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Ian_944

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About Ian_944

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  1. The "fixed premium" paid and "tracking the price of the option" are effectively one and the same thing. For example, take the example of paying £5 to buy a call option on Instrument X: If you trade on the the actual option market, you pay £5 to buy the call. If at expiry the option finishes out of the money you lose £5. If the option expires in the money, you take delivery of Instrument X which typically will have a value very close to the value of the option at the moment of expiry. If you trade a spreadbet on an option on IG, you still pay £5 to establish the position (technically you pay a bit more because IG add their margin to the price of the option). If at expiry the option finishes out of the money, you lose that £5. If the option expires in the money you are paid the value of the option at expiry but do not take delivery of Instrument X. Again the value of the option at expiry will usually be very close to the value of the delivery of Instrument X. Both on the actual market and the spreadbet market, the value of the option (and in effect your MTM PnL) will fluctuate based on movements in the price of Instrument X, volatility, theta, etc. Ian
  2. Looking at the price history for the CME CL future which I think is the futures contract that is used by IG, between midnight and 01h45, the June contract (May expiry) moved from ~11.10 to ~11.40. Over the same period the July contract (expiry June) traded from ~18.00 to $18.41. So there was movement in the futures market, but you will have to calculate what that would have implied for the movement of the DFB spreadbet. As @Caseynotes states and you are aware, the price is an interpolation of 2 contracts. At midnight your stop was about $0.40 from the price in a market which currently has a standard deviation on hourly charts of ~$2.00, or to say it differently your stop was 3.5% from the price in a market moving 20% a day. You're going to get stopped out by simple market noise a LOT if you use stops in the above manner. Ian
  3. I've done the math on that before, and the spread on the futures instruments is so wide (it incorporates the overnight charge) that there is minimal advantage to the future over holding the DFB, and you lose all the flexibility offered by the narrow spread of the DFB.
  4. @TrendFollower raises a good question, and @daxhad better do the math and understand exactly what he's trying to achieve. However, there is a valid argument for a long-term hold strategy using daily funded bets, it simply behaves like buying stocks in a margin account with the consequent leveraging of returns and losses we know so well. I'm not advocating a leveraged long-term trade, simply showing the math. Let's take a worked example - for simplicity a single investment rather than the recurring investment, but the principle is the same. The FTSE is currently at 7178. Let's assume in 1 year's time it is trading at ~7900 for a ~10% annual return. Now let's assume our investor has £12,000 to invest. If he invests in buy/hold via an ETF invested in the FTSE, unleveraged, he earns 10% or £1200. Simple. Maybe with dividends included total return is 14% in the year. But let's say he puts the £12k in a spread bet account and opens a DFB on the FTSE100. Let's say he decides to gear his position 6:1, so he takes out a £10 bet giving the trade a notional value of £71,780. Margin is about £3.5k, but not all that relevant since he's not maxing out his leverage. Let's assume the overnight rate is going to be about 5.5% (LIBOR +IG's fee) / 365 which means his overnight charge is going to be £10.82 when he opens the position, and rise to £11.90 a year later due to the higher index value. Long story short, the overnight charges for holding the position for a year amount to £4,136. So - where does that leave him? The position is up 7900 - 7178 = 722 points, or £ 7,220. Deducting the funding costs he has made £7220 - £4136 = £3,084, which is a return of over 25% on the £12,000 he allocated to the trade. Way more than the 14% from putting the £12k into an unleveraged buy/hold strategy. . Obviously if the market went down 722 points by year end (-10%), he would be deeply under water with a loss of - £-3,081 + £-4,136 = £-7,217, leaving him with a return on his £12k of -60%. If the trader can access a ~£70k loan for less than the 5.5% rate, then obviously he would do better to borrow from that source and invest into an unleveraged ETF or similar, and not establish the position via a spread bet. Would be great if someone double-checked my logic and math on the above @dax Buying every month will mean you will accumulate multiple trades, but so what? The user interface shows them aggregated against the instrument in any case. Ian
  5. Hi IG Index, Would you be able to support a long position on cUS Dollar vs Argentina Peso? Thank Ian
  6. Hooray! Thanks guys! Well done and ! Cheers, Ian
  7. Thanks guy - I appreciate the feedback. Ultimately the thread has served its purpose for me in getting a good sense of how these products behave in a portfolio, and getting a practical understanding of the funding costs associated with owning on margin.
