Options 600 Proprietary Trading

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Options 600 Proprietary Trading

• The Power of Risk Based Margin

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What is Margin

• Margin is the amount of money (risk) your
  broker/dealer holds in your trading account in
  order for you to place a trade.
• It is money to cover the maximum loss in your
  position at expiration.

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Types of Trading Margin

• 1. Reg-T Margin traditional broker OptionsXpre
  ss, ThinkorSwim
• 2. SPAN Margin commodities, futures Interactiv
  e Brokers
• 3. Haircut Margin market maker VtraderPro

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1. Reg-T Margin

• Reg-T margin or retail margin is a cost based,
  not risk-based margin.
• You must provide 100 of the capital in your
  account to place a position.
• Ex Buy 35 MSFT call option Sell a 30 MSFT
  call option
• This is a 35/30 Bear Call position (credit
  spread) with a margin requirement of
  500/contract, (less the credit received for the
  position).

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2. SPAN Margin

• Standardized Portfolio Analysis of Risk
• Is a risk-based margin calculated by a set of
  complex algorithms to determine a global (total
  portfolio) assessment of the one-day risk for a
  trader's account.
• SPAN margin is calculated on a daily basis.
• Mostly used with Futures Commodities

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3. Haircut Margin

• Is a risk-based margin
• Haircut is the margin or difference between the
  actual market value of a security and the value
  of the security assessed by the clearing firm
  with risk.
• For equity only positions, this equates to
  approximately 61 overnight leverage.

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How is Haircut Calculated?

• Calculate the greatest daily risk associated
  within a 30 range, ie, 15 up and 15 down from
  the current trading place.
• Or, the minimum requirement of 25 per options
  contract as some positions have little to no
  risk.

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Different Haircuts?

• Equities up/down 15
• MSFT, MMM, IBM, etc
• Narrow-based Indexes up 8/down 10
• QQQQ, NDX, RUT, etc
• High Cap Indexes up 6, down 8
• SPX, DJX, OEX, etc.

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-conditional-

• Be advised that the clearing corporation may
  adjust the Haircut rate of a particular security
  at any time if it determines market conditions
  warrant such actions.

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Examples of Haircut Margin

• You decide you would like to purchase 1,000
  shares of IBM. IBM is trading at 82/share.
  Your capital requirement in a regular retail
  account would be 82,000
• In a haircut account 15 of 82 would be 12.3
  or only 12,300 for the same position.

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- continued -

• Lets say you would like to write or sell 10
  November 85 calls against the position for .90
  or 900 of credit.
• You would be writing a Covered Call
• Retail ROM 900/82000 or 1.1
• Haircut ROM 900/12,300 or 7.3
• Different return on Margin! Same Return on
  RISK

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- follow up -

• Should IBM continue up to 85.00 then the return
  would be 32 using Haircut Margin versus 4.8 in
  a retail margin account.
• A significant difference for the same risk!

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- one step further -

• Since haircut is calculated on the NET option
  position, the 12,300 is really only 11,400 at
  risk because of the 900 credit received. So
  were really looking at
• R.O.M. of 900/11,400 or 7.9

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- a word of caution -

• Haircut does not eliminate or remove risk, the
  full risk remains the same.
• If IBM went to ZERO, you would still be liable
  for the full 82,000 less the 900 credit.
• The advantage is, IBM will probably not go to
  zero in the next 30 days, and you wont have to
  tie up that capital.

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So Whats the REAL advantage

• You have more capital working for you
• You can diversify more with the same amount of
  original capital
• You have additional capital to make adjustments
  or hedge risk
• More money working for YOU

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Long Stock Position IBM _at_ 82

• Retail Account
• Buy 1000 Share IBM
• Margin 82,000

• Haircut Account
• Buy 1000 shares IBM
• Margin 12,300

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Long Stock w/Put IBM _at_ 82

• Retail Account
• Buy 1000 Share IBM
• Cost 82,000
• Buy 10 Put contracts
• Cost 1,100
• Margin 83,100

• Haircut Account
• Buy 1000 Share IBM
• Cost 82,000
• Buy 10 Put contracts
• Cost 1,100
• Margin 4,100

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Covered Call w/Put - IBM_at_82.00

• Retail Margin Account
• Buy 1000 Share IBM
• Cost 82,000
• Buy 10 Jan 07 Puts 750.00 - Debit
• Sell 10 Nov 80 calls 3,800.00 - Credit
• Margin 82,750-3,400 credit 79,350

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Covered Call w/Put - IBM_at_82.00

• Break even 77.50
• Profit above 80.00 averages 900.00 or or 1.1
• Break even allows for approx -5 stock price
  decline
• Same risk as Hair cut but substantially less
  reward
• Risk 4,100 for 1. 1 return

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Covered Call w/Put - IBM_at_82.00

• Haircut Account
• Buy 1000 Share IBM
• Cost 82,000
• Buy 10 Jan 07 Puts 750.00 - Debit
• Sell 10 Nov 80 calls 3,800.00 Credit
• Margin 7,500-3,400 credit 4,100

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Covered Call w/Put - IBM_at_82.00

