Shorting Stocks to Pay Off Margin Loan

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levinvest1
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Shorting Stocks to Pay Off Margin Loan

Post by levinvest1 »

I maintain a portfolio of something like 120% long + 20% short positions. To get 120% long exposure, I need to take a 20% margin loan. But I would like the cash received from 20% shorts to offset that margin loan. Is there any broker which allows this?

I have tried IBKR: they give some paltry interest on 20% short cash proceeds and continue charging me high interest on 20% margin loan. Schwab is worse and just keeps all the short cash to itself and doesn't pay any interest on that. This was fine earlier but now with margin interest rate going up so much, it has started to hurt.

I know I can run SPX box spreads (basically selling options) but I am already shorting stocks and would like to use that money. It's strange to me that money received from selling options is yours to keep but money received from short selling stocks is grabbed by the broker. (Note that this has nothing to do with stock borrow fee which I am anyway paying.)
Charles Joseph
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Re: Shorting Stocks to Pay Off Margin Loan

Post by Charles Joseph »

I know nothing about shorts, nothing about margin loans, and nothing about box spreads.

This sounds like a really bad idea.
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levinvest1
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Re: Shorting Stocks to Pay Off Margin Loan

Post by levinvest1 »

There is another excellent post in this forum called "Let's Talk SPX Box Spreads". You can learn about Box spreads there. Here I am talking about a slightly different way to borrow cash (at higher but intentional risk).
gougou
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Re: Shorting Stocks to Pay Off Margin Loan

Post by gougou »

IBKR has a page explaining why the short sale proceeds do not cancel out your margin loans:
https://ibkr.info/node/2186/

It looks like the short sale proceeds must be posted as collateral so it generates little interest income for you. And you'll have to borrow the margin loan from IBKR separately.
NoRegret
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Re: Shorting Stocks to Pay Off Margin Loan

Post by NoRegret »

Sell deep ITM leap calls instead of short? Need option level 4 and watch portfolio margin.
Market timer targeting long term cycles -- aiming for several key decisions per asset class per decade
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levinvest1
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Re: Shorting Stocks to Pay Off Margin Loan

Post by levinvest1 »

gougou wrote: Thu Aug 04, 2022 6:20 pm IBKR has a page explaining why the short sale proceeds do not cancel out your margin loans:
https://ibkr.info/node/2186/

It looks like the short sale proceeds must be posted as collateral so it generates little interest income for you. And you'll have to borrow the margin loan from IBKR separately.
Yeah this is just money grab. I agree that there should be sufficient collateral but that's what portfolio margin is for. Hopefully there are brokers whose policies are different.
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levinvest1
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Re: Shorting Stocks to Pay Off Margin Loan

Post by levinvest1 »

NoRegret wrote: Thu Aug 04, 2022 6:36 pm Sell deep ITM leap calls instead of short? Need option level 4 and watch portfolio margin.
Yeah, could be a good alternative although the risks are a little different.
learntoinvest123
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Re: Shorting Stocks to Pay Off Margin Loan

Post by learntoinvest123 »

Dont understand why are you 120% long and 20% short. That is equivalent to being 100% long and paying margin. If you want to play both sides options are a better way of doing this.
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whodidntante
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Re: Shorting Stocks to Pay Off Margin Loan

Post by whodidntante »

levinvest1 wrote: Thu Aug 04, 2022 9:22 pm
gougou wrote: Thu Aug 04, 2022 6:20 pm IBKR has a page explaining why the short sale proceeds do not cancel out your margin loans:
https://ibkr.info/node/2186/

It looks like the short sale proceeds must be posted as collateral so it generates little interest income for you. And you'll have to borrow the margin loan from IBKR separately.
Yeah this is just money grab. I agree that there should be sufficient collateral but that's what portfolio margin is for. Hopefully there are brokers whose policies are different.
You propose creating an environment of systemic risk. Since there are plenty of those already, we should probably not create even more. There is no one, including the government or the broker who facilitated the arrangement, who is obligated to bail out securities lenders. The posted collateral is the only thing securities lenders can count on getting if the borrower defaults.

Larger traders may be allowed to post collateral in the form of T-bills, and institutional traders may be allowed to borrow shares based on their word, but plebs like me have to post cash collateral with daily settlement. It's not ideal, but it does have the benefit of not sucking everyone's money into a giant black hole.
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levinvest1
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Re: Shorting Stocks to Pay Off Margin Loan

Post by levinvest1 »

learntoinvest123 wrote: Thu Aug 04, 2022 11:20 pm Dont understand why are you 120% long and 20% short. That is equivalent to being 100% long and paying margin. If you want to play both sides options are a better way of doing this.
Long and short are not for the same stocks. I am picking stocks which I like and don't like.
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levinvest1
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Re: Shorting Stocks to Pay Off Margin Loan

Post by levinvest1 »

whodidntante wrote: Thu Aug 04, 2022 11:44 pm
levinvest1 wrote: Thu Aug 04, 2022 9:22 pm
gougou wrote: Thu Aug 04, 2022 6:20 pm IBKR has a page explaining why the short sale proceeds do not cancel out your margin loans:
https://ibkr.info/node/2186/

It looks like the short sale proceeds must be posted as collateral so it generates little interest income for you. And you'll have to borrow the margin loan from IBKR separately.
Yeah this is just money grab. I agree that there should be sufficient collateral but that's what portfolio margin is for. Hopefully there are brokers whose policies are different.
You propose creating an environment of systemic risk. Since there are plenty of those already, we should probably not create even more. There is no one, including the government or the broker who facilitated the arrangement, who is obligated to bail out securities lenders. The posted collateral is the only thing securities lenders can count on getting if the borrower defaults.

