Interactive Brokers (Best Kept Secret)

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Oregano
Posts: 207
Joined: Fri Nov 22, 2019 9:30 pm

Re: Interactive Brokers (Best Kept Secret)

Post by Oregano »

saver007 wrote: Sat Apr 11, 2020 2:31 pm Somewhere in IB systems, one can specify priority order for liquidating security.. I never use it but I know the functionality exist. Also if you have portfolio margin account, you have the option of buying hedging Option position to temporarily decrease/eliminate margin reqirement although that has some cost to it.
Good to know, but not something can set and forget. The price of each security at any moment in time determines what the investor would want to sell and that's not easy to predict in advance.
occambogle
Posts: 693
Joined: Thu Dec 12, 2019 4:58 am

Re: Interactive Brokers (Best Kept Secret)

Post by occambogle »

Just in case some people didn't notice.... interest on cash balances has been zero since March :-(
I had been wondering why they'd missed my April payment.
I guess to be expected given current rates...
MrJedi
Posts: 432
Joined: Wed May 06, 2020 11:42 am

Re: Interactive Brokers (Best Kept Secret)

Post by MrJedi »

Is IBKR margin a viable option for a bridge loan between homes?

I have enough cash for a down payment but that would leave me with no cash leftover. My plan is to move into the new house and take 2-3 months to prepare, stage and sell the old house. Equity in the old house more than covers new down payment and the amount of liquidity I might need in the 1-3 months that I would be floating 2 mortgages. So the sale proceeds would be used to replenish my desired cash position and repay the margin loan immediately.

Am I missing anything? Any other brokers to consider for something like this? The rates and simplicity of applying for margin seem much more favorable than something like a HELOC. I'm aware of margin calls... I'd only borrow like 20-30% against the taxable equities.
glennherwig
Posts: 23
Joined: Wed Oct 24, 2018 7:52 pm

Re: Interactive Brokers (Best Kept Secret)

Post by glennherwig »

MrJedi wrote: Fri Jun 26, 2020 12:13 pm Is IBKR margin a viable option for a bridge loan between homes?

I have enough cash for a down payment but that would leave me with no cash leftover. My plan is to move into the new house and take 2-3 months to prepare, stage and sell the old house. Equity in the old house more than covers new down payment and the amount of liquidity I might need in the 1-3 months that I would be floating 2 mortgages. So the sale proceeds would be used to replenish my desired cash position and repay the margin loan immediately.

Am I missing anything? Any other brokers to consider for something like this? The rates and simplicity of applying for margin seem much more favorable than something like a HELOC. I'm aware of margin calls... I'd only borrow like 20-30% against the taxable equities.
Schwab Pledged Asset Line comes to mind. Interest rate is smidge higher but they give you more time to post collateral in event of margin call. You can also borrow up to 70% of account value versus margin loan 50%. Obviously the more you borrow the more risk of margin call. Interactive brokers also has auto liquidation if margin call occurs.

Margin is risky, but as long as you don’t over extend your account it can make life much simpler.
User avatar
NewMoneyMustBeSmart
Posts: 488
Joined: Sat Jun 01, 2019 10:28 pm
Location: Midwest

Re: Interactive Brokers (Best Kept Secret)

Post by NewMoneyMustBeSmart »

AndroAsc wrote: Sat Sep 28, 2019 10:29 pm I'm trying to understand this margin loan thing from a few posts back. Is it possible to use it as an emergency fund? Is the loan callable?
Yes, the broker can generally change the terms at any time including calling the loan.
-- | Few are those who see with their own eyes and feel with their own hearts - Einstein
IndexCore
Posts: 159
Joined: Wed Mar 25, 2020 1:44 am

Re: Interactive Brokers (Best Kept Secret)

Post by IndexCore »

Investing with a margin loan means the losses are leveraged, and could wipe out your account. If you go 3X on leverage, and what you buy loses 1/3rd, you have wiped out your equity. The brokerage will spot the problem and liquidate the account to pay off the margin loan...leaving the account with a $0 balance.

Even without a wipe out, margin calls lock in leveraged losses. Imagine two days of -7% (circuit breaker losses) inflicting a -14% loss. But with 3X leverage, it becomes a -42% loss. That's also the time when margin calls are likely: after losing -42%, you're likely to have your equities sold (without your consent - they are collateral for the margin loan)... and then the cash used to pay down the margin loan. You could take a leveraged loss, and then lose the leverage needed to make your gains back.
afan
Posts: 5550
Joined: Sun Jul 25, 2010 4:01 pm

Re: Interactive Brokers (Best Kept Secret)

Post by afan »

MrJedi wrote: Fri Jun 26, 2020 12:13 pm Is IBKR margin a viable option for a bridge loan between homes?

I have enough cash for a down payment but that would leave me with no cash leftover. My plan is to move into the new house and take 2-3 months to prepare, stage and sell the old house. Equity in the old house more than covers new down payment and the amount of liquidity I might need in the 1-3 months that I would be floating 2 mortgages. So the sale proceeds would be used to replenish my desired cash position and repay the margin loan immediately.

