Not looking for something complicated, just something simple in order to not lose too much against inflation and Euro blowup.
Can you just walk me through the logistics. Say for this illustration, I wanted to simultaneously long the underlying stock while selling the equivalent SSF. ONXX1D 2012-08 OCX. BID = 0.0700 ASK = 0.0860 I would then take out the above bid price @ .07 by selling or shorting the above EFP to achieve said above strategy? And then as the decay effect kicks in, I end up pocketing this premium?? Thanks in advance. __________________________________________________ That is it. You are , in effect, participating in a lending transaction that is economically similar to a repo trade. The "price" of the EFP is an interest rate that you require to participate in the loan. The combination of the LongStock/ShortSSF means you have zero delta exposure to the movements of the underlying and as the two legs will be exactly equal to each other at expiration, the premium in the SSF decays as yield into the customer's account. It can all be done as a single transaction and executed in a single account.....at the right brokerage. It is not complicated in any way. Best.
OK. Appreciate your time. In terms of the actual number of EFP's I can sell is that based on the actual underlying value of say the stock price? In other words if you have $100K of cash and the stock price is $10, that would mean 10,000 shares. Would it be prudent to use leverage in the case of selling an EFP @ the bid, since you would be taking in a credit and not adding any debit balance to margin? If so what kind of leverage will a typical broker do on an EFP? Thanks again.
There are a number of EFPs that are constantly being quoted with associated sizes displayed. I attached the link in a prior post but will append again: http://www.onechicago.com/?page_id=4289 The above displays only our NoDivRisk contracts as the EFP executed with these are purely interest rate plays as the PV of Expected Dividend is not priced into the contract but rather the settlement price of the SSF is adjusted by the value of the distribution on the morning of ex_date. It is also the case that every desk may have varying inventories and therefore the interest rate they will pay will be underlying specific in most cases. You can scroll down the above page and see that while similar , they are not all the same. You can also sort the page by "Lowest Ask" and you will see negative interest rates. These are Hard To Borrow names that the negative rates reflect the negative rebates charged in the Stock Borrow and Loan worlds. When you see a negative interest that you can buy think of it as you are getting paid the interest to carry the position. In affect you are loaning your stock out and capturing the rebate yourself. BE VERY CAREFUL with this particular trade as the sale of the Stock leg may trigger a tax event for those that do not claim Mark-to-Market status. Please talk with your tax advisor. Your math is correct for the number of shares. Since each SSF represents 100 shares you would want to sell 100 EFPs which represent 100 SSF against 10,000 shares of stock. You should not use leverage for selling the EFP as the cost of funds from your brokerage will most certainly exceed the potential interest rate you will be looking to capture even prior to paying transaction cost friction. In general if there is an interest rate that can be arbitraged rest assured that the Delta desks will clean it up first. Best.
So basically you are saying you can sell the EFP at bid and wait for expiration at which point you collect the premium. But what is the premium in general? It would make sense that the "ask" would be at 0 after expiration, so to speak, so is it too simplistic to assume that and just say you would net the entire credit of the sale when selling the EFP (after the future expires) ? If not, is there any historical data on EFPs to approximate the actual intrest earned by selling EFPs (SSFs) based on current data ? I can imagine it has a very big positive skew, similar to options selling, but the little bit of negativity comes from very rare events. To me it sounds like trading EFPs is actually trading the "difficulty to borrow" property of the underlying stock, especially if going long EFP.
Pardon my flip and somewhat irrelevant (but serious) answer: Outside of IB and in an FDIC insured account.
A simple formula for a NoDivRisk contract is: SSF= Stock + Interest A simple formula for a NoDiv Risk EFP is: EFP= SSF - Stock Which can also be expressed as: EFP=Stock + Interest - Stock The stock cancels out leaving: EFP=Interest Accordingly, as long as the stock is GC name and interest rates are positive and time is positive then the SSF will trade at a premium (contango) to the spot. Buying spot and selling the SSF will allow you to capture the interest component as yield. Transactions costs need to be kept low. In addition there are certain brokers who are long inventory and would like to free up the cash. They can do this via repo transactions or they can be buyers of EFPs (Sell Stock/ Buy SSF ) and are willing to pay a higher interest rate to entice EFP sellers. Yield seekers can take advantage of this. Best.
Most currencies are generally grouped into risk currencies or non risk. Aussie dollar with exposure to China is a risk currency, US dollar is a non risk defensive currency. If you own a basket of risk and non-risk currencies you will remain neutral. Risk currencies worth holding Swiss franc, Canadian Dollar, Aussie dollar. Non risk - USD, Euro etc. If one gains the others lose. It's a zero sum game.
The EFPs thing will earn a rate similar to libor with the credit risk of the clearinghouse(minus commissions and spread)