]

So I guess the moral of the story is that if you have PM, you want to use it because you are going to pay a least a little for it.

From the TDA Portfolio Margin site

Special Rules for Portfolio Margin Accounts

6. A portfolio margin account or sub-account will be subject to a minimum margin requirement of $0.375 for each listed option, unlisted
derivative and security futures product, multiplied by the contract’s or instrument’s multiplier, carried long or short in the account.
Other eligible products are not subject to a minimum margin requirement.

[cwelsh 1,549]

On 6/19/2023 at 12:28 PM, Alan said:

I am also interested in knowing how scalable the strategy is.

Well, a lot of that depends on your risk tolerances, and liquidity.  If you have a $100,000 account, this strategy will have you trading at 20x leverage (at least $2m in positions -- yes they're hedged).

 

But would I want to trade this in a fund with $50m?  No, not really.  I personally (if I can get to this liquidity anyway), probably wouldn't trade more than $500k, and maybe not even that much.

[Daniel F 10]

11 minutes ago, cwelsh said:

Are you sure about this?  Post-brexit, all continental EU countries should have PM through IB.  (I pesonally know of at least two that do).

Yesterday, I contacted the IB customer service and, unfortunately, they confirmed that it´s not possible for EU residents to have PM accounts.

Given this restriction, I´d like to inquire about any alternative available for EU residents who wish to engage in trading using this particular strategy.

Thanks!!

 

[gabbox 2]

17 minutes ago, cwelsh said:

Are you sure about this?  Post-brexit, all continental EU countries should have PM through IB.  (I pesonally know of at least two that do).

Not sure because IB(Ireland) support claims that every account has PM enabled but if I perform a test it seems that I have normal margin requirements.
There are people asking on Reddit. it's confusing...

[SSP 6]

Thanks for the update Chris.  Looking forward to reading the details 

Sarang

[LearPilot 35]

2 minutes ago, Daniel F said:

Yesterday, I contacted the IB customer service and, unfortunately, they confirmed that it´s not possible for EU residents to have PM accounts.

I am wondering about this. I am from Germany and have a PM account with IB - no problem.

[cwelsh 1,549]

4 minutes ago, LearPilot said:

I am wondering about this. I am from Germany and have a PM account with IB - no problem.

I just called my rep at IB, and he sent me here:

 

Margin Requirements | Interactive Brokers U.K. Limited

 

It's a tool to see what you can trade and where on margin.  He said if a client country is clear on that list, and they can't get PM turned on, to call in and they should be able to walk them through it.  

 

It looks like the only real restriction is Canada -- but you should be able to find PM through other brokers if you're in Canada.  Again, this is just using what IB told me, I really have no way of verifying outside of opening accounts for clients.

[V_NAM 24]

I have margin account why is my maintenance margin so high for this trade?

[NJ_KenRob 160]

57 minutes ago, VNambula said:

I have margin account why is my maintenance margin so high for this trade?

 

That looks like Reg T margin, not Portfolio Margin

Edited June 28, 2023 by NJ_KenRob

[cwelsh 1,549]

4 minutes ago, NJ_KenRob said:

That looks like Reg T margin, not Portfolio Margin

I double this, that's pretty much exactly what it should be on Reg-T

[ocr008 12]

 

What is the difference between 

Reg T margin and  Portfolio Margin
for example $100000 on margin full invested you pay 6% okay   now margin required only $10.000 we pay 6% off $100.000 or $10.000   I borrow $100.000

 

Edited June 28, 2023 by ocr008

[greenspan76 332]

2 hours ago, ocr008 said:

 

What is the difference between 

Reg T margin and  Portfolio Margin
for example $100000 on margin full invested you pay 6% okay   now margin required only $10.000 we pay 6% off $100.000 or $10.000   I borrow $100.000

 

The margin requirements (whether you have Reg T or Portfolio Margin) only determine how much you are allowed to borrow. Regardless of the type of margin account you have, you pay interest on the actual amount you borrow. So if you buy $200,000 of equities and your account has a value of $100,000, you're borrowing $100,000. But if you buy $2,000,000 of equities and your account has a value of $100,000 you are borrowing $1,900,000.