Larger traders may be allowed to post collateral in the form of T-bills, and institutional traders may be allowed to borrow shares based on their word, but plebs like me have to post cash collateral with daily settlement. It's not ideal, but it does have the benefit of not sucking everyone's money into a giant black hole.
You are mixing cash collateral with maintenance margin requirements. My collateral is my other stocks and overall high value portfolio. IBKR will happily let me withdraw cash from my account. It's just that they would start charging interest on that even though I have plenty of cash in my account from shorting stocks. It's very profitable for IBKR.
moneyflowin
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Re: Shorting Stocks to Pay Off Margin Loan

Post by moneyflowin »

levinvest1 wrote: Thu Aug 04, 2022 5:22 pm I maintain a portfolio of something like 120% long + 20% short positions. To get 120% long exposure, I need to take a 20% margin loan. But I would like the cash received from 20% shorts to offset that margin loan. Is there any broker which allows this?

I have tried IBKR: they give some paltry interest on 20% short cash proceeds and continue charging me high interest on 20% margin loan. Schwab is worse and just keeps all the short cash to itself and doesn't pay any interest on that. This was fine earlier but now with margin interest rate going up so much, it has started to hurt.

I know I can run SPX box spreads (basically selling options) but I am already shorting stocks and would like to use that money. It's strange to me that money received from selling options is yours to keep but money received from short selling stocks is grabbed by the broker. (Note that this has nothing to do with stock borrow fee which I am anyway paying.)
If I understand your question, you're saying that you received interest from IBKR from the cash collateral to secure the borrowed stock, but IBKR won't use that received interest to pay down your margin balance? I tested that scenario on their paper account a while back and I recall the short-stock interest payments did reduce margin balance. So maybe I misunderstood your question?
comeinvest
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Re: Shorting Stocks to Pay Off Margin Loan

Post by comeinvest »

levinvest1 wrote: Fri Aug 05, 2022 1:14 am
whodidntante wrote: Thu Aug 04, 2022 11:44 pm
levinvest1 wrote: Thu Aug 04, 2022 9:22 pm
gougou wrote: Thu Aug 04, 2022 6:20 pm IBKR has a page explaining why the short sale proceeds do not cancel out your margin loans:
https://ibkr.info/node/2186/

It looks like the short sale proceeds must be posted as collateral so it generates little interest income for you. And you'll have to borrow the margin loan from IBKR separately.
Yeah this is just money grab. I agree that there should be sufficient collateral but that's what portfolio margin is for. Hopefully there are brokers whose policies are different.
You propose creating an environment of systemic risk. Since there are plenty of those already, we should probably not create even more. There is no one, including the government or the broker who facilitated the arrangement, who is obligated to bail out securities lenders. The posted collateral is the only thing securities lenders can count on getting if the borrower defaults.

Larger traders may be allowed to post collateral in the form of T-bills, and institutional traders may be allowed to borrow shares based on their word, but plebs like me have to post cash collateral with daily settlement. It's not ideal, but it does have the benefit of not sucking everyone's money into a giant black hole.
You are mixing cash collateral with maintenance margin requirements. My collateral is my other stocks and overall high value portfolio. IBKR will happily let me withdraw cash from my account. It's just that they would start charging interest on that even though I have plenty of cash in my account from shorting stocks. It's very profitable for IBKR.
I think there is no "theoretical" or "good" reason. It's a convention that the industry thought up to enrich the brokerages. I think all U.S. brokers will do the same. As a result, it will be hard for retail investors to implement strategies that involve short sales with good risk-adjusted returns.
Last edited by comeinvest on Tue Aug 09, 2022 3:17 am, edited 1 time in total.
comeinvest
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Re: Shorting Stocks to Pay Off Margin Loan

Post by comeinvest »

moneyflowin wrote: Sun Aug 07, 2022 8:48 pm
levinvest1 wrote: Thu Aug 04, 2022 5:22 pm I maintain a portfolio of something like 120% long + 20% short positions. To get 120% long exposure, I need to take a 20% margin loan. But I would like the cash received from 20% shorts to offset that margin loan. Is there any broker which allows this?

I have tried IBKR: they give some paltry interest on 20% short cash proceeds and continue charging me high interest on 20% margin loan. Schwab is worse and just keeps all the short cash to itself and doesn't pay any interest on that. This was fine earlier but now with margin interest rate going up so much, it has started to hurt.

I know I can run SPX box spreads (basically selling options) but I am already shorting stocks and would like to use that money. It's strange to me that money received from selling options is yours to keep but money received from short selling stocks is grabbed by the broker. (Note that this has nothing to do with stock borrow fee which I am anyway paying.)
If I understand your question, you're saying that you received interest from IBKR from the cash collateral to secure the borrowed stock, but IBKR won't use that received interest to pay down your margin balance? I tested that scenario on their paper account a while back and I recall the short-stock interest payments did reduce margin balance. So maybe I misunderstood your question?
You probably just looked at the net cash in TWS. But that is just the sum. If you look at your statements, you will probably see that interest is charged and credited at different rates.
Rule_of_72t
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Re: Shorting Stocks to Pay Off Margin Loan

Post by Rule_of_72t »

It’s not your exact question, but you could manage your long position through options. Create a synthetic long by selling a put and buying a call at the same strike price for minimal cash out of pocket. Or you could sell a deep in the money put on a stock you want to own.