• Break even 77.50
• Break even at -5 stock price decline
• Profit above 80.00 yeilds 900.00 or 22
• Now this is a great return on a conservative
  stock with a conservative strategy
• Risk 4,100 for 22 return

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RISK COMPARISON CHART- Covered CallCASH versus
Hair Cut Margin-IBM 1000 SHARESShort Nov 80
Calls Long Puts in Hair Cut Account

• CASH
• Margin 82,000
• Max Risk 82,000
• Max Profit 1,190
• ROI 1.5

• HAIR CUT w/ Puts
• Margin 4,100
• Max Risk 4,100
• Max Profit 900
• ROI 22

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RISK COMPARISON CHART- Covered CallCASH versus
Hair Cut Margin-IBM 1000 SHARESShort Nov 80
Calls Long Puts in Hair Cut Account
And if the Market Falls

• Retail Account
• - 5 -800
• -10 -5,700
• -15 -8,800
• -20 -12,700

• Haircut Account
• -5 -200
• -10 -2,000
• -15 -3,300
• -20 -4,000

Volatility increases in downward movement. Puts
increase in value accordingly.
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Additional Hair Cut Examples

• STOCK PROFIT RISK RETURN ON RISK
• AMGN 1400 3500 40
• XOM 650 1800 36
• LLL 2100 5300 39
• FDX 1500 3500 42
• CAT 550 1950 28
• BBY 650 1850 35
• PEP 650 1850 35
• MO 1280 3700 35
• TOTAL 8,780 23,450 MARGIN
• The above list would require 725K in a cash
  account

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Strangle Position IBM _at_ 82

• Retail Account
• Buy 10 85 calls
• Cost 900
• Buy 10 80 puts
• Cost 1100
• Margin 2,000

• Haircut Account
• Buy 10 85 calls
• Cost 900
• Buy 10 80 puts
• Cost 1100
• Margin 310

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Bull Call Spread IBM _at_ 82

• Retail Account
• Buy 10 85 calls
• Sell 10 90 calls
• Cost 2,400
• Margin 2,400

• Haircut Account
• Buy 10 85 calls
• Sell 10 90 calls
• Cost 2,400
• Margin 2,200

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Ratio Put Spread IBM _at_ 82

• Retail Account
• Buy 30 75 puts
• Sell 10 80 puts
• Credit 500
• Margin 4,500

• Haircut Account
• Buy 30 75 puts
• Sell 10 80 puts
• Credit 500
• Margin only 179, but a minimum 25 a contract
  1,000

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IRON Condor SPX _at_ 1335

• Retail Account
• Buy 10 1265 puts
• Sell 10 1275 puts
• Buy 10 1400 calls
• Sell 10 1390 calls
• Credit 2000
• Margin 8,000

• Haircut Account
• Buy 10 1265 puts
• Sell 10 1275 puts
• Buy 10 1400 calls
• Sell 10 1390 calls
• Credit 2000
• Margin 4,500

NOTE Iron Condor is not taking advantage of
Haircut and the risk will likely continue to
rise over time.
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Double Diagonal SPX _at_ 1335

• Retail Account
• Buy 10 1250 puts
• Sell 10 1275 puts
• Buy 10 1425 calls
• Sell 10 1400 calls
• Debit 2400
• Margin 27,400

• Haircut Account
• Buy 10 1250 puts
• Sell 10 1275 puts
• Buy 10 1425 calls
• Sell 10 1400 calls
• Debit 2400
• Margin 13,700

NOTE Double Diagonal leverages Haircut much
nicer considering the risk is likely to not rise
much over time and allows for adjustments much
easier.
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Summary

• The obvious advantage of Haircut Margin vs.
  Retail Margin is ROM with less risk if managed
  properly.
• Think of the Married Put / Covered Call strategy
  which practically triples your return with a
  fraction of the risk.

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And Theres Even More.

• Well further discuss how selling back month
  options to buy front month curvature can add even
  greater potential returns with less risk.
• Now lets look at some live positions using
  ThinkorSwims Analysis feature.

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LK Capital Benefits

• We will use Hair Cut Margin higher returns for
  less risk
• Volume discount on Option contracts
• 5.25 interest on capital
• Professionally managed risk
• 60/40 Tax Break on all Equities
• Your Cost 3 per year
• Your benefits will exceed your cost

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Benefits of Trading with GRIG

• Use of Hair Cut Margin
• Lower option prices (.50-.90) / contract
• 5.25 interest on capital
• Cross-margin on correlated positions
• Ability to sell Far Out Months against near term
  months
• GRIG support group
• 60/40 Tax Break on all Equities

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What Does it Cost You?

• Virtually Nothing. an accounting setup fee of
  3 a year or ¼ per month
• PLUS, you will end up making money
• Lower option costs
• Direct floor broker access, no middle man will
  allow you the edge on one side of your position
• More return for less risk
• 5.25 interest on capital or credit positions

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Where does any profit go?

• GRIG, LLC expenses
• Pay for subscriptions
• Pay for materials
• Pay for seminars
• Any left over profits get passed directly through
  to the company.
• Yes, we are doing this for FREE!

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Next G.R.I.C. Meeting

• Monday, Oct 9th Bearish Strategies
• Saturday, Oct 14th VTraderPro
• Possible special guest from Florida attending.