Can someone explain "haircut" a bit more? Lets say for example I have 25k on deposit and am getting 5-1 overnight. I don't know if this matters but lets say no more than 5% is in any one pos. Does 15% haircut mean that over 365 days I would be charged 15,000 for use of cap?
Firms interpret haircut differently. Some consider H/C as a sunk cost that traders have to pay for going over certian cap buying power. So if I have 25K and am allowed 10:1 the firm might charge me a dly fee of x% for every $ I exceed 250k in BP or carry overnight. Other more progressive firms simply define h/c as the amt a trader must have in acct in order to put on a position. Ex. If I buy 1000 shares of XYZ at $50 15% risk is XYZ going down 15% or $7.5 per share. On a 1000 share loss would be $7500. Using risk based h/c I need to have at least $7500 in account to carry 1000 shares. BUT if I buy 10 OTM puts, the risk gets buttoned up due to hedge. In this case, I might only need to have $800 in account to put on L 1000 XYZ + L 10 puts. I can keep carrying this position and the only cost is the interest on the debit balance since I laid out cash to buy XYZ and put premium. Hope this helps.
Perfect. Thank you GaTrader. Since I often trade with what I call "disaster insurance". I`ll go a few ATR`s out and collar the other side with ATM front month calls/puts. For example Short 100 ACI @ 74 , long 1 Dec 80 call @ .60. So with certain firms trading this way will provide some haircut relief? If you don't mind and if you know, can u PM me the name of any prop firms with that sort of risk management? Thanks TR
(repeat) Hedged positions: = 6 times your equity with no haircut. 6-12 times = 2% per year. 12-18 times = 4% per year etc. Don
Does Bright consider a protective option that is one or two strikes away an appropriate hedge to get those haircut figures? I thought from previous posts that the above numbers were for pairs trades.