I use a small amount of my portfolio margin as collateral to sell out of the money puts. My account is credited with cash that I put in fixed income. It allows me to go above 100% without a margin loan.
JackoC
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Re: Shorting Stocks to Pay Off Margin Loan

Post by JackoC »

comeinvest wrote: Tue Aug 09, 2022 3:14 am
levinvest1 wrote: Fri Aug 05, 2022 1:14 am
whodidntante wrote: Thu Aug 04, 2022 11:44 pm
levinvest1 wrote: Thu Aug 04, 2022 9:22 pm
gougou wrote: Thu Aug 04, 2022 6:20 pm IBKR has a page explaining why the short sale proceeds do not cancel out your margin loans:
https://ibkr.info/node/2186/

It looks like the short sale proceeds must be posted as collateral so it generates little interest income for you. And you'll have to borrow the margin loan from IBKR separately.
Yeah this is just money grab. I agree that there should be sufficient collateral but that's what portfolio margin is for. Hopefully there are brokers whose policies are different.
You propose creating an environment of systemic risk.
You are mixing cash collateral with maintenance margin requirements.
I think there is no "theoretical" or "good" reason. It's a convention that the industry thought up to enrich the brokerages. I think all U.S. brokers will do the same. As a result, it will be hard for retail investors to implement strategies that involve short sales with good risk-adjusted returns.
I agree just to settle any theoretical issue, the proceeds of the short sale are earning interest. The interest just isn't going to the retail short seller. It's generally being kept by their broker. There's really no such thing as money that doesn't earn interest (to the extent Fed Funds or interest on reserves rates are non-zero) considered broadly (and excluding paper currency). Your checking account for example might not pay *you* interest, but that money even if not used to fund a loan is deposited or invested in some low risk short term asset earning the *bank* interest, similarly here. The short sale proceeds is posted as collateral to the securities lender, but it's still earning interest (either the collateral is treasury securities or cash deposited somewhere earning interest). The prevailing competitive environment is just such that retail brokers aren't forced to pay it out to their clients. They no longer get much in the way of commissions, they have to make money on something, and this is one of those things.

Not relevant to OP who is doing long/short stock picking, but if you short the whole index via the futures, you effectively get that interest at the professional market rate (as an adjustment of the futures relative to cash price, vs. adjustment for the dividends you'd pay shorting cash stocks you don't pay shorting the futures, which goes in the opposite direction).
comeinvest
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Re: Shorting Stocks to Pay Off Margin Loan

Post by comeinvest »

JackoC wrote: Tue Aug 09, 2022 11:54 am There's really no such thing as money that doesn't earn interest (to the extent Fed Funds or interest on reserves rates are non-zero) considered broadly (and excluding paper currency). Your checking account for example might not pay *you* interest, but that money even if not used to fund a loan is deposited or invested in some low risk short term asset earning the *bank* interest, similarly here. The short sale proceeds is posted as collateral to the securities lender, but it's still earning interest (either the collateral is treasury securities or cash deposited somewhere earning interest).
Cash posted as futures maintenance margin collateral also does not earn interest at most, probably all brokers. I'm not sure if that cash earns interest for someone, e.g. at the CME or other futures exchange where the cash eventually ends up being held. I'm not even sure if the exchange member brokers actually transfer the futures collateral cash to the exchange, or if they just promise (and do audits) to retain and save-guard the collateral in the amount of the minimum margin requirements from their clients.
manuvns
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Re: Shorting Stocks to Pay Off Margin Loan

Post by manuvns »

Sell SPY and QQQ puts to pay off your margin loan .
Thanks!
gougou
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Re: Shorting Stocks to Pay Off Margin Loan

Post by gougou »

If the stocks you short have very active options, you could do synthetic short instead of actual short. Synthetic short is done by long-put-short-call at the same strike price. Keep in mind that the short call part has early exercise risk, so you typically want the strike price to be significantly higher than the current stock price to avoid the early exercise risk.

Of course the tax treatment will be very different from a straight short sale. And you'll have to manage your cash position by buying/selling SPX box spreads.

You may have to own a stock brokerage firm to be able to offset margin loans with short sale proceeds :)
moneyflowin
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Re: Shorting Stocks to Pay Off Margin Loan

Post by moneyflowin »

comeinvest wrote: Tue Aug 09, 2022 3:15 am
moneyflowin wrote: Sun Aug 07, 2022 8:48 pm
levinvest1 wrote: Thu Aug 04, 2022 5:22 pm I maintain a portfolio of something like 120% long + 20% short positions. To get 120% long exposure, I need to take a 20% margin loan. But I would like the cash received from 20% shorts to offset that margin loan. Is there any broker which allows this?

I have tried IBKR: they give some paltry interest on 20% short cash proceeds and continue charging me high interest on 20% margin loan. Schwab is worse and just keeps all the short cash to itself and doesn't pay any interest on that. This was fine earlier but now with margin interest rate going up so much, it has started to hurt.