[V_NAM 24]

Chris, May be you are going to cover this somewhere, but why not just stay in the trade only for a month or less and get one dividend and move on to next trade? I know transaction costs will eat into it, but on the other hand, I am going to save on interest. What is the advantage of 6 month trade vs short trade?

[ocr008 12]

Thank you so much.

[tind3r 5]

Would we need a separate PM account to run this strategy? Or could we run this in the same account as my steady options fund? 

[Ima 0]

On 6/27/2023 at 6:00 PM, LearPilot said:

I am wondering about this. I am from Germany and have a PM account with IB - no problem.

Maybe you had already PM as an "old" client of IB UK?

Just my guess (as IB doesn't like to make it straight): customers having a PM account with IB UK have maintained the PM with IB Ireland.

But today they don't give PM to anyone, no matter how much you have in the account. They say IB Ireland use a "risk based" margin account  similar to PM, but nobody outside really knows their calculations.

 

 

[SlayTrader 4]

On 6/27/2023 at 9:00 PM, Ringandpinion said:

I intend to get a better understanding of how it works, but TDA told me a few days ago somewhat the same thing.  They didn't say buying power, they said the cash and sweep vehicle, if it was not negative then you were charged no interest.  That said, I just read some of their PM literature and there is a small automatic interest charged for PM accounts even if you are not using any.

What ringandpinion said is correct: "I intend to get a better understanding of how it works, but TDA told me a few days ago somewhat the same thing.  They didn't say buying power, they said the cash and sweep vehicle, if it was not negative then you were charged no interest. "

There is no interest charged by TDA in PM account till you buying power is positive. I have been using TDA portfolio margin since last 2 years.

[SlayTrader 4]

On 6/29/2023 at 7:25 AM, greenspan76 said:

The margin requirements (whether you have Reg T or Portfolio Margin) only determine how much you are allowed to borrow. Regardless of the type of margin account you have, you pay interest on the actual amount you borrow. So if you buy $200,000 of equities and your account has a value of $100,000, you're borrowing $100,000. But if you buy $2,000,000 of equities and your account has a value of $100,000 you are borrowing $1,900,000.

This is incorrect. For PM, there is no interest charged on the $1,900,000 you borrow as long as your buying power is positive. I am using TDA portfolio margin since last 2 years and I know this for a fact after checking all my account statements. This is the beauty of a PM account if you use it wisely.

[Ringandpinion 1,657]

Since this new trade is dependent on Portfolio Margin, I thought I would mention one more thing about Thinkorswim/TDAmeritrade.  Over the last 6 years I've had 5 margin calls, 3 from early assignment and 2 from PM requirements changing due to stock movement and increased risk from TDA's point of view.  I've heard horror stories about other brokers liquidating assets (especially IB) and just doing a disservice to the trader because of a margin call, possibly to discourage that kind of behavior.  TDA has a pretty laid back attitude about it.  In each case, I called in before the market opened or within a few minutes and made them aware that I was aware.  They just thanked me for taking care of it and in one case requested I get it done pretty quickly, otherwise their normal policy gives you a couple of days, IF they have heard from you and know you plan to handle it.  That kind of customer service I can live with.

And no, I don't work for TDA and am not receiving a kickback for the above statements. 😁

[StacyB 32]

I have had similar experiences with TOS/TDA - customer service (PM, tech support, etc) has been very good.

[ocr008 12]

You are wrong 

if you have an account $100,000

you bought ABC $100 * $5,00=$500,000

you borrowed $400,000 that means you pay interest on $400,000

i just spoke with TDAmeritrade  my interest rate’s 9.85%

[cwelsh 1,549]

On 6/28/2023 at 10:05 PM, VNambula said:

Chris, May be you are going to cover this somewhere, but why not just stay in the trade only for a month or less and get one dividend and move on to next trade? I know transaction costs will eat into it, but on the other hand, I am going to save on interest. What is the advantage of 6 month trade vs short trade?

