I mainly sell puts and have a lot of cash sitting in my IB account. Would you guys recommend buying say 4 month Treasuries or just leaving it in cash? Also an elementary question but if I buy the treasury, at maturity date will IB just auto process it and deposit the cash into my account? Cheers guys!
Most know more than I, but I think: 1. You will get a much better rate buying the Treasuries. Or at least a good bit better of a rate, anyways. 2. Yes, auto process.
I made a post on here somewhere explaining this in more detail, but you might be able to capture a higher yield by: 1) Buy ATM put on SPY 2) Sell 100 shares of SPY 3) Sell ATM call on SPY Since you can put that on for a credit, it's a zero-risk return. If SPY happens to expire close to the ATM strike, then the only additional thing you might have to do at expiration is sell SPY and buy back the call. That's unlikely to happen. In the past, I have used that trade to lock in around a 2.5% effective yield with a hold time of a couple months. Won't make you rich, but it is a better yield than IB currently pays for holding cash.
I bought my first T-bill about a month ago on IB. I added a tab at the bottom of TWS and selected "Bond Scanner". Here's some key points I think would be useful for someone who is familiar with IB, but not bonds. Also these are confirmations on some points that wasn't 100% clear to me prior to doing this trade: 1) Commissions -- IB's direct commissions on US fed treasuries is 0.02% of face value with a $5 minimum. Effectively what this means is that if you buy less than $25k, you're paying $5 commissions. If you want the 0.02% to match $5, then you need to trade at least $25k to optimize commissions. They have a price break at $1M, but I'm a bit short of that. Also I wanted to do a small amount as my first bond trade, so I did $25k. 2) Other fees -- IB includes all the other party's fees in to the spread, so when you see the yield, this is inclusive of all the other exchange / intermediary fees. 3) Margin requirement -- $25k of face value was $250 (1%) 4) Adjustments to available margin / cash -- the bond purchase reduced my cash by the value I paid, but did not reduce my buying power (as above, margin was reduced by 1% of bond face value -- $250). So it seems that IB does in fact consider the t-bill as 99 % cash equivalent (as collateral sort of way). 5) Slippage -- You won't get the NBBO when buying/selling unless you're doing a large amount. Unfortunately I can't tell you what that is and I was unable to find it in TWS. Here's what I know, when I bought my first bond, I kept increasing the limit price and went beyond the ask (I forget how much) until it was finally filled. Maybe I didn't see the message on my first go, but I tried again on Thursday and I got a message that effectively said that my size was too small to be matched against the ask and to either trade higher size or be more aggressive on my bid (ie bid above the ask) in order to get filled. You could think of this like the NBBO are AON (All Or Nothing) orders, but I didn't see anything in TWS to tell me what the size was. I mean I could see $25M sitting at the ask, but I don't know if that was 1 order or multiple. Due to the nature of how t-bills work -- you buy at a discount to face and the yield (ie interest) is effectively the difference. You are paid face value on the maturity date, so your profit is the difference between face and what you paid. Anyway what this means is that the higher your bid, the worse your yield. Think of it as slippage if you're not doing enough size. 6) Maturity / settlement -- my first and only t-bill purchase had a maturity of May 31st. I expected to get the money the day after -- June 1st + some settlement time (like 0-7 days). To my surprise I had the cash when I opened my software before market open May 31st, so apparently settlement effectively happens the morning of maturity. 7) Interest paid on cash balance-- IB is currently (or at least when I bought my t-bill) paying 1.2% interest on cash balances. I got a yield of just over 1.4% on my bond, but consider that IB doesn't pay interest on the first $10k in your account. By buying bonds, you're reducing your cash balance. As a result, you should take this in to consideration when looking at your interest+bond yield on a total account value. I mainly trade options, but if you trade such that you're borrowing money from IB, I'm not sure how bonds play in to this (ie will the reduced cash balance mean you're borrowing more money from IB?). The purchase does reduce cash balance, but not buying power or margin (well margin is reduced by only 1% of the face value of the bonds). Anyway I never traded a bond before. I did a lot of research just to understand how bonds work, but there were still some unknowns / things I wasn't sure of until I did it and saw first hand how it actually works on IB. Most of my suspicions were confirmed, but some things I wasn't sure about like settlement and total affect on margin+buying power, etc. The above notes are what I think a non-bond trader would want to know about buying bonds on IB, but there's probably additional items that you'd find important that I may not have touched on, so definitely do your own research before doing it.
Wow thats a really great write up Lee; and much appreciated. Seems we are both following the same path, thanks for leading the way!
I had looked in to this. The problem is that if you buy outside your broker (ie treasury direct), you can't transfer the treasury to your broker for 45 days. This means your cash balance at your broker is reduced by whatever amount you transferred out to buy the treasury for at least 45 days, which means you have less margin and buying power available to you. The available margin and buying power is calculated based on "cash + cash equivalents". If you buy the treasury directly within IB, your cash is converted to a treasury and IB treats 99% of the treasury's face value as cash equivalent, which means your margin requirements only go up by 1% and your day trading buying power is only affected by this 1% change in cash equivalents vs transferring 100% of the purchase price of the bond out of IB means you're losing 100% of the cash+cash equivalent. I know some brokers allow you to participate in auctions in some fashion, but I'm no bond trader and I didn't see such an option at IB. I was just trying to find the simplest way to increase interest earned on my unused cash portion to see how it played out. To illustrate -- say you deposit $100k cash in to your IB account. If you then tie up $25k margin in options, you have roughly $75k in cash/available option margin and your buying power is $300k (again I'm simplifying). If you buy $50k in treasuries, then your margin requirement only goes up by $500 to $25.5k so your available margin is now $74.5k and your buying power is reduced to $298k. If instead you transferred the $50k cash to treasury direct, then your cash is reduced by $50k and you only have available margin of $24.5k and buying power of $98k. In short, keeping the treasury in IB means you pay more commissions, but IB treats 99% of the treasury as cash equivalent and therefore is available for margin+buying power purposes. If your broker allows participating in the auction and immediately get the treasury in to your account, then this would likely be better (depending on commissions). I didn't see that option in IB. I was going to look in to this, but haven't gotten to that (my first bond trade just finished on May 31st and I was waiting to see how it settled before diving further). Also I specifically used a t-bill. Other types of bonds (even government) are almost certainly treated differently in terms of their consideration of cash equivalent, margin required, etc.