I know I can run SPX box spreads (basically selling options) but I am already shorting stocks and would like to use that money. It's strange to me that money received from selling options is yours to keep but money received from short selling stocks is grabbed by the broker. (Note that this has nothing to do with stock borrow fee which I am anyway paying.)
If I understand your question, you're saying that you received interest from IBKR from the cash collateral to secure the borrowed stock, but IBKR won't use that received interest to pay down your margin balance? I tested that scenario on their paper account a while back and I recall the short-stock interest payments did reduce margin balance. So maybe I misunderstood your question?
You probably just looked at the net cash in TWS. But that is just the sum. If you look at your statements, you will probably see that interest is charged and credited at different rates.
Yes I know there are two line items. One for margin debit interest (negative number) and one for net short stock interest (positive #).

Reading the OP's post again, I understand what they're asking. They're asking if any broker pays the same short stock interest rate as the margin debit interest rate. The answer is No. Most retail brokers pay 0% on short stock credit interest. IBKR is the only retail broker who pays anything meaningful

The other ideas here like synthetic stock using options still have the financing charge built in.

If any broker paid a short sale interest rate as high as the margin rate, then everyone with a margin loan would just short BIL to completely offset their margin loan interest with zero risk.
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Re: Shorting Stocks to Pay Off Margin Loan

Post by arcticpineapplecorp. »

is this really:
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It's hard to accept the truth when the lies were exactly what you wanted to hear. Investing is simple, but not easy. Buy, hold & rebalance low cost index funds & manage taxable events. Asking Portfolio Questions | Wiki
comeinvest
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Re: Shorting Stocks to Pay Off Margin Loan

Post by comeinvest »

moneyflowin wrote: Tue Aug 09, 2022 8:59 pm
comeinvest wrote: Tue Aug 09, 2022 3:15 am
moneyflowin wrote: Sun Aug 07, 2022 8:48 pm
levinvest1 wrote: Thu Aug 04, 2022 5:22 pm I maintain a portfolio of something like 120% long + 20% short positions. To get 120% long exposure, I need to take a 20% margin loan. But I would like the cash received from 20% shorts to offset that margin loan. Is there any broker which allows this?

I have tried IBKR: they give some paltry interest on 20% short cash proceeds and continue charging me high interest on 20% margin loan. Schwab is worse and just keeps all the short cash to itself and doesn't pay any interest on that. This was fine earlier but now with margin interest rate going up so much, it has started to hurt.

I know I can run SPX box spreads (basically selling options) but I am already shorting stocks and would like to use that money. It's strange to me that money received from selling options is yours to keep but money received from short selling stocks is grabbed by the broker. (Note that this has nothing to do with stock borrow fee which I am anyway paying.)
If I understand your question, you're saying that you received interest from IBKR from the cash collateral to secure the borrowed stock, but IBKR won't use that received interest to pay down your margin balance? I tested that scenario on their paper account a while back and I recall the short-stock interest payments did reduce margin balance. So maybe I misunderstood your question?
You probably just looked at the net cash in TWS. But that is just the sum. If you look at your statements, you will probably see that interest is charged and credited at different rates.
Yes I know there are two line items. One for margin debit interest (negative number) and one for net short stock interest (positive #).

Reading the OP's post again, I understand what they're asking. They're asking if any broker pays the same short stock interest rate as the margin debit interest rate. The answer is No. Most retail brokers pay 0% on short stock credit interest. IBKR is the only retail broker who pays anything meaningful

The other ideas here like synthetic stock using options still have the financing charge built in.

If any broker paid a short sale interest rate as high as the margin rate, then everyone with a margin loan would just short BIL to completely offset their margin loan interest with zero risk.
That would be what would and should happen in a transparent market, where the cash debits and credits of a customer account would be netted, and no "hidden fee" or "hidden profit center" would exist. I use the word "hidden" because many retail investors who short stocks are not aware of this additional cost they are paying. I'm not saying the "system" is unfair, as everyone who complains is free to start their own brokerage business with a different fee structure. But we have to recognize that the regulators allowed this source of profit, which skews the market as it puts retail investors at a systematic disadvantage to institutional investors if they were to implement long/short strategies. I assume that institutional investors don't pay this margin in yield differences.
As a consolation, I think in most other countries in the world you would have a much harder time shorting stocks in the first place, along with a gazillion of other things we can do here in the U.S. but not elsewhere.
Last edited by comeinvest on Tue Aug 09, 2022 11:02 pm, edited 1 time in total.
Dovahkiin
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Re: Shorting Stocks to Pay Off Margin Loan

Post by Dovahkiin »

levinvest1 wrote: Thu Aug 04, 2022 5:22 pm I maintain a portfolio of something like 120% long + 20% short positions. To get 120% long exposure, I need to take a 20% margin loan. But I would like the cash received from 20% shorts to offset that margin loan. Is there any broker which allows this?

I have tried IBKR: they give some paltry interest on 20% short cash proceeds and continue charging me high interest on 20% margin loan. Schwab is worse and just keeps all the short cash to itself and doesn't pay any interest on that. This was fine earlier but now with margin interest rate going up so much, it has started to hurt.

I know I can run SPX box spreads (basically selling options) but I am already shorting stocks and would like to use that money. It's strange to me that money received from selling options is yours to keep but money received from short selling stocks is grabbed by the broker. (Note that this has nothing to do with stock borrow fee which I am anyway paying.)
Unfortunately brokerages are legally required to separate short-sale proceeds for retail accounts from the equity account which option sales are apart of. So you need to fund your 20% leverage with some sort of short option trades of the short. You could short ITM calls for a synthetic short - with the risk of being assigned. Or short SPX box spreads for outright leverage at +20 to +40 basis points over the equivalent US Treasury.