Am I missing anything? Any other brokers to consider for something like this? The rates and simplicity of applying for margin seem much more favorable than something like a HELOC. I'm aware of margin calls... I'd only borrow like 20-30% against the taxable equities.
I would be cautious in assuming the house will sell that quickly. Even once you put it in the market, it could take much longer that 1-2 months to find a buyer. Once you have a "sale" the buyer has to get financing and go to closing. That alone can take a couple of months. You don't get the money until closing.
From the time you start preparing to the time you get the money could easily be 6 months. Longer if you push harder on price, something happens in the housing market, you need bigger repairs...

As other have noted, there is a risk if you borrow close to your limit. If you keep a wide margin on your margin then it could be safe. Perhaps model a 40% drop in the value of your holdings then borrow no more than that would support. A 50% drop would be even safer.

Otherwise, this might be cheaper than a conventional bridge loan. But shop for those as well.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama
JackoC
Posts: 2060
Joined: Sun Aug 12, 2018 11:14 am

Re: Interactive Brokers (Best Kept Secret)

Post by JackoC »

MrJedi wrote: Fri Jun 26, 2020 12:13 pm Is IBKR margin a viable option for a bridge loan between homes?

I have enough cash for a down payment but that would leave me with no cash leftover. My plan is to move into the new house and take 2-3 months to prepare, stage and sell the old house. Equity in the old house more than covers new down payment and the amount of liquidity I might need in the 1-3 months that I would be floating 2 mortgages. So the sale proceeds would be used to replenish my desired cash position and repay the margin loan immediately.

Am I missing anything? Any other brokers to consider for something like this? The rates and simplicity of applying for margin seem much more favorable than something like a HELOC. I'm aware of margin calls... I'd only borrow like 20-30% against the taxable equities.
As typically some responses ignore the last sentence and assume 'margin' means 'high leverage'. At 20-30% borrowing the market has to drop a lot and/or IBKR change their terms a lot for there to be a margin call, considering the current maximum borrowing under 'portfolio margin' would be in the range of 75% depending what particular assets in the account.

A $500k loan from IBKR at 25% of $2mil (I didn't see numbers specified so just hypothetically) equity value costs around 1.18% interest (see their calculator by amount). No other direct* borrowing rate will be within miles of that. So what's a plausible probability (you might use options prices as a proxy) that the market drops say 60%, the initial $2mil becomes $800k, the $500k loan becomes 62.5% of equity and IBKR then effectively lowers the max borrowing from 75% to less than 62%? It's non zero, but a matter of risk preference whether it's worth paying probably several % points more on any other borrowing option. And one might try for some consistency v their equity position. If somebody is 70-100% equity and afraid of a 25% temporary margin loan because stocks can crash...why are they so heavily allocated to stocks? (because stocks will always bounce back...says who?). I agree that you'd want to assume a time horizon greater than what you expect if all goes well.

*if various tax aspects allow, one might instead sell $500k of US index funds to buy the house in cash, and replace that position temporarily with long in S&P index futures where the implicit borrowing rate now is ~0.35-0.40%.
saver007
Posts: 182
Joined: Fri Nov 07, 2014 9:18 pm

Re: Interactive Brokers (Best Kept Secret)

Post by saver007 »

I don't think its needed if you are borrowing only 20% of your portfolio but for additional saftey you can buy put options to hedge your portfolio. IB' portfolio margin requirement will drastically come down if your portfolio (collateral) is hedged.
Dottie57
Posts: 9701
Joined: Thu May 19, 2016 5:43 pm
Location: Earth Northern Hemisphere

Re: Interactive Brokers (Best Kept Secret)

Post by Dottie57 »

CABob wrote: Mon May 11, 2015 9:59 pm
Andymoler58 wrote: Interactive Brokers offers all the Vanguard mutual funds and etf's you need too.
What is the transaction fee for buying Vanguard funds?
I don't suspect a conspiracy or anything of that nature. It is not mentioned here often probably because those that post here are not interested in this type of broker.
+1
international001
Posts: 1822
Joined: Thu Feb 15, 2018 7:31 pm

Re: Interactive Brokers (Best Kept Secret)

Post by international001 »

Stupid question.

Why not use a margin loan to buy your house?
Tanelorn
Posts: 1824
Joined: Thu May 01, 2014 9:35 pm

Re: Interactive Brokers (Best Kept Secret)

Post by Tanelorn »

international001 wrote: Tue Jul 14, 2020 5:26 pm Stupid question. Why not use a margin loan to buy your house?
Not stupid. It’s a floating rate, similar to an ARM rather than a long term fixed rate. Also, the amount you borrow depends on your portfolios value, but if you don’t borrow that much vs the size, you shouldn’t have issues with margin calls and such. In short, it’s a much better rate (1%) but with some caveats.

https://www.interactivebrokers.com/en/index.php?f=44427
international001
Posts: 1822
Joined: Thu Feb 15, 2018 7:31 pm

Re: Interactive Brokers (Best Kept Secret)

Post by international001 »

I'm new to this.

