How do rolling and margin on futures trading work?

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langlands
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Joined: Wed Apr 03, 2019 10:05 pm

How do rolling and margin on futures trading work?

Post by langlands »

One reason I've been hesitant to use futures is that it seems like a big hassle and I'm just not familiar with the mechanics of how it works. (I'm quite familiar with how futures work on a textbook/theoretical level) I would be much more keen on using it if I could invest in futures the way I invest in stocks, i.e. enter a position and let it sit indefinitely without requiring day to day management. Could someone who uses futures regularly answer a couple of questions for me:

1) How easy is it to roll futures automatically and efficiently? I think automatic rolling is possible with certain brokers, but I'm worried about being front run. If hedge funds know that IB always rolls over on a certain day of the month, it seems pretty easy to take advantage at the retail investor's expense.

2) Is there an easy way to link a savings account to automatically satisfy margin calls? For efficiency reasons, you obviously want to keep a minimum amount of collateral in your futures account. From what I understand, the E-mini is leveraged 50:1, which means a 2% drop completely wipes out your account. I anticipate that margin calls are going to be a rather regular occurrence. Is it possible to set it up so that the broker just takes whatever it needs from my savings account to meet the margin? Honestly, this fear of margin calls I read about online has always puzzled me. Obviously, if you're actually leveraged beyond your means, it is pretty scary. But if you have plenty of assets but just choose to allocate it efficiently, it seems that margin calls should be par for the course and should be simple to deal with.

3) Is there anything else I'm missing in terms of making efficient futures investing a more or less automated process?

Much thanks.
Topic Author
langlands
Posts: 600
Joined: Wed Apr 03, 2019 10:05 pm

Re: How do rolling and margin on futures trading work?

Post by langlands »

Quite a few posters are knowledgable about futures...no one actually trades them for their personal account? Come on, I know there are a few of you out there :)
rascott
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Re: How do rolling and margin on futures trading work?

Post by rascott »

I'm not aware of automated rolling.....I have to manually roll mine.

Also don't think you can just link a savings account to your margin account. Believe you need to have the cash actually sitting in your margin account.... which you can probably put in t-bills or something similar to offset the cash drag issue.
ohai
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Joined: Wed Dec 27, 2017 2:10 pm

Re: How do rolling and margin on futures trading work?

Post by ohai »

1) Yes, there is auto roll. If you don't want to use this, then it's not hard to roll futures yourself.

https://www.interactivebrokers.com/en/s ... llover.htm

2) You probably have to have a bank account in the same company as the futures brokerage, because I don't think it's ok for the broker to just automatically take money from your third party bank account whenever they want.

3) You can buy ETFs that basically do these operations for you. Leveraged long or short ETFs, for instance, use derivatives to effect delta exposure. Even if they don't use only futures, the economics should be very similar.
Topic Author
langlands
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Re: How do rolling and margin on futures trading work?

Post by langlands »

ohai wrote: Fri Jan 10, 2020 2:11 pm 1) Yes, there is auto roll. If you don't want to use this, then it's not hard to roll futures yourself.

https://www.interactivebrokers.com/en/s ... llover.htm

2) You probably have to have a bank account in the same company as the futures brokerage, because I don't think it's ok for the broker to just automatically take money from your third party bank account whenever they want.

3) You can buy ETFs that basically do these operations for you. Leveraged long or short ETFs, for instance, use derivatives to effect delta exposure. Even if they don't use only futures, the economics should be very similar.
1) Now that I think about it, the market impact from a retail investor trading futures is absolutely miniscule, so my fears of being front run are probably unfounded. So auto-rolling should work just fine.

2) Hm, that's pretty annoying albeit understandable. It seems that it's unavoidable that there's some non-negligible component of active management to futures investing.

3) In your opinion then, is the ~0.9% expense ratio for leveraged ETFs worth it?
Topic Author
langlands
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Re: How do rolling and margin on futures trading work?

Post by langlands »

rascott wrote: Fri Jan 10, 2020 2:10 pm I'm not aware of automated rolling.....I have to manually roll mine.

Also don't think you can just link a savings account to your margin account. Believe you need to have the cash actually sitting in your margin account.... which you can probably put in t-bills or something similar to offset the cash drag issue.
Can you set it up so that the t-bills are automatically sold to service your futures position? Basically, I really don't like the idea of constantly having to worry about an emergency margin call.
ohai
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Joined: Wed Dec 27, 2017 2:10 pm

Re: How do rolling and margin on futures trading work?

