So if I get paid for shorts and I am dollar neutral wouldn't that net out the fees for the longs, resulting in no overnight lending cost. By the way one of the firms I am talking to will not pay me for the shorts, I gather this can add up to quite a bit.
There is a lot of misinformation on this thread. It seems as though a lot of people here are confusing capital charges with debit/credit rates. Don and I might need to do a prop shop bootcamp for ETers. What do you say Donnie boy? Free pizza?
SHorts will reduce your overnight costs, however, the short rate is less then the long rate. So you end up paying. On top of that you are going to pay another fee for use of firm capital, risk, etc. It will end up costing you 10% or more for that capital, depending on the amount of leverage you are using. If you stay less then 6 times at Bright, there is no capital charge, but you still have the intersted charges which won't be much. Hope this clarifies. And for DOn and Mav...at least treat us to a good dinner....you guys are making the big bucks....
OK, let me try to explain. There is no charge for up to one to one haircut on capital. Say you have 25k. That 25k could be leveraged to let's say 300k. You are not paying a penny on that 300k because that is REG T equivalent margin. You would only be paying a capital charge if you exceeded one to one haircut. Typical capital charges are around 9% annually for that amount. The debit and credit rates are something entirely different. Any cash or credit balance in your account is going to earn you the current credit rate (usually 50 bp under broker call rate). And debit balances and you will be paying the debit rate (50 bp over broker call rate). And if you are short stock, you will earn the short stock rate. Current broker call rate is 5.75%. So your debit rate would be around 6.25% and your credit rate would be around 5.25%. The short stock rate is around 4.85%. So if you are long stock in your account. You will pay the debit rate to hold that stock. If you are short stock, you will earn the short stock rate. If you are short options, you will earn the credit rate. And if you are long options, you will pay the debit rate. Does everyone understand now?
I always thought haircut was about 15%, and anything over that would be subject to charges. So you get 12X with no hair cut. Am I understanding this correctly? Wow....and Bright only offers 6X. BTW, I still havn't rec'd my pizza yet!
No, you are only charged for what you go over. You are not really getting 12x. The exchange is just minimizing what you need to put up, they are providing the relief, hence you don't pay interest on that money. Well, you misunderstood Don. Don is actually doing the same thing. For straight stock, equity haircut is 15%, roughly 6 to 1. Since most of Don's traders are pure stock traders, he uses the 6 to 1 ratio. With options you can theoretically get up to 30 or 50 to 1. For example, long straddles on index options have enormous leverage. Do you follow?
Sure, if you can get 50 ET'ers in a room, without needing armed guards, I'll buy the pizza. Actually, not a bad idea....I came to Chicago in August, your turn to come to Vegas...bring all the ET types. In all seriousness, check with Baron, perhaps you and I could host a call in (keyboard in) chat regarding the subject. Don
Always happy to buy Dinner Mike...but, just to clarify, our mazimum haircut charge for hedged positions is 6% per year, not 10%. But, yes, if you're "naked" long or short (over 2 times your equity), then it could cost 12%, but very few (very, very few) do that. Don