If you're over $500k+ it might be different with a prime-brokerage agreement, as that's a common hedge fund tactic to gain extra leverage. I'm not aware if they have the same segregation requirements as retail accounts do though.
comeinvest
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Re: Shorting Stocks to Pay Off Margin Loan

Post by comeinvest »

Dovahkiin wrote: Tue Aug 09, 2022 11:01 pm
levinvest1 wrote: Thu Aug 04, 2022 5:22 pm I maintain a portfolio of something like 120% long + 20% short positions. To get 120% long exposure, I need to take a 20% margin loan. But I would like the cash received from 20% shorts to offset that margin loan. Is there any broker which allows this?

I have tried IBKR: they give some paltry interest on 20% short cash proceeds and continue charging me high interest on 20% margin loan. Schwab is worse and just keeps all the short cash to itself and doesn't pay any interest on that. This was fine earlier but now with margin interest rate going up so much, it has started to hurt.

I know I can run SPX box spreads (basically selling options) but I am already shorting stocks and would like to use that money. It's strange to me that money received from selling options is yours to keep but money received from short selling stocks is grabbed by the broker. (Note that this has nothing to do with stock borrow fee which I am anyway paying.)
Unfortunately brokerages are legally required to separate short-sale proceeds for retail accounts from the equity account which option sales are apart of. So you need to fund your 20% leverage with some sort of short option trades of the short. You could short ITM calls for a synthetic short - with the risk of being assigned. Or short SPX box spreads for outright leverage at +20 to +40 basis points over the equivalent US Treasury.

If you're over $500k+ it might be different with a prime-brokerage agreement, as that's a common hedge fund tactic to gain extra leverage. I'm not aware if they have the same segregation requirements as retail accounts do though.
Even if you substituted your debit cash with options box spreads, you will still pay an additional cost for short sales in the form of an interest rate spread, as long as you get no interest or a below risk-free interest rate on your short sale proceeds.
I think many retail investors have tax-deferred and taxable account in excess of $500k these days. I'm not sure if there are any better conditions available to them than an IB account. What I have seen and heard, full-service brokerages suck a lot more fees out of the investors than the low-fee online brokerages. I'm not sure exactly what is a prime brokerage agreement; let me know if you find out anything how to get a hold of it. I doubt that this is a feasible option, otherwise many in this forum would have one and it would have been discussed in this forum.
Dovahkiin
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Re: Shorting Stocks to Pay Off Margin Loan

Post by Dovahkiin »

comeinvest wrote: Tue Aug 09, 2022 11:09 pm I doubt that this is a feasible option, otherwise many in this forum would have one and it would have been discussed in this forum.
Most people aren't even on portfolio margin here despite having $500k+. A prime brokerage account is the industry term for a hedge fund account:

https://www.finra.org/rules-guidance/ke ... margin/faq

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

https://www.fool.com/the-ascent/buying- ... -agreement

These used to be the de-facto portfolio margin accounts in the 1980s before retail PM accounts were introduced in 2009. Legally you need at least $500k in the account at all times. It allows netting (portfolio margin) of short sales and short options. Retail PM allows netting of short options but not short stock.

To get the most out of it you need $5 mill, that allows you to do unlisted swap transactions and other OTC trades.

The benefits of a prime brokerage agreement are:
  • Portfolio margin with regular TIMS modeling.
  • Possibly netting of short sales to cover long stock and not pay broker margin interest. (What OP desires)
  • Portfolio margin with looser house margin restrictions (You really can't get true TIMS anywhere retail wise. TDA, IBKR, and TW has neutered portfolio margin with a privy of house rules where only certain specific portfolios can gain substantial leverage/other advantages over reg-t.)
  • Portfolio margin with different margining methodologies (value at risk - VAR models. TIMS can fail to provide appropriate margin relief in certain situations.)
  • "Fishing"/Market-Making trades - with a prime brokerage agreement you can execute with any broker you want in any size and clear trades at the end of the day. That means you can make trades for any multiples of size over your account size as long as you net to cash or your clearing house's leverage requirements end of day. With a $1m prime-broker account I could make orders to buy/sell $20 million of TSLA, and as long as I net to over $500k of liquidation value at end of day this is acceptable. This is how market makers are able to market make.
  • Custom leverage limits. Instead of being tied to 6.66x leverage on Retail-PM (15% buying power reduction), you can possibly get 10x to 30x depending on your clearing firm's comfort level, ie you can get 30x for a merger-arbitrage trade of two large cap stocks, and so on.
  • $5M+ accounts: Access to OTC derivatives, swap agreements, etc. The famous "ISDA" agreement from The Big Short. The movie made it sound like it's a huge accomplishment. It really isn't. It's a uniform standardized contract, last updated in 2002. If you have $5m you can get one. IBKR is a great broker for OTC swaps and options, they have a tool to custom negotiate these with a hoist of banks.
As you can see - most people here are buy and hold and probably won't make use of PM. Very few would have the trading desire to have access to vanilla TIMS with no house-margin rules, no Value-At-Risk margining, no market making desires, or be logically rewarded for running a long-short portfolio.