This is going to be covered in the exit thread.  But the general reason is profits don't accrue that fast.  In fact, its entirely possible for the trade to be down after the dividend is paid (basically option makers aren't stupid).

 

Take my MPW trade I did, where I sold the 5 call and bought the 5 put (MPW was about $9 at the time), and paid $5.41 for the trade and entered 5 days or so before it went ex-dividend.  The dividend was $0.29 and I would get 4 of them over the life of the trade.  After receiving the first dividend, the trade was down by MORE than $0.29.  So if I closed, it would be for a loss.  I have now received 2 dividends.  My basis, not including interest, is now $4.83.  The position mid-point says it's worth $5.36 -- if I could close for that I would.  But I can't.

 

I run a constant calculation of profit remaining vs current price -- and remember what I can get on other trades.  If there's only a 10% gain left to be had out of the original 90% potential gain and six months left on the trade, we absolutely would exit and just enter another trade.  But what if there's a potential 110% left to be had? Then we stay.

 

That's where trade management comes in (I'm writing posts as fast as I can on this  )

[cwelsh 1,549]

9 hours ago, SlayTrader said:

This is incorrect. For PM, there is no interest charged on the $1,900,000 you borrow as long as your buying power is positive. I am using TDA portfolio margin since last 2 years and I know this for a fact after checking all my account statements. This is the beauty of a PM account if you use it wisely.

I would love to see those statements (happy to send email), as this is vastly different than my experience and anything I've ever seen (and doesn't even make sense -- that's a free loan of millions).

[Ringandpinion 1,657]

7 minutes ago, cwelsh said:

I would love to see those statements (happy to send email), as this is vastly different than my experience and anything I've ever seen (and doesn't even make sense -- that's a free loan of millions).

@cwelsh, I know that when I talked to them, they said that as long as the "cash and sweep vehicle" (not buying power) balance was above zero that there would be no interest charge.  I also saw the wording about a basic small charge per option was always charged, but it was a tiny amount and I suspect you would need a lot of contracts open for it to amount to much.   If I can find the particular place in the documents where it points this out, I will post it.

[NJ_KenRob 160]

1 minute ago, Ringandpinion said:

I know that when I talked to them, they said that as long as the "cash and sweep vehicle" (not buying power) balance was above zero that there would be no interest charge

If you buy 500k of stock with 100k in cash, doesn't your cash and sweep vehicle balance go to 0.00?

[VT3 26]

2 minutes ago, Ringandpinion said:

@cwelsh, I know that when I talked to them, they said that as long as the "cash and sweep vehicle" (not buying power) balance was above zero that there would be no interest charge.  I also saw the wording about a basic small charge per option was always charged, but it was a tiny amount and I suspect you would need a lot of contracts open for it to amount to much.   If I can find the particular place in the documents where it points this out, I will post it.

If you have cash $100,000 and you will buy stock worth $2,000,000 , your cash and sweep vehicle will become -$1,900,000 and you will be charged an interest for $1,900,000 amount.

[Ringandpinion 1,657]

1 minute ago, NJ_KenRob said:

If you buy 500k of stock with 100k in cash, doesn't your cash and sweep vehicle balance go to 0.00?

I've never done it so I have no direct knowledge.  From the conversation, I go the impression that the cash and sweep vehicle could be negative, possibly identifying how much margin you are actually using.  The problem with quantifying PM margin is that the actual margin applied to a trade is figured with a set formula, but the variables to said formula can change on how risky the broker feels about the underlying at that particular instant.  This whole conversation has made me want to look into it sufficiently to understand it, kind of like balancing your check book, I've done it for over 50 years but I've never found a mistake by the bank, but I'm going to still do it.

[SlayTrader 4]

5 minutes ago, NJ_KenRob said:

If you buy 500k of stock with 100k in cash, doesn't your cash and sweep vehicle balance go to 0.00?

That is for a regular margin account. It works differently for PM. 

[SlayTrader 4]

8 minutes ago, VT3 said:

If you have cash $100,000 and you will buy stock worth $2,000,000 , your cash and sweep vehicle will become -$1,900,000 and you will be charged an interest for $1,900,000 amount.