Post by ohai »

langlands wrote: Fri Jan 10, 2020 2:23 pm
3) In your opinion then, is the ~0.9% expense ratio for leveraged ETFs worth it?
I'm not religious about it or anything, but let's say you are committed to some kind of equity leverage and you consider 3x leveraged ETFs, the most efficient leveraged ETFs per unit of leverage currently. If we assume 0.10% expense ratio on the first unit of leverage, that leaves 0.40% expense ratio on the two next units. So, you're effectively borrowing at libor+equity funding+expense ratio for those additional leverage units. This will be something like 1.7%+0.3%+0.4% currently, so you are borrowing for 2.4%, which is pretty cheap to me. Where else can you borrow at this rate to just buy stocks?

Furthermore:
1) The capital you save can usually be invested for over 2.4%. Since I have leveraged ETFs that replace normal equity capital, I can reserve the saved capital in muni funds paying 3% to 4%, for example.
2) Leveraged ETFs pay very low dividends usually: 0.4% for UPRO with 3x leverage, compared to 2% with normal SPX funds. Since I am in the maximum dividend tax rate at the moment, I have incentive to defer these dividends by transforming them to capital gains to be realized later.

Yes, I won't pay the expense ratio if I trade futures myself. However, I can't open up Think or Swim or whatever platform every day to rebalance the portfolio, as I have a job (which actually also includes managing this sort of position). Also, operational risk is far reduced by outsourcing.

So, overall, to me, the cost is worth it for the capital I would put into these assets.
rascott
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Joined: Wed Apr 15, 2015 10:53 am

Re: How do rolling and margin on futures trading work?

Post by rascott »

langlands wrote: Fri Jan 10, 2020 2:30 pm
rascott wrote: Fri Jan 10, 2020 2:10 pm I'm not aware of automated rolling.....I have to manually roll mine.

Also don't think you can just link a savings account to your margin account. Believe you need to have the cash actually sitting in your margin account.... which you can probably put in t-bills or something similar to offset the cash drag issue.
Can you set it up so that the t-bills are automatically sold to service your futures position? Basically, I really don't like the idea of constantly having to worry about an emergency margin call.

Every broker does it differently.... you'd just need to talk with them. Most don't seem to auto- liquidate to cover margin calls, but would rather put you on margin and paying them interest.
Topic Author
langlands
Posts: 600
Joined: Wed Apr 03, 2019 10:05 pm

Re: How do rolling and margin on futures trading work?

Post by langlands »

ohai wrote: Fri Jan 10, 2020 3:06 pm
langlands wrote: Fri Jan 10, 2020 2:23 pm
3) In your opinion then, is the ~0.9% expense ratio for leveraged ETFs worth it?
I'm not religious about it or anything, but let's say you are committed to some kind of equity leverage and you consider 3x leveraged ETFs, the most efficient leveraged ETFs per unit of leverage currently. If we assume 0.10% expense ratio on the first unit of leverage, that leaves 0.40% expense ratio on the two next units. So, you're effectively borrowing at libor+equity funding+expense ratio for those additional leverage units. This will be something like 1.7%+0.3%+0.4% currently, so you are borrowing for 2.4%, which is pretty cheap to me. Where else can you borrow at this rate to just buy stocks?

Furthermore:
1) The capital you save can usually be invested for over 2.4%. Since I have leveraged ETFs that replace normal equity capital, I can reserve the saved capital in muni funds paying 3% to 4%, for example.
2) Leveraged ETFs pay very low dividends usually: 0.4% for UPRO with 3x leverage, compared to 2% with normal SPX funds. Since I am in the maximum dividend tax rate at the moment, I have incentive to defer these dividends by transforming them to capital gains to be realized later.

Yes, I won't pay the expense ratio if I trade futures myself. However, I can't open up Think or Swim or whatever platform every day to rebalance the portfolio, as I have a job (which actually also includes managing this sort of position). Also, operational risk is far reduced by outsourcing.

So, overall, to me, the cost is worth it for the capital I would put into these assets.
Thanks, I agree with your analysis. Also more reassuring coming from what sounds like a finance professional :) Regarding the taxes, isn't another huge benefit that it is possible to arrange it so you only pay LTCG on UPRO (when you sell) vs. 60/40 LTCG/STCG on futures capital gains (every year)?
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