Source: I have a portfolio margined account I invest with leverage doing modified HFEA. I've personally worked in the options market-making industry at a few of the big firms. I plan to sign a prime brokerage agreement when I'm reliably above $500k in my taxable PM account.
comeinvest
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Re: Shorting Stocks to Pay Off Margin Loan

Post by comeinvest »

Dovahkiin wrote: Tue Aug 09, 2022 11:45 pm
comeinvest wrote: Tue Aug 09, 2022 11:09 pm I doubt that this is a feasible option, otherwise many in this forum would have one and it would have been discussed in this forum.
Most people aren't even on portfolio margin here despite having $500k+. A prime brokerage account is the industry term for a hedge fund account:

https://www.finra.org/rules-guidance/ke ... margin/faq

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

https://www.fool.com/the-ascent/buying- ... -agreement

These used to be the de-facto portfolio margin accounts in the 1980s before retail PM accounts were introduced in 2009. Legally you need at least $500k in the account at all times. It allows netting (portfolio margin) of short sales and short options. Retail PM allows netting of short options but not short stock.

To get the most out of it you need $5 mill, that allows you to do unlisted swap transactions and other OTC trades.

The benefits of a prime brokerage agreement are:
  • Portfolio margin with regular TIMS modeling.
  • Possibly netting of short sales to cover long stock and not pay broker margin interest. (What OP desires)
  • Portfolio margin with looser house margin restrictions (You really can't get true TIMS anywhere retail wise. TDA, IBKR, and TW has neutered portfolio margin with a privy of house rules where only certain specific portfolios can gain substantial leverage/other advantages over reg-t.)
  • Portfolio margin with different margining methodologies (value at risk - VAR models. TIMS can fail to provide appropriate margin relief in certain situations.)
  • "Fishing"/Market-Making trades - with a prime brokerage agreement you can execute with any broker you want in any size and clear trades at the end of the day. That means you can make trades for any multiples of size over your account size as long as you net to cash or your clearing house's leverage requirements end of day. With a $1m prime-broker account I could make orders to buy/sell $20 million of TSLA, and as long as I net to over $500k of liquidation value at end of day this is acceptable. This is how market makers are able to market make.
  • Custom leverage limits. Instead of being tied to 6.66x leverage on Retail-PM (15% buying power reduction), you can possibly get 10x to 30x depending on your clearing firm's comfort level, ie you can get 30x for a merger-arbitrage trade of two large cap stocks, and so on.
  • $5M+ accounts: Access to OTC derivatives, swap agreements, etc. The famous "ISDA" agreement from The Big Short. The movie made it sound like it's a huge accomplishment. It really isn't. It's a uniform standardized contract, last updated in 2002. If you have $5m you can get one. IBKR is a great broker for OTC swaps and options, they have a tool to custom negotiate these with a hoist of banks.
As you can see - most people here are buy and hold and probably won't make use of PM. Very few would have the trading desire to have access to vanilla TIMS with no house-margin rules, no Value-At-Risk margining, no market making desires, or be logically rewarded for running a long-short portfolio.

Source: I have a portfolio margined account I invest with leverage doing modified HFEA. I've personally worked in the options market-making industry at a few of the big firms. I plan to sign a prime brokerage agreement when I'm reliably above $500k in my taxable PM account.
Thanks for all this interesting information.
I never saw advertisements or terms and conditions anywhere on the web for prime brokerage accounts. How would I get an account if I have > $500k? Call the brokers and negotiate?
I personally don't need any of the features at this moment, but I'm curious in case I need some of the features in the future.
Just fyi, with IB and I think Schwab and the other accounts that I have, I can transact very large sums, buy and sell of the same stock within one day, much larger than my max margin allows, as long as at any given time my positions (settled or unsettled) don't exceed the margin limits. Everything is netted at the end of the day, and settled based on the settlement period of the instrument. So what you call "fishing" or "market making" already works with my regular PM accounts.
I also do mHFEA, but I don't need any of the prime brokerage features for that. I use futures and option box spreads in PM accounts up to ca. 2.5x leverage which is the max of my mHFEA investment plan before I deleverage, and far below what PM allows. My understanding is that any higher leverage would likely be destructive to the portfolio due to volatility decay, as was discussed in the mHFEA thread.
Dovahkiin
Posts: 224
Joined: Thu Jan 26, 2012 11:36 pm

Re: Shorting Stocks to Pay Off Margin Loan

Post by Dovahkiin »

comeinvest wrote: Wed Aug 10, 2022 3:49 am Thanks for all this interesting information.
I never saw advertisements or terms and conditions anywhere on the web for prime brokerage accounts. How would I get an account if I have > $500k? Call the brokers and negotiate?

You're welcome! Pretty much you call around, different prime brokers have different offerings. For example IBKR:
https://www.interactivebrokers.com/en/index.php?f=3182

Goldman Sachs is really popular in this line of work:
https://www.goldmansachs.com/what-we-do ... -services/

I'd really would recommend over $1m for prime broker services. Go one dollar under $500k, ie $499k, and you're legally kicked off. There is also a few downsides I forgot to mention too - this is a professional account so expect professional exchange fees & data rates. You're probably going to be paying $100-$200 a month for data/etc, unless you want to grab data for free from your retail accounts.

You're going to need a professional trade software platform if you want to interface with Goldman. At IBKR you can use the default client but even if you're retail I recommend a paid client for IBKR.
comeinvest wrote: Wed Aug 10, 2022 3:49 am So what you call "fishing" or "market making" already works with my regular PM accounts.
Yes but you still have the "credit check" before every order. With a prime brokerage account there is no "credit check."

You can only place an order for only up to 6.66x your NLV. With a $1 million account you can only trade 6.6 million of TSLA at a time. With a prime brokerage account you can trade unlimited tesla. You can place a order for $20 million if you want. $40 million. $100 million. Orders don't reduce your "buying power" with a prime brokerage account. Only fills do. You can post both sides easily in good notional numbers.