No. In Portfolio Margin, if your margin required to buy $2,000,000 of stock is let's say $30,000, then your cash and sweep vehicle of $100,000 will still remain positive and you will not be charged any interest. I again confirmed this with TDA.

[Bullfighter 385]

In TDA, you get charged margin interest if your cash & sweep vehicle gets under zero. To open trades, what matters is the available funds for trading. Different instruments, and different combinations of options have different impacts on the available funds for trading, what we would refer as margin. For instance, to buy one thousand shares of SPY now, I wouldn't need $443,800, just $66,568.50, as you can see in this screenshot I just took from my account. If you borrow with a box spread, that increases your cash vehicle at the expense of your margin, and if you lend with a box spread, you lose cash vehicle but not much margin. Box spread are a great way to manage those two buckets so that you don't need to spend expensive margin rates, just borrow or lend from the options market. 

 

[VT3 26]

3 minutes ago, SlayTrader said:

No. In Portfolio Margin, if your margin required to buy $2,000,000 of stock is let's say $30,000, then your cash and sweep vehicle of $100,000 will still remain positive and you will not be charged any interest. I again confirmed this with TDA.

I traded T-Bills in TDA and with Portfolio Margin.

If I buy $50,000 worth of T-Bills then my "Stock Buying Power" goes down by about $500, because it is low-risk asset, but my "cash and sweep vehicle" was decreased by $50,000 .

[Kim 7,943]

I believe people confuse margin and cash.

PM allows you to buy much more stock compared to regular margin. But if you buy more stock than the cash you have in your account, your cash will become negative. Which means that the broker gives you a loan. I never heard about interest free loans (well, unless Biden's loan forgiveness plan gets approved).

[Bullfighter 385]

To figure out how much margin a trade is going to require, you use the Analyze tab in TOS. This is where the slices come in. You add the simulation of the trade you want to do, and it will show the PM requirement. The rules are explained at: https://tlc.thinkorswim.com/center/faq/Portfolio-Margin

You need to short a box spread to increase the cash vehicle at the expense of some margin. Unless you intend to withdraw the borrowed funds out of your TDA account, a box spread won't use much margin. Again, you can model it in the analyze tab.

[SBatch 3,123]

Here is the OCC’s PM calculator:

https://www.theocc.com/Risk-Management/Portfolio-Margin-Calculator

[sg_trader 0]

@cwelsh Will this strategy work for foreign investors? For foreigners, there is a dividend withholding tax of 35%. I wonder how this will diminish the returns if the strategy involves holding stock and collecting dividends. Thanks.

[diamond 2]

Hey Chris,

If a person joins this service will the service be offering up trade ideas to implement and the spreadsheets, etc. for evaluation/tracking?

[cwelsh 1,549]

On 7/2/2023 at 5:11 AM, sg_trader said:

@cwelsh Will this strategy work for foreign investors? For foreigners, there is a dividend withholding tax of 35%. I wonder how this will diminish the returns if the strategy involves holding stock and collecting dividends. Thanks.

It should work for everyone that can trade options. Your tax consequences might be significantly different, and returns vary depending on PM and interest rates, but its not difficult to trade or implement.

[cwelsh 1,549]

1 hour ago, diamond said:

Hey Chris,

If a person joins this service will the service be offering up trade ideas to implement and the spreadsheets, etc. for evaluation/tracking?

I'm about to get to posting the trades I've already done and have in place to allow members to look at them and ask questions.

 

I also will be posting trades as I do them, but that might not match will all member's accounts.  So my goal is to put up a list weekly of 10 or so candidates and ensure that members know how to evaluate and can pick the ones they want.

 

Of course if someone simply wants to track and follow exactly what I do, that's perfectly acceptable as well, but as this is an education service, I'd like to equip members to evaluate different options and pick which ones suit them.

 

For instance, maybe some members like the idea of getting 70% with 0 risk (other than dividend risk), while others like getting 100% with small levels of risk -- or a blend.  And given that there is always a (small) chance of assignment, members should evaluate the stocks they like the best.

