basic long/short carrying cost question

Discussion in 'Retail Brokers' started by blueraincap, Aug 22, 2018.

  1. I would like to confirm the cost of a long/short position in IB.

    -I am long $1mn Banana stock and have $0 cash balance.
    -then I go long $0.5mn Apple stock (IB margin interest is 2.92%)
    -I go short $0.5mn Orange stock (lending fee is 0.5%, rebate rate is 1.5%)
    -the cash balance shows $0

    Am I right that the trade incurs 1.92% net cost of carry (margin + borrow fee - rebate)? Or I only owe the 0.5% short fee (which the helpdesk told)?
    Last edited: Aug 22, 2018
  2. elt894


    You're correct that the long and short balances are treated independently, but you need to use the tiered rates. The rebate rate shown in TWS is the theoretical rate if you could earn the benchmark rate. The tiers for short sales are here.

    In your example, you have a 500k margin loan and 500k short sales proceeds.

    For the 500k margin loan, you pay 3.42% on the first 100k and 2.92% on the remaining 400k, for an average of 3.02%.
    For the 500k short sale, you pay the 0.5% borrow fee. You receive no rebate on the first 100k and 0.67% on the remaining 400k, for an average of 0.536%.

    Your total carry rate will be 2.984%.

    There's an additional adjustment because the collateral you post for short sales is calculated as 1.02 times the share price, rounded up to the nearest dollar, times the number of shares. The borrow fee is charged on this amount, so the effective rate is at least 0.51%. I think this means your margin loan will actually be >510k, but I'm not sure on this point. That would put your carry rate around 3.05%
    luisHK, MoreLeverage and blueraincap like this.
  3. Thank you for clarifying. So the cost of carry for a long/short portfolio in IB is actually material, obviously unless I finance the long leg with cash rather than short proceeds. Seems difficult to carry a sizable medium-term long/short portfolio given the capital intensity of long/short and high spread of margin-rebate
    Last edited: Aug 22, 2018
  4. elt894


    Agreed, there are a bunch of trades I would do if I could net the long and short balances.

    If you're looking at liquid stocks on the short leg and expect to hold at least a month, you should be able to get the cost of carry down to 0.5%-1%. On the long side, buy the stock and finance it by selling an SPX box spread. You'll pay 2.2-2.4% for the September expiry. On the short side, sell a synthetic with options or single stock futures. The rate you'll get here is more variable depending on liquidity and the dividend schedule, but for many large caps you should be able to get 1.5-2%.
  5. traider


    Are single stock futures liquid enough to trade? What exchanges are they traded on?
  6. elt894


    They're traded on OneChicago. The spreads are too wide for day trading, but if you're willing to hold to expiry the rates can be pretty good (for some stocks) if you know how to trade them. For example, if you want to earn a rebate shorting a stock, you usually shouldn't just sell the future outright. Instead, you should short the stock and then sell an EFP (short future + long stock as a combo trade). Then you would roll the position by selling a calendar spread or selling another EFP when the first one expires.
  7. Short call premiums are 100% cash right? so the premium starts earning IB daily interest from day 1?
  8. elt894


    Right, it's fully credited to your cash balance. The cash settles T+1.
    blueraincap likes this.
  9. If I sell a covered call, say 20% OTM, and the stock rallies, making the short call deeply in the red. How does IB treat the PL, will it issue a margin call despite it is covered?
  10. elt894


    Portfolio margin or Reg T? In either case I think it should recognize the offsetting gain in the stock.
    #10     Sep 14, 2018