Picture PM as baby steps to a prime brokerage account.
comeinvest wrote: Wed Aug 10, 2022 3:49 am I also do mHFEA, but I don't need any of the prime brokerage features for that. I use futures and option box spreads in PM accounts up to ca. 2.5x leverage which is the max of my mHFEA investment plan before I deleverage, and far below what PM allows. My understanding is that any higher leverage would likely be destructive to the portfolio due to volatility decay, as was discussed in the mHFEA thread.
I agree. You don't need prime brokerage accounts for mHFEA or HFEA. Regular portfolio margin works amazing for it - as long as you weren't at IBKR during Covid. They reduced leverage to 2.8x on retail PM so 3x HFEA got hit hard. Prime brokers typically don't reduce leverage.
comeinvest
Posts: 1267
Joined: Mon Mar 12, 2012 6:57 pm

Re: Shorting Stocks to Pay Off Margin Loan

Post by comeinvest »

Dovahkiin wrote: Wed Aug 10, 2022 9:07 am I agree. You don't need prime brokerage accounts for mHFEA or HFEA. Regular portfolio margin works amazing for it - as long as you weren't at IBKR during Covid. They reduced leverage to 2.8x on retail PM so 3x HFEA got hit hard. Prime brokers typically don't reduce leverage.
I think during Covid, equity index futures margin went up from ca. 5-7% to somewhere around 10-20% for most equity index futures.

I can't remember seeing the nominal maintenance margin of stocks changing from 15%. But I know, PM calcs are more complicated and not transparent. Do you happen to have any documented statistics on PM margin changes during the 2008 crash and other crashes? Would be nice to have for modelling a worst-case or bad-case scenario for leveraged strategies.

Another question, do I have to have a legal entity for prime brokerage accounts?
Dovahkiin
Posts: 224
Joined: Thu Jan 26, 2012 11:36 pm

Re: Shorting Stocks to Pay Off Margin Loan

Post by Dovahkiin »

comeinvest wrote: Wed Aug 10, 2022 1:35 pm
Dovahkiin wrote: Wed Aug 10, 2022 9:07 am I agree. You don't need prime brokerage accounts for mHFEA or HFEA. Regular portfolio margin works amazing for it - as long as you weren't at IBKR during Covid. They reduced leverage to 2.8x on retail PM so 3x HFEA got hit hard. Prime brokers typically don't reduce leverage.
I think during Covid, equity index futures margin went up from ca. 5-7% to somewhere around 10-20% for most equity index futures.

I can't remember seeing the nominal maintenance margin of stocks changing from 15%. But I know, PM calcs are more complicated and not transparent. Do you happen to have any documented statistics on PM margin changes during the 2008 crash and other crashes? Would be nice to have for modelling a worst-case or bad-case scenario for leveraged strategies.

Another question, do I have to have a legal entity for prime brokerage accounts?
I don't have stats on PM in 2008 unfortunately. It was a pilot program from 2005 to 2007. Very few brokers offered PM in 2008, basically only Thinkorswim:

https://tickertape.tdameritrade.com/tra ... eg-t-15526

I don't know if you have to provide a legal entity or if it's customary to for a prime brokerage account. I don't think you'd have any issues with an individual account. They'll make you sign a personal guarantee with an entity account for under $5m unless you have a non-relative partner in the entity.

Past $5m I'd recommend an entity account if you want to be more aggressive than HFEA in the prime brokerage account. That way if you blow up no personal guarantee = they can't go after your non LLC assets. Likewise, it might be possible your LLC assets shields you from personal creditors/judgements/etc.
gougou
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Re: Shorting Stocks to Pay Off Margin Loan

Post by gougou »

Dovahkiin wrote: Tue Aug 09, 2022 11:45 pm
comeinvest wrote: Tue Aug 09, 2022 11:09 pm I doubt that this is a feasible option, otherwise many in this forum would have one and it would have been discussed in this forum.
Most people aren't even on portfolio margin here despite having $500k+. A prime brokerage account is the industry term for a hedge fund account:

https://www.finra.org/rules-guidance/ke ... margin/faq

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

https://www.fool.com/the-ascent/buying- ... -agreement

These used to be the de-facto portfolio margin accounts in the 1980s before retail PM accounts were introduced in 2009. Legally you need at least $500k in the account at all times. It allows netting (portfolio margin) of short sales and short options. Retail PM allows netting of short options but not short stock.

To get the most out of it you need $5 mill, that allows you to do unlisted swap transactions and other OTC trades.