So let's say I want to borrow 1.5M at 0.98% interest, as per the link

Do I need any amount of assets on my IB account? Is it ok if they are in another account?
I just need to pay 0.98% over the 1.5M (let's say every year 1.5M*0.98%) plus any principal I want
User avatar
Steve Reading
Posts: 2815
Joined: Fri Nov 16, 2018 10:20 pm

Re: Interactive Brokers (Best Kept Secret)

Post by Steve Reading »

international001 wrote: Tue Jul 14, 2020 7:31 pm I'm new to this.

So let's say I want to borrow 1.5M at 0.98% interest, as per the link

Do I need any amount of assets on my IB account? Is it ok if they are in another account?
I just need to pay 0.98% over the 1.5M (let's say every year 1.5M*0.98%) plus any principal I want
Yes, you need assets in the account that will serve as the collateral to secure the loan. IB is not offering 0.98% personal loans.

To borrow 1.5M, you'd need to bring and keep at IB something more, say about 2M and keep it there as collateral. Obviously you wouldn't keep it in cash (otherwise, you'd use that cash to pay for whatever you're paying with the 1.5M margin loan). But you could invest that collateral in, say, stocks.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
AlohaJoe
Posts: 5757
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Interactive Brokers (Best Kept Secret)

Post by AlohaJoe »

international001 wrote: Tue Jul 14, 2020 7:31 pm I'm new to this.

So let's say I want to borrow 1.5M at 0.98% interest, as per the link

Do I need any amount of assets on my IB account? Is it ok if they are in another account?
They have to be the IBKR account, not another account.
I just need to pay 0.98% over the 1.5M (let's say every year 1.5M*0.98%) plus any principal I want
You don't have to pay anything at all if you don't want to. If you don't pay, the interest just gets added to the amount you owe.

The interest rate changes every day, so you're not going to pay "every year 1.5M*0.98%".
international001
Posts: 1822
Joined: Thu Feb 15, 2018 7:31 pm

Re: Interactive Brokers (Best Kept Secret)

Post by international001 »

Ok.. every day the amount you own 1.5M*0.98%/365

Does it work with an IRA?
I see so many folks arguing how good is to get a loan because stocks beats the interest on the long term. BUt here the interest it seems so much better

So you bring 2M on investments to your IB account, you ask for a loan of 1.5M, you get cash and you use that cash to pay your home
You may pay the 1.5M loan little by little with the dividends of the 2M or selling part of the 2M investments, for instance

You never have to sell 1.5 M of investments to pay for the house, and pay taxes for it. You just have to pay taxes on the dividends (that you have to pay regardless) or by selling small parts of the investments (usually better since you get to spread the sells over the years)

So where is the catch?
Tanelorn
Posts: 1824
Joined: Thu May 01, 2014 9:35 pm

Re: Interactive Brokers (Best Kept Secret)

Post by Tanelorn »

international001 wrote: Wed Jul 15, 2020 4:52 am Does it work with an IRA?
No, you can’t borrow from your IRA. That’s part of the IRS rules (well you can, but the penalties are terrible so you should never do it).
So you bring 2M on investments to your IB account, you ask for a loan of 1.5M, you get cash and you use that cash to pay your home
You may pay the 1.5M loan little by little with the dividends of the 2M or selling part of the 2M investments, for instance

You never have to sell 1.5 M of investments to pay for the house, and pay taxes for it. You just have to pay taxes on the dividends (that you have to pay regardless) or by selling small parts of the investments (usually better since you get to spread the sells over the years)

So where is the catch?
That’s right. You can also pay down the loan by contributing additional savings to your investment account from your paycheck or the like. This will reduce the margin balance and your interest charges going forward.

As for a catch, borrowing 75% of the value of your portfolio is a lot. You can do it, but it only leaves the equity of your account at $0.5M. Suppose you did this in January and then the market falls 25% like it did in March. At some point on the way down, your account won’t be worth enough vs the loan and IB will automatically sell everything you own, leaving you with large losses. Then when the market recovers, as it has since March, your portfolio won’t becuase it was wiped out during the downturn.

If you want to be pretty safe, I wouldn’t borrow more than half. If you want to be really safe, don’t borrow more than 1/3. Of course it depends on what you own. Bonds or ETFs are much safer than indivisible stocks, diversification helps, etc.
AlohaJoe
Posts: 5757
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Interactive Brokers (Best Kept Secret)

Post by AlohaJoe »

international001 wrote: Wed Jul 15, 2020 4:52 am Does it work with an IRA?
No, it is illegal to use margin in an IRA.
So you bring 2M on investments to your IB account, you ask for a loan of 1.5M

So where is the catch?
If the stock market goes down, like it just did a few weeks ago, then you lose your entire life savings and end up with $0. Or, even worse, you lose your entire life savings and end up owning Interactive Brokers $100,000 and they sue you to collect it.
vsquid
Posts: 114
Joined: Sat May 18, 2019 2:24 pm

Re: Interactive Brokers (Best Kept Secret)

Post by vsquid »

