Monday, March 21, 2011

Options House deleted my comment

I posted a comment in this article in the Options House blog, and they deleted it.

I didn't think it was controversial, and while I don't remember my exact wording, my points were:

  1. Wow, their margin rates are now cheaper than my mortgage.

  2. That the rates are "not tiered" is kind of weird. Let's say you borrow $40,000 at 4.0%. That would cost you about $133 per month in interest. If you go up to $50,000 the rate drops to 3.0%, and your monthly interest drops to $125. That's a nice bonus for borrowing an additional $10,000. Is that how other brokerages do it?

  3. One interesting change is that the previous margin schedule used the Broker Call Rate as the base rate, but now they are using the Federal Funds Rate. (Here's where I find the current rates.)
  4. I wonder why. They also quote the Federal Funds Rate as 0.25%, but that's not entirely true. The Federal Reserve has a "target rate" which is currently between zero and 0.25%. According to the Federal Reserve Bank of New York today's rate is 0.15%. This rate varies daily based on actual interbank lending.


Now let's get controversial...


Interactive Brokers probably can't be beaten.


First of all, Interactive Brokers is still cheaper. I wasn't going to post this on their blog, but now I'm on my blog, so let's go. I can't link directly to their margin schedule, but go here and click on "Interest Charged to You." You will see their highest rate is currently 1.64%. Above the $100,000 tier, it drops to 1.14%, and it just gets more absurd from there.

If I was a carrier of margin debt, I would be at IB in a heartbeat. Options House can crow about how they're lower than their crappy competitors, but there is one good competitor that I'm certain they can't beat.

You can do better with options.


The other thing is that you can obtain better rates from the options market itself. I'll go into more detail when I'm not on a lunch break, but it's fairly easy to find a credit spread on an index (like SPX, or XSP) that results in borrowing money for a relatively low rate, even after paying the spread.

Let's say we do a SPX box spread. While I'm typing I can sell a Dec 2013 $3000 put, and buy the same expiration $2500 put for a net credit of $47,539.30. (Don't bother looking for these numbers. As soon as I typed it, it was out of date.) In 2 years and 9 months, when the S&P 500 fails to crack 2500, this spread will "lose" $50,000.

But look at the mechanics of receiving $47.5K now, and paying $50K in almost 3 years. It kind of looks like you borrowed $47,539.30 at an APR of about 1.8%. That's locked in for almost 3 years. Not bad.

You'd do better borrowing more. At some point a full box spread is cheaper, but that depends on the bid/ask spread and if you start using options that are close to the money. But that's all optimization. If I spent more than 5 seconds looking, I could probably do better than an unlikely-to-pay-off bear put spread. Deals can be found.

Read more...

2 comments:

Chuck Homic said...

I am posting my questions one by one, to see if one of those topics is something they're sensitive about. Let's see how that goes. :)

Lisa Ann Homic, M.Ed. D.C. said...

short and sweet works, see what they say.