The benefits of a prime brokerage agreement are:
  • Portfolio margin with regular TIMS modeling.
  • Possibly netting of short sales to cover long stock and not pay broker margin interest. (What OP desires)
  • Portfolio margin with looser house margin restrictions (You really can't get true TIMS anywhere retail wise. TDA, IBKR, and TW has neutered portfolio margin with a privy of house rules where only certain specific portfolios can gain substantial leverage/other advantages over reg-t.)
  • Portfolio margin with different margining methodologies (value at risk - VAR models. TIMS can fail to provide appropriate margin relief in certain situations.)
  • "Fishing"/Market-Making trades - with a prime brokerage agreement you can execute with any broker you want in any size and clear trades at the end of the day. That means you can make trades for any multiples of size over your account size as long as you net to cash or your clearing house's leverage requirements end of day. With a $1m prime-broker account I could make orders to buy/sell $20 million of TSLA, and as long as I net to over $500k of liquidation value at end of day this is acceptable. This is how market makers are able to market make.
  • Custom leverage limits. Instead of being tied to 6.66x leverage on Retail-PM (15% buying power reduction), you can possibly get 10x to 30x depending on your clearing firm's comfort level, ie you can get 30x for a merger-arbitrage trade of two large cap stocks, and so on.
  • $5M+ accounts: Access to OTC derivatives, swap agreements, etc. The famous "ISDA" agreement from The Big Short. The movie made it sound like it's a huge accomplishment. It really isn't. It's a uniform standardized contract, last updated in 2002. If you have $5m you can get one. IBKR is a great broker for OTC swaps and options, they have a tool to custom negotiate these with a hoist of banks.
As you can see - most people here are buy and hold and probably won't make use of PM. Very few would have the trading desire to have access to vanilla TIMS with no house-margin rules, no Value-At-Risk margining, no market making desires, or be logically rewarded for running a long-short portfolio.

Source: I have a portfolio margined account I invest with leverage doing modified HFEA. I've personally worked in the options market-making industry at a few of the big firms. I plan to sign a prime brokerage agreement when I'm reliably above $500k in my taxable PM account.
Do you know if IBKR prime brokerage account allows netting of short sale proceeds against margin loans? That would be amazing and I actually need it right now because I have some long-short positions. Do you know how much it costs?

Thank you for the detailed post. This is really valuable information.
Dovahkiin
Posts: 224
Joined: Thu Jan 26, 2012 11:36 pm

Re: Shorting Stocks to Pay Off Margin Loan

Post by Dovahkiin »

gougou wrote: Wed Aug 10, 2022 11:16 pm Do you know if IBKR prime brokerage account allows netting of short sale proceeds against margin loans? That would be amazing and I actually need it right now because I have some long-short positions. Do you know how much it costs?

Thank you for the detailed post. This is really valuable information.
You're welcome. You'd have to ask them that about short sales. They make their money with professional data fees, commissioned trades, etc.

Each prime broker is willing to take different risks. For instance IBKR makes even prime brokerage accounts do a credit check before every order. Most don't as you can see how it'd be hard to market make both sides effectively with a credit check. IBKR also auto liquidates prime brokerage accounts and it sounds like they're just on standard PM while Goldman Sachs uses a proprietary value at risk model taking into a ton of other factors like interest rates which PM doesn't do. I believe Goldman allows cross-product netting including short sales, merger-arb, and the like. Again, it's best to just call them, say you have $X million, and ask what they're willing to do for your specific trading situation.

Good luck!
Logan Roy
Posts: 267
Joined: Sun May 29, 2022 10:15 am

Re: Shorting Stocks to Pay Off Margin Loan

Post by Logan Roy »

learntoinvest123 wrote: Thu Aug 04, 2022 11:20 pm Dont understand why are you 120% long and 20% short. That is equivalent to being 100% long and paying margin. If you want to play both sides options are a better way of doing this.
This was a popular type of retail fund a while back – a 130-30 strategy. It is worth noting, even among the best traders, in the long run, due to all the headwinds: costs, lack of dividends, etc. almost no one makes a profit on their short book. So the short exposure is probably best thought of as a way to reduce volatility.

Guys like El-Erian popularised instead having your long exposure passive and low cost, and using an 'alpha overlay', which would be just the market neutral long/short exposure. I do this with Vanguard Global All-Cap, and the overlay is Man GLG Alpha Select, which has about 200% gross market exposure (net zero). It works quite well – it creates quite appealing return characteristics. But most market neutral funds are an absolute disaster. I don't think one should expect long-term outperformance (vs just 100% market exposure), but for a pessimist, it's a strategy that might hold up better through worst case decades.
Kenneth Almquist
Posts: 59
Joined: Mon Sep 26, 2016 1:59 am

Re: Shorting Stocks to Pay Off Margin Loan

Post by Kenneth Almquist »

gougou wrote: Thu Aug 04, 2022 6:20 pm IBKR has a page explaining why the short sale proceeds do not cancel out your margin loans:
https://ibkr.info/node/2186/

It looks like the short sale proceeds must be posted as collateral so it generates little interest income for you. And you'll have to borrow the margin loan from IBKR separately.
What would work for the OP would be for IBKR to use some of his long positions as collateral for the shares that he needs to borrow for his short positions. Then the OP wouldn't have to borrow any money from IBKR. The problem is that current practice calls for cash collateral, and that would be non-trivial to change.

Collateral doesn't completely eliminate counterparty risk because if the price of the borrowed stock changes, the amount of collateral will no longer match the price of the borrowed stock. If, instead of cash, the borrower puts up shares of a different stock as collateral, then there are two stock whose price can change rather than one. If someone is borrowing Costco stock and puts up Walmart stock as collateral, that might be as good or better than cash collateral because there is some correlation between these two stocks. On the other hand, if the borrower offers Gamestock stock as collateral, the counterparty risk is going to be higher because Gamestock is highly volatile and not correlated with Costco stock. So I would expect that lenders would vary their lending fees depending on the type of collateral offered.

If that happened, the process of borrowing shares would become more complicated, to the point that it would be impractical without large investments in automation to deal with the complexity. And that requires coordination, because if IBKR develops software that allows it to offer non-cash collateral, that's money down the drain if no lender will accept non-cash collateral.
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