Tanelorn wrote: Wed Jul 15, 2020 5:20 am As for a catch, borrowing 75% of the value of your portfolio is a lot. You can do it, but it only leaves the equity of your account at $0.5M. Suppose you did this in January and then the market falls 25% like it did in March. At some point on the way down, your account won’t be worth enough vs the loan and IB will automatically sell everything you own, leaving you with large losses. Then when the market recovers, as it has since March, your portfolio won’t becuase it was wiped out during the downturn.
This is it. You need to have enough equity to cover your margin requirements even when a bear market hits. If your investments tank enough to trigger a margin call, IB will sell your assets to cover your loan. This would pretty much liquidate your savings. To avoid this, you should loan more like 20-30% of your investments, not 75%.
Tanelorn
Posts: 1824
Joined: Thu May 01, 2014 9:35 pm

Re: Interactive Brokers (Best Kept Secret)

Post by Tanelorn »

AlohaJoe wrote: Wed Jul 15, 2020 5:25 am it is illegal to use margin in an IRA.
Off topic a bit, but that’s not true. You can borrow to make IRA investments, such as brokerage margin or get a mortgage for real estate investing. There can be tax consequences to this, so the IRA may well owe taxes, but it’s possible with the right custodian and not forbidden under the IRA rules. What’s not allowed, or rather counts as a “prohibited transaction” with very severe penalties, is borrowing from your IRA for yourself individually.
AlohaJoe
Posts: 5757
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Interactive Brokers (Best Kept Secret)

Post by AlohaJoe »

Tanelorn wrote: Wed Jul 15, 2020 6:03 am
AlohaJoe wrote: Wed Jul 15, 2020 5:25 am it is illegal to use margin in an IRA.
Off topic a bit, but that’s not true.
Thanks for the correction. I must have misremebered (or mislearned in the first place) and relied on my increasingly faulty memory :sharebeer
snailderby
Posts: 1353
Joined: Thu Jul 26, 2018 11:30 am

Re: Interactive Brokers (Best Kept Secret)

Post by snailderby »

It looks like much of the discussion in this thread has revolved around IBKR's margin rates. Are there any significant benefits that IBKR offers over other low cost brokerages, other than their cheaper margin rates?
Tanelorn
Posts: 1824
Joined: Thu May 01, 2014 9:35 pm

Re: Interactive Brokers (Best Kept Secret)

Post by Tanelorn »

snailderby wrote: Wed Jul 15, 2020 7:23 am It looks like much of the discussion in this thread has revolved around IBKR's margin rates. Are there any significant benefits that IBKR offers over other low cost brokerages, other than their cheaper margin rates?
Lots more trading tools especially for better execution
access to lots of foreign markets (Oslo and Poland stock exchanges anyone?)
ability to trade lots of products easily and cheaply (futures, options, options on futures, FX, corporate and muni bonds with no phone calls)
very cheap currency exchange rates
excellent performance tracking statistics not just for your overall portfolio but how each trade did vs making the same trade a few seconds / minutes / hours later, etc.
Portfolio margin for options and other high leverage strategies

And don’t forget...

Automatic liquidation of your portfolio if you get a margin call in just a few minutes without you having to do anything ;)
Last edited by Tanelorn on Thu Jul 16, 2020 5:37 am, edited 1 time in total.
international001
Posts: 1822
Joined: Thu Feb 15, 2018 7:31 pm

Re: Interactive Brokers (Best Kept Secret)

Post by international001 »

vsquid wrote: Wed Jul 15, 2020 5:47 am
Tanelorn wrote: Wed Jul 15, 2020 5:20 am As for a catch, borrowing 75% of the value of your portfolio is a lot. You can do it, but it only leaves the equity of your account at $0.5M. Suppose you did this in January and then the market falls 25% like it did in March. At some point on the way down, your account won’t be worth enough vs the loan and IB will automatically sell everything you own, leaving you with large losses. Then when the market recovers, as it has since March, your portfolio won’t becuase it was wiped out during the downturn.
This is it. You need to have enough equity to cover your margin requirements even when a bear market hits. If your investments tank enough to trigger a margin call, IB will sell your assets to cover your loan. This would pretty much liquidate your savings. To avoid this, you should loan more like 20-30% of your investments, not 75%.
Or have a less risky portfolio.
I guess with a normal house loan you have the option of sending them the check every month if your total assets (including house) go under the value of the loan. But lender can still loose, so this should reflect on higher rates

So a good option is to get a margin loan for a small amount, like 25%. How are the rates calculated? Can you ask for a 30 year fixed?
vsquid
Posts: 114
Joined: Sat May 18, 2019 2:24 pm

Re: Interactive Brokers (Best Kept Secret)

Post by vsquid »

international001 wrote: Thu Jul 16, 2020 2:55 am So a good option is to get a margin loan for a small amount, like 25%. How are the rates calculated? Can you ask for a 30 year fixed?
The interest rate is tied to a benchmark rate (depends on currency), accrued daily, and posted monthly. I assume that the interest rate adjusts daily based on the benchmark. You can see what IB adds on top of the benchmark rate here https://www.interactivebrokers.com/en/i ... 46376&p=mv

As for "30 year" there really is no such thing as payback time. Margin loan is just negative cash balance on your account and interest gets added on top of it. You don't need to ever pay it back if you have enough equity to avoid margin calls.
snailderby
Posts: 1353
Joined: Thu Jul 26, 2018 11:30 am

Re: Interactive Brokers (Best Kept Secret)

Post by snailderby »

Tanelorn wrote: Wed Jul 15, 2020 1:58 pm
snailderby wrote: Wed Jul 15, 2020 7:23 am It looks like much of the discussion in this thread has revolved around IBKR's margin rates. Are there any significant benefits that IBKR offers over other low cost brokerages, other than their cheaper margin rates?
Lots more trading tools especially for better execution
access to lots of foreign markets (Oslo and Poland stock exchanges anyone?)
ability to trade lots of products easily and cheaply (futures, options, options on futures, FX, corporate and muni bonds with no phone calls)
very cheap currency exchange rates
excellent performance tracking statistics not just for your overall portfolio but how each trade did vs making the same trade a few seconds / minutes / hours later, etc.
Portfolio margin for options and other high leverage strategies

And don’t forget...

