Any of you guys know whether there is a commission when the SSF is exercised at the end of the EFP? Also, what is the likelihood of an early exercise? OldTrader
I would assume that the delivery is only at expiration (and not over a span like for commodities), but I haven't read the contract specs in detail yet.
LOL! Now that I read your answer, I realize how dumb my question was. These aren't options...they're futures. So you're right, they probably are "delivered" at expiration. Maybe I better go read the specifications myself. OldTrader PS: What they say under Settlement/Delivery is the following: "Physical delivery of underlying security on third business day following the Expiration Day".
Wouldnt it be perfect if early delivery? U get to collect the futures premium without having to wait for the whole time.
Some of these profits are pretty skinny, making the dividend important to the return. Looks like early delivery is not an issue though. OldTrader
This thing is really messing with my head. Who's done one of these (sold EFP) and can report on exact buying power results as displayed by TWS. I gather you only want to do this for stock value up to the actual cash in the account, lest you be charged interest for amounts over that. Example 50k Acct Sell EFP for 50k worth of stock. Something like 5% maint margin, so that leaves you with 47500 BP, and what, 4X47500 intraday?? and what for overnight. And now you earn the EFP interest rate on the full 50k. Correct? Don't know why IB doesnt supply actual examples like this, but there it is. I have another question for the experts. What is accomplished by BUYING an EFP? , since you are basically flat the stock (short stock, long future), and you pay the interest differenial.
Your initial margin requirements, for an EFP, are identical to those for the stock leg of the EFP. Caution: IB has made contradictory statements about this, and has not yet answered my trouble ticket seeking clarification, so I am answering based on what I see in my TWS account window. Note that your loss of buying power is much greater than what you suggested. You would, in your example, earn the EFP interest rate on the entire 50K. You might BUY an EFP as a way of borrowing money more cheaply than you would if you paid any broker's margin rate. You could then use the borrowed funds to finance some other position more cheaply than if you simply relied on the broker to extend you a margin loan. If you are long a stock having an SSF, then an EFP is particularly useful as a replacement for paying the broker's rate on a margin loan to finance the long. You can also sell EFPs as a technique for earning greater interest, than your broker will pay, on the proceeds from a short sale. IB, for example, pays no interest at all, on the first $100K in proceeds from a short sale, BUT you can get around this by selling EFPs, which allow you to earn a market rate of interest on your short sale proceeds.
Yes, of course you'd generate "interest" on the full 50k -- you get part of that up front when you "sell" the EFP (well, the present discounted value of it). The dividends received from your long position in the underlying also contributes to the "interest." I also noticed that IB is only making a market in the near expiration, which eats into the interest w/the commissions on rollover. I am still not yet convinced that the after tax incremental return is that favorable, except maybe with high yielding stocks (bec you get the lower dividends tax rate). Has anyone researched the exact tax treatment? Like, will Sec 1259 on constructive sales apply on a long underlying/short SSF? I'd presume so. But what about a short underlying/long SSF -- I don't think 1259 would apply there. In any case, it seems inevitable that there's a per transaction cost to be added for the work my tax accountant will perform to consider as well. P.S.: I'm still waiting for cust svc clarification on the commissions -- I am guessing this new mailing is generating a lot of inquiries!
The commissions are negligible compared to the return on EFPs. I think it is so silly to suggest that taxes cancel the benefits of EFPs, that I won't even waste my time arguing the point.