Margin Interest

Discussion in 'Options' started by dkw, Feb 11, 2006.

  1. dkw

    dkw

    Here's a basic question.

    As I leg into various positions I've noticed that the margin requirement for a simple protective Put is usually about 10% of the stock value. (Buy 100 shares, buy 1 ATM Put) Of course this changes as the underlying moves. I'm just referring to initial conditions.

    Hypothetically, if I buy 100 shares at 50 and 1 ATM Put, and the margin requirement is about $500, what value am I paying interest on. $2500? $4500?


    I'm thinking of this in terms of longer term trades/investments. I'm wondering if just buying calls and investing the difference is better than buying stock and puts.


    - d
     
  2. Here's a basic question.

    As I leg into various positions I've noticed that the margin requirement for a simple protective Put is usually about 10% of the stock value. (Buy 100 shares, buy 1 ATM Put) Of course this changes as the underlying moves. I'm just referring to initial conditions.

    Hypothetically, if I buy 100 shares at 50 and 1 ATM Put, and the margin requirement is about $500, what value am I paying interest on. $2500? $4500?


    I'm thinking of this in terms of longer term trades/investments. I'm wondering if just buying calls and investing the difference is better than buying stock and puts.


    Different brokers have different margin rate. If you buy a PUT, the money that you paid for your PUT , comes from your cash. If you have $4000 in your account and buy 100 shares for $50 and then pay $100 for buying one PUT contract, You will have the following case:
    You will have $4000-$100=$3900 left in your account.
    You will need 0.3 of your trade that means $5000 x 0.3 =$1500 from that $3900 to keep that position. So you will have :
    $3900-$1500= $2400 to buy other stuff.
    And you will pay the interest for $3900-$4900=$1000 that you have used for your trade from margin.
     
  3. It's the same...it has to be or it will be arbitraged away.
     
  4. hopback

    hopback

    I assume this a retail account since you're are asking about margin interest.

    With that said, how are you only being charged a 10% margin req. on equities? NYSE minimum equity requirement is 25%.

    Back to the thread...
    You will be charged margin interest on any debit balance.
    A debit balance can be created by trades or a cash withdrawal/transfer.
    This includes the put.
    Despite what alot of people on ET seem to think, although options are not marginable they can be bought on margin.
    What a concept...

    If you start with $5000 (and no marginable positions) and buy 100 shares of XYZ at $50, you will have a cash balance of $0, excess equity of $3750, and buying power of $15,000 (based on 25% req.). If you buy 1 put at, let's say, $1.50 you will have a debit balance of $150 and will pay margin interest on that amount, excess equity of $3600 and BP of $14,400.

    Retail margins do not recognize synthetics and will charge you for both the stock and the put.

    All of this is assuming that this is NOT a newly funded account and has SMA sufficiently inflated to avoid Reg T requirements... and of course no commissions. In which case, who's your broker?

    TempusFugit is correct, P/L wise there is no difference between long stock / long put (provided that the $50 put was bought while XYZ was $50 and there were no unusual vol skews) and a long call, other than the fact that an ATM call will be priced slightly higher than an ATM put due to the way carry is lognormally distributed across the sythetic long (that's the "time cost of money" for you).
     
  5. You may be confusing "margin requirement" with margin borrowing. Your example does not say how much money you borrowed. If you did not borrow any money you will pay no interest.

    Buying calls as opposed to the synthetic equivalent (stock + put) would probably be cheaper if you actually had to borrow money for the synthetic (depending on borrow rates).

    Don
     
  6. dkw

    dkw

    I'm not a daytrader so I'm referring to overnight requirements. I'm using IB for this type of trading.

    With that said, how are you only being charged a 10% margin req. on equities? NYSE minimum equity requirement is 25%.

    Right. IB's formula isn't "10%". But margin requirements change when stock and options are combined. In this situation overnight maintenance ends up being about 10% for the total position. If I first buy stock, overnight maintenance is 50% but then it drops when I buy a Put. (This is the case when the position is first opened. Of course requirements change as the underlying moves.)

    If you start with $5000 (and no marginable positions) and buy 100 shares of XYZ at $50, you will have a cash balance of $0, excess equity of $3750, and buying power of $15,000 (based on 25% req.). If you buy 1 put at, let's say, $1.50 you will have a debit balance of $150 and will pay margin interest on that amount, excess equity of $3600 and BP of $14,400.

    And you will pay the interest for $3900-$4900=$1000 that you have used for your trade from margin.

    I see. I only pay interest if there's a debit balance, if cash is negative.

    When I first started out I was daytrading so I wasn't very concerned about overnight requirements. I vaguely remember reading something different way back when: in a margin account overnight stock positions are always margined. For example, if you simply buy 100 shares @ 50 you will be required to borrow $2500 (50%) from your broker and pay interest on it. This seemed a little severe to me because the amount of interest paid would erode gains in share price and dividends received.


    You may be confusing "margin requirement" with margin borrowing. Your example does not say how much money you borrowed. If you did not borrow any money you will pay no interest.

    Yes I want to understand margin borrowing for overnight positions. I understand clearly what my margin requirements are. I can look at the account screen and see those values. I've been trying to accurately determine what value I pay interest on when I combine stock with options -- margin borrowing. According to everyone's responses here I pay nothing unless there's a debit balance.

    I should have called this thread Margin Borrowing.

    Thanks everyone for your responses.

    - d