Automatic liquidation of your portfolio if you get a margin call in just a few minutes without you having to do anything ;)
Haha. That last feature sounds like the best of them all! ;) Thanks for your response. :)
deltaneutral83
Posts: 1809
Joined: Tue Mar 07, 2017 4:25 pm

Re: Interactive Brokers (Best Kept Secret)

Post by deltaneutral83 »

international001 wrote: Wed Jul 15, 2020 4:52 am Ok.. every day the amount you own 1.5M*0.98%/365

Does it work with an IRA?
I see so many folks arguing how good is to get a loan because stocks beats the interest on the long term. BUt here the interest it seems so much better

So you bring 2M on investments to your IB account, you ask for a loan of 1.5M, you get cash and you use that cash to pay your home
You may pay the 1.5M loan little by little with the dividends of the 2M or selling part of the 2M investments, for instance

You never have to sell 1.5 M of investments to pay for the house, and pay taxes for it. You just have to pay taxes on the dividends (that you have to pay regardless) or by selling small parts of the investments (usually better since you get to spread the sells over the years)

So where is the catch?
The catch, how about Feb 20-March 23????

I wouldn't go more than 25% LTV on a margin loan. If you have a million with Interactive brokers, and it's all in equities for example,then $250k in a margin loan would be my max. If the market tanks 50% you're still at 50% or better LTV. They can pretty much call when they want, at least that's how I'd view it in general terms, and they will likely get conservative when the market tanks 34%. If you take 75% of your account in a margin loan on Feb 20, I would have to assume you'd see a margin call by March 23.

Still though, it seems like a great way to minimize costs if you want a few weeks to move from house#1 to close on house#2 and then go back and sell #1 after some move out time and 25% of your taxable gives you this option or at least foot the down payment. All of that to say the usual caveats apply given that your home may take longer to sell than you anticipate in which case the 25% cap is a good way to mitigate.
international001
Posts: 1822
Joined: Thu Feb 15, 2018 7:31 pm

Re: Interactive Brokers (Best Kept Secret)

Post by international001 »

A guess a good strategy may be to transfer to IB the bond part of your portfolio. Then I would go even with 50%

I understand a call is whe IB tells you they want all their money back. Can you explain what are the rules for a call? When your assets go below the amount you owe? Anytime they want?
vsquid
Posts: 114
Joined: Sat May 18, 2019 2:24 pm

Re: Interactive Brokers (Best Kept Secret)

Post by vsquid »

international001 wrote: Fri Jul 17, 2020 4:49 am I understand a call is whe IB tells you they want all their money back. Can you explain what are the rules for a call? When your assets go below the amount you owe? Anytime they want?
Margin call happens when your portfolio’s net liquidation value falls below your maintenance margin requirement. Maintenance margin is the amount capital you need to have in the account to keep your current loan amount. It’s a bit complex and even I have only a cursory understanding how it works. I assume google and YouTube will find you a lot of material how a margin account works. In case of a margin call, IB will automatically liquidator your positions to cover the margin requirements. Some other brokers might give a few days to deposit more money in your account.
User avatar
Makaveli
Posts: 782
Joined: Mon May 19, 2014 11:18 pm

Re: Interactive Brokers (Best Kept Secret)

Post by Makaveli »

Continue to follow this thread since I fall in the camp where I am fully invested with limited liquidity. When the time comes for me to buy my first home I'll likely pledge my assets for the downpayment vs. sell securities that may or may not have capital gains.

https://www.investopedia.com/terms/p/pledgedasset.asp

A pledged asset mortgage is also another avenue I've been reading up on.
international001
Posts: 1822
Joined: Thu Feb 15, 2018 7:31 pm

Re: Interactive Brokers (Best Kept Secret)

Post by international001 »

Makaveli wrote: Fri Jul 17, 2020 7:31 am Continue to follow this thread since I fall in the camp where I am fully invested with limited liquidity. When the time comes for me to buy my first home I'll likely pledge my assets for the downpayment vs. sell securities that may or may not have capital gains.

https://www.investopedia.com/terms/p/pledgedasset.asp

A pledged asset mortgage is also another avenue I've been reading up on.
Something else to learn.
Do you know which kind of assets are allowed? A Vanguard MF? How much does a rate get reduced?
Tanelorn
Posts: 1824
Joined: Thu May 01, 2014 9:35 pm

Re: Interactive Brokers (Best Kept Secret)

Post by Tanelorn »