 

The example I like to give is C (citigroup).  The trade I did carries some risk if the price craters -- but the price would have to be at something like a 10 plus year low.  And at that price, I'd be a buyer anyway.

[diamond 2]

On 7/3/2023 at 4:04 PM, cwelsh said:

I'm about to get to posting the trades I've already done and have in place to allow members to look at them and ask questions.

 

I also will be posting trades as I do them, but that might not match will all member's accounts.  So my goal is to put up a list weekly of 10 or so candidates and ensure that members know how to evaluate and can pick the ones they want.

 

Of course if someone simply wants to track and follow exactly what I do, that's perfectly acceptable as well, but as this is an education service, I'd like to equip members to evaluate different options and pick which ones suit them.

 

For instance, maybe some members like the idea of getting 70% with 0 risk (other than dividend risk), while others like getting 100% with small levels of risk -- or a blend.  And given that there is always a (small) chance of assignment, members should evaluate the stocks they like the best.

 

The example I like to give is C (citigroup).  The trade I did carries some risk if the price craters -- but the price would have to be at something like a 10 plus year low.  And at that price, I'd be a buyer anyway.

Thanks - understood

[chrisag 0]

On 7/3/2023 at 4:04 PM, cwelsh said:

I'm about to get to posting the trades I've already done and have in place to allow members to look at them and ask questions.

 

I also will be posting trades as I do them, but that might not match will all member's accounts.  So my goal is to put up a list weekly of 10 or so candidates and ensure that members know how to evaluate and can pick the ones they want.

 

Of course if someone simply wants to track and follow exactly what I do, that's perfectly acceptable as well, but as this is an education service, I'd like to equip members to evaluate different options and pick which ones suit them.

 

For instance, maybe some members like the idea of getting 70% with 0 risk (other than dividend risk), while others like getting 100% with small levels of risk -- or a blend.  And given that there is always a (small) chance of assignment, members should evaluate the stocks they like the best.

 

The example I like to give is C (citigroup).  The trade I did carries some risk if the price craters -- but the price would have to be at something like a 10 plus year low.  And at that price, I'd be a buyer anyway.

Will you be posting the trades here or somewhere else? 

[cwelsh 1,549]

3 minutes ago, chrisag said:

Will you be posting the trades here or somewhere else? 

In the Lorintine threads for this -- that's where I'm putting up the trading strategy right now. I've set out the basic rules, just put the first example up.  Hope to put a second example up Sunday.

 

Then Monday get up the risk thread

 

Then by end of week have in trade management section

 

Then for 2 weeks from now, have a couple live sample trades (not executing, just walking through the process on them in live fashion).

 

Then 3 weeks from now have a Q/A thread going where we can answer outstanding questions.

 

Then start live Aug 1 or so.

 

That's the plan for right now.

[agoro 3]

Hi chris, 

Could you or someone guide me where to find lorintine treads so I can continue to follow this strategy?

thank you.

[Kim 7,943]

[Bullfighter 385]

On 6/30/2023 at 4:16 AM, SlayTrader said:

This is incorrect. For PM, there is no interest charged on the $1,900,000 you borrow as long as your buying power is positive. I am using TDA portfolio margin since last 2 years and I know this for a fact after checking all my account statements. This is the beauty of a PM account if you use it wisely.

That's right. For instance, I have right now a portfolio of positions worth $2,451,409 in Reg T margin right now, but because I have a PM account with TDA, it only uses $10K of buying power. The cash requirement is higher, about 100K, which is not costing any interest since I still have more cash in the account (still less than the $2.4 million in positions it holds now). If your cash is about to get to zero but your buying power is still high, you can either borrow from your broker for from the options market by shorting a box spread, the latter being more cost effective.

I don't know the details of the strategy, but an important thing to keep in mind, besides keeping your cash and margin in check, is that the -20% slice is less than 2 times your account value (net liq). The -20% slice is the simulated value of your account if the market dropped 20%), which you get in the analyze tab. If your account violates this rule, you get a margin call. You also want to make sure that  your net liq. is greater than the -15% slice.

[Mavis_Williams 0]

On 7/11/2023 at 5:11 PM, Kim said:

Thanks for shating!