Makaveli wrote: Fri Jul 17, 2020 7:31 am Continue to follow this thread since I fall in the camp where I am fully invested with limited liquidity. When the time comes for me to buy my first home I'll likely pledge my assets for the downpayment vs. sell securities that may or may not have capital gains.

https://www.investopedia.com/terms/p/pledgedasset.asp

A pledged asset mortgage is also another avenue I've been reading up on.
In my experience these offer worse interest rates and much more limited eligible securties than a margin loan, while having basically the same risks (ie margin call essentially if your assets fall relative to your loan). If you’re interested in borrowing for a house, I’d either get a mortgage or use margin, not a pledged asset credit line.
User avatar
Makaveli
Posts: 782
Joined: Mon May 19, 2014 11:18 pm

Re: Interactive Brokers (Best Kept Secret)

Post by Makaveli »

Tanelorn wrote: Fri Jul 17, 2020 11:35 am
Makaveli wrote: Fri Jul 17, 2020 7:31 am Continue to follow this thread since I fall in the camp where I am fully invested with limited liquidity. When the time comes for me to buy my first home I'll likely pledge my assets for the downpayment vs. sell securities that may or may not have capital gains.

https://www.investopedia.com/terms/p/pledgedasset.asp

A pledged asset mortgage is also another avenue I've been reading up on.
In my experience these offer worse interest rates and much more limited eligible securties than a margin loan, while having basically the same risks (ie margin call essentially if your assets fall relative to your loan). If you’re interested in borrowing for a house, I’d either get a mortgage or use margin, not a pledged asset credit line.
Ten4, recently stumbled upon it so not committed one way or another.

If I pledge 500k to IB their blended rate is 1.2ish. How do they make money?
international001
Posts: 1822
Joined: Thu Feb 15, 2018 7:31 pm

Re: Interactive Brokers (Best Kept Secret)

Post by international001 »

Ally offers me less. I wish I was IB.
More yield almost 100% safe
vsquid
Posts: 114
Joined: Sat May 18, 2019 2:24 pm

Re: Interactive Brokers (Best Kept Secret)

Post by vsquid »

Makaveli wrote: Fri Jul 17, 2020 12:55 pm If I pledge 500k to IB their blended rate is 1.2ish. How do they make money?
Current risk-free overnight interest for USD (eg libor) is around 0.1% so IB makes plenty of money on that. You also need to remember that your rate is directly tied to market rates so if interest rates go up, you will pay more and IB will still be getting their profit.
AlohaJoe
Posts: 5757
Joined: Mon Nov 26, 2007 2:00 pm
Location: Saigon, Vietnam

Re: Interactive Brokers (Best Kept Secret)

Post by AlohaJoe »

Makaveli wrote: Fri Jul 17, 2020 12:55 pm If I pledge 500k to IB their blended rate is 1.2ish. How do they make money?
They borrow at less than 1.2ish? It should be pretty obvious since their rates are always quoted as "benchmark + profit'. Anyway, very few businesses try to make money on every single service they offer. Companies often offer loss-leaders or barely break even on some products and services just to attract/retain customers.

The real question is why other brokers change >5% above their borrow rate for a line of business they don't care about. Vanguard is the one I really don't get. Either don't offer margin at all or follow through on your "customers are our owners" shtick. Don't charge 8% in today's market.
Thereum
Posts: 64
Joined: Sun Jun 14, 2020 9:05 pm

Re: Interactive Brokers (Best Kept Secret)

Post by Thereum »

You can always borrow cash at close to the risk free rate by selling an SPX box spread. You never need to accept a broker's margin rates.

That is the real "best kept secret"
RocketShipTech
Posts: 679
Joined: Sat Jun 13, 2020 10:08 pm

Re: Interactive Brokers (Best Kept Secret)

Post by RocketShipTech »

Thereum wrote: Sat Jul 18, 2020 3:10 am You can always borrow cash at close to the risk free rate by selling an SPX box spread. You never need to accept a broker's margin rates.

That is the real "best kept secret"
Is the implied interest rate from a SPX box spread tax-deductible?
Tanelorn
Posts: 1824
Joined: Thu May 01, 2014 9:35 pm

Re: Interactive Brokers (Best Kept Secret)

Post by Tanelorn »

Thereum wrote: Sat Jul 18, 2020 3:10 am You can always borrow cash at close to the risk free rate by selling an SPX box spread. You never need to accept a broker's margin rates.
How does this allow you to take a more money out against your portfolio at the broker? Doesn’t the spread just increase your portfolio’s margin requirements, leaving less available to withdraw? You can buy lots of things on margin at a broker, but being able to remove excess equity to borrow for a house is a separate issue.
Thereum wrote: Sat Jul 18, 2020 3:10 am Is the implied interest rate from a SPX box spread tax-deductible?
Basically yes. For futures and similar options bets, the implied financing comes out of your profit (or increases your loss), so it ends up being reducing your capital gains. If you have too many capital losses, it might be delayed before you can deduct down the road against future profits.
Last edited by Tanelorn on Sat Jul 18, 2020 2:01 pm, edited 1 time in total.
Thereum
Posts: 64
Joined: Sun Jun 14, 2020 9:05 pm

Re: Interactive Brokers (Best Kept Secret)

Post by Thereum »

Tanelorn wrote: Sat Jul 18, 2020 8:50 am
Thereum wrote: Sat Jul 18, 2020 3:10 am You can always borrow cash at close to the risk free rate by selling an SPX box spread. You never need to accept a broker's margin rates.
How does this allow you to take a more money out against your portfolio at the broker? Doesn’t the spread just increase your portfolio’s margin requirements, leaving less available to withdraw? You can buy lots of things on margin at a broker, but being able to remove excess equity to borrow for a house is a separate issue.
The margin requirement for the box spread is zero. It works exactly the same as a margin loan would work.

Let's say you have 200,000 in stocks. If you withdraw 50,000 you will have a margin debit of 50,000. The broker would charge their interest rate on this debit. However, if you use a box spread to correct the debit, you will only have to pay the risk free rate. This would save you about 1% a year at Interactive Brokers and 5% or more at other brokers like Fidelity.
tryingmybest
Posts: 45
Joined: Tue Nov 04, 2008 12:23 pm

Re: Interactive Brokers (Best Kept Secret)

Post by tryingmybest »

Is there a downside to a SPX box spread (mentioned above)? For instance:
  • Is it subject to anything like margin calls?
  • Is the loan restricted? Or can it be withdrawn and used for anything you like?
  • Can the interest rate or other conditions change?
  • Are there high fees to enter a box spread?
  • Is it available at other institutions (not just IB)?
  • Is it complicated maintain (paperwork, tax reporting, etc).
Is there a reason for an SPX box spread not being widely known?
Thereum
Posts: 64
Joined: Sun Jun 14, 2020 9:05 pm

Re: Interactive Brokers (Best Kept Secret)

Post by Thereum »

No real downsides. I suppose one drawback is that there is some slippage due to poor liquidity in the long term SPX options. However, the cost of this is negligible compared to the savings over a margin loan from a broker.

I am using a box spread as a loan right now, so this isn't just theory for me.
RocketShipTech
Posts: 679
Joined: Sat Jun 13, 2020 10:08 pm

Re: Interactive Brokers (Best Kept Secret)

Post by RocketShipTech »

Thereum wrote: Sat Jul 18, 2020 2:45 pm No real downsides. I suppose one drawback is that there is some slippage due to poor liquidity in the long term SPX options. However, the cost of this is negligible compared to the savings over a margin loan from a broker.

I am using a box spread as a loan right now, so this isn't just theory for me.
How do you pick the strike price and expiration?
Thereum
Posts: 64
Joined: Sun Jun 14, 2020 9:05 pm

Re: Interactive Brokers (Best Kept Secret)

Post by Thereum »

RocketShipTech wrote: Sat Jul 18, 2020 2:54 pm
Thereum wrote: Sat Jul 18, 2020 2:45 pm No real downsides. I suppose one drawback is that there is some slippage due to poor liquidity in the long term SPX options. However, the cost of this is negligible compared to the savings over a margin loan from a broker.

I am using a box spread as a loan right now, so this isn't just theory for me.
How do you pick the strike price and expiration?
I used the furthest expiration possible, which as of now is Dec 2022. As for strikes, you would figure out how much you need and then choose your strikes based on your requirements. It's probably better to sell one large box than many small ones.
xerxes101
Posts: 444
Joined: Sat Oct 14, 2017 11:25 am

Re: Interactive Brokers (Best Kept Secret)

Post by xerxes101 »

Thereum wrote: Sat Jul 18, 2020 3:14 pm
RocketShipTech wrote: Sat Jul 18, 2020 2:54 pm
Thereum wrote: Sat Jul 18, 2020 2:45 pm No real downsides. I suppose one drawback is that there is some slippage due to poor liquidity in the long term SPX options. However, the cost of this is negligible compared to the savings over a margin loan from a broker.

I am using a box spread as a loan right now, so this isn't just theory for me.
How do you pick the strike price and expiration?
I used the furthest expiration possible, which as of now is Dec 2022. As for strikes, you would figure out how much you need and then choose your strikes based on your requirements. It's probably better to sell one large box than many small ones.
Where can I learn more about this approach? Could you recommend a book or a source that explains it further? thx
RayKeynes
Posts: 259
Joined: Mon Nov 11, 2019 2:14 am

Re: Interactive Brokers (Best Kept Secret)

Post by RayKeynes »

I am currently using the following in my IB account:

Asset Leverage (USD): 139.8% (defined maximum: 150%)
Asset Leverage (Swiss Francs - home currency): 130% (defined maximum: 130% - I plean decreasing it to 125%)
Return Leverage: 155% (planned between 140% - 300%, as I will not rebalance the leveraged position in 3X ETFs)

I do that by taking on more margin loan but leaving Swiss Francs in the account. This way - I can hedge, at least partly, against the downfall of the US Dollar relatively to the Swiss Franc by around 28%.

Further, I do take on Return Leverage of 155% by investing 20% of my assets into 2X ETFs and another 20% in 3X ETFs. That part of the portfolio will be sold once the GSPC hits the SMA-230.

To give you an idea how I am managing Leverage in my excel dashboard:
Image
User avatar
Steve Reading
Posts: 2815
Joined: Fri Nov 16, 2018 10:20 pm

Re: Interactive Brokers (Best Kept Secret)

Post by Steve Reading »

xerxes101 wrote: Sun Aug 23, 2020 10:33 pm
Thereum wrote: Sat Jul 18, 2020 3:14 pm
RocketShipTech wrote: Sat Jul 18, 2020 2:54 pm
Thereum wrote: Sat Jul 18, 2020 2:45 pm No real downsides. I suppose one drawback is that there is some slippage due to poor liquidity in the long term SPX options. However, the cost of this is negligible compared to the savings over a margin loan from a broker.

I am using a box spread as a loan right now, so this isn't just theory for me.
How do you pick the strike price and expiration?
I used the furthest expiration possible, which as of now is Dec 2022. As for strikes, you would figure out how much you need and then choose your strikes based on your requirements. It's probably better to sell one large box than many small ones.
Where can I learn more about this approach? Could you recommend a book or a source that explains it further? thx
Aside from a few threads on reddit and elitetrader, Natenberg's Option Pricing and Volatility has a small section on it although it's not particularly enlightening either. Probably best is to play around with it on a paper trading account.

It does tend to produce better pricing that margin. It's not quite the risk-free rate, mostly due to the spreads. I got my boxes filled at a 0.5% implied rate, so not quite the 0.2-0.4% you see in repo and futures. But still a win over even IBKR's margin. And it's tax-deductible at 60/40 and fixed until expiration.

The disadvantage is that you can't really pay it off as you earn paychecks. With margin, you slowly pay back the negative cash position. The boxes, you close by paying the full amount. So you'll want to consider how much you want to borrow, the date of expiration and your cash flows. It depends on how much you're leveraging too.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
xerxes101
Posts: 444
Joined: Sat Oct 14, 2017 11:25 am

Re: Interactive Brokers (Best Kept Secret)

Post by xerxes101 »

Steve Reading wrote: Wed Aug 26, 2020 10:04 am
xerxes101 wrote: Sun Aug 23, 2020 10:33 pm
Thereum wrote: Sat Jul 18, 2020 3:14 pm
RocketShipTech wrote: Sat Jul 18, 2020 2:54 pm
Thereum wrote: Sat Jul 18, 2020 2:45 pm No real downsides. I suppose one drawback is that there is some slippage due to poor liquidity in the long term SPX options. However, the cost of this is negligible compared to the savings over a margin loan from a broker.

I am using a box spread as a loan right now, so this isn't just theory for me.
How do you pick the strike price and expiration?
I used the furthest expiration possible, which as of now is Dec 2022. As for strikes, you would figure out how much you need and then choose your strikes based on your requirements. It's probably better to sell one large box than many small ones.
Where can I learn more about this approach? Could you recommend a book or a source that explains it further? thx
Aside from a few threads on reddit and elitetrader, Natenberg's Option Pricing and Volatility has a small section on it although it's not particularly enlightening either. Probably best is to play around with it on a paper trading account.

It does tend to produce better pricing that margin. It's not quite the risk-free rate, mostly due to the spreads. I got my boxes filled at a 0.5% implied rate, so not quite the 0.2-0.4% you see in repo and futures. But still a win over even IBKR's margin. And it's tax-deductible at 60/40 and fixed until expiration.

The disadvantage is that you can't really pay it off as you earn paychecks. With margin, you slowly pay back the negative cash position. The boxes, you close by paying the full amount. So you'll want to consider how much you want to borrow, the date of expiration and your cash flows. It depends on how much you're leveraging too.
Thank you both for sharing info on this. I am even more interested and curious to learn about it now :)
petulant
Posts: 1901
Joined: Thu Sep 22, 2016 1:09 pm

Re: Interactive Brokers (Best Kept Secret)

Post by petulant »

Has anybody tried donating stocks held in a brokerage account at IBKR? I tried searching for donate and DAF, but I didn't see it come up in the thread.
ChrisBenn
Posts: 461
Joined: Mon Aug 05, 2019 7:56 pm

Re: Interactive Brokers (Best Kept Secret)

Post by ChrisBenn »

xerxes101 wrote: Sun Aug 23, 2020 10:33 pm
Thereum wrote: Sat Jul 18, 2020 3:14 pm
RocketShipTech wrote: Sat Jul 18, 2020 2:54 pm
Thereum wrote: Sat Jul 18, 2020 2:45 pm No real downsides. I suppose one drawback is that there is some slippage due to poor liquidity in the long term SPX options. However, the cost of this is negligible compared to the savings over a margin loan from a broker.

I am using a box spread as a loan right now, so this isn't just theory for me.
How do you pick the strike price and expiration?
I used the furthest expiration possible, which as of now is Dec 2022. As for strikes, you would figure out how much you need and then choose your strikes based on your requirements. It's probably better to sell one large box than many small ones.
Where can I learn more about this approach? Could you recommend a book or a source that explains it further? thx
In addition to the info provided already this whitepaper from occ covers it pretty well:
https://www.optionseducation.org/refere ... -cash.aspx
Post Reply