  8. Unsurprisingly the market action from the past two weeks put a significant dent into this portfolio. While a long term holder would still be comfortably ahead of the game, the demo trading account I have tracked since December has swung from a +10% return to being down by -10% in terms of notional value. The rebalance from a few weeks back helped save a couple percent, but was a drop in the ocean given how rapid volatility ramped. Last week another rebalance was triggered and the portfolio is currently running at the lowest equity exposure in its history with only a 28% exposure to equities. Graphs below if you enjoy visuals of carnage I have been thinking about how best to use leveraged ETFs in light of the performance of this portfolio, as well as the silliness that is the XIV situation. XIV was always doomed to go to zero (and how that was lost for some folk is lost on me), but that issue aside I have been thinking about the warning on all the prospectus's which highlight they are for use as short term trading vehicles only. I'd argue it's not completely accurate to say they are short term only, as both this "risk parity" portfolio and even a terminal product like XIV have exhibited periods where owning them for periods far in excess of their design has yielded strong performance in the right conditions. I think a more accurate statement would be to say leveraged ETFs should not be used in a manner that assumes that returns will compound, e.g. avoid a pure buy and hold approach. And actually if you look at the math and path dependency in these products, it feels intuitive although I have not proven that out. So what to do? I think the solution to utilising these products optimally over the long term is to fix the size of the investment. For example, using my risk parity portfolio as an example: initially invest to a notional value of £20k, but at regular intervals sweep profits out of the portfolio to maintain that initial value of £20k. e.g. portfolio goes up to £21k in a month, then sweep £1k out of the portfolio to bring it's notional value back to £20k. I need to model exactly how this would play out, but intuitively the result would be a reduction in the parabolic outperformance shown in the graph below, but also a dramatic reduction of any draw downs. To be precise: I think my next generation effort for this portfolio will do the following: Run the same core investments and volatility-based rebalance strategy Add an additional rebalancing overlay that sweeps profits in excess of the initial investment into a short duration treasury ETF such as SHY. (e.g. sweep every time profits exceed 10%) Given that this thread has generated little interest, I do not plan on making further updates. Regards, Ian
  9. Well, what a week on the US markets! Simply a rocket ship, but the trend of increased volatility continued this week and has caused the strategy to trigger a rebalance, it actually fired on Tuesday, but as I only update over the weekend I will rebalance Monday. The table below shows that the optimal portfolio mix needs to be 55% S&P500 and 45%Treasury, which means I will need to reduce the position (bet) size for S&P500 to 0.71 and increase Treasury to 4.96, which will move roughly £2.2k out of S&P500 and into the other fund. As an aside, if I was running this portfolio in real life I would be very tempted to scale the whole position down to take some profit given our return on capital is sitting at almost 50% in a little under two months.
  10. straddle wrote: Hi Ian You write "Whereas before you would have seen a 75% return on capital (500/660), you will now see a 7.5% return on capital. If you have places with a higher rate of return than that, then you should switch to those, but in my mind that's still a phenomenal return." My point is that a 7.5% return is far from guaranteed, and in fact there is a high chance of loss. Selling options is considered a high risk strategy, which in my opinion is not warranted for the sake of a maximum 7.5 % return and the chance of a loss many times that. Sorry, I edited my post later, so the comment you referenced changed underneath you a bit, but to respond to your point: I really, really think you misunderstand the difference between the expectation of a trade versus the impact of leverage on a trade. Where you can make a return on capital of 75% due to high leverage, you can just as easily make a loss of 75% of capital, Leverage impacts the size of both your wins and losses. With a 7.5% return on capital due to lower leverage, your likely losses would be reduced to a similar order of magnitude as your wins.
  11. Hi straddle, You're welcome to get into an opinionated debate with the regulator about what their role should encompass. I think that decision was already made in the distant past, so it is of little interest to me. I am also very concerned about the impact of reduced leverage on the future of the industry and reflected that in my comments. I am sorry, your DAX example is flawed in many ways: Your assertion that reducing leverage will negatively impact the risk/reward ratio of a trade is simply incorrect. Risk/reward ratio is determined by where stop and profit levels are set and the likelihood of being right. A trade with a positive expectation remains profitable independent of leverage. Return on capital will decrease (I guess the point you were trying to make). Whereas before you would have seen a 75% return on capital (500/660), you will now see a 7.5% return on capital. But your losses are similarly amplified. Your comments on extra deposits being required along with extra margin are misleading at best. When you sell an option you establish a notional position equal to bet size * contract value. That notional value is the same value irrespective of leverage / the amount of margin required. With higher margins / low leverage you are much, much less likely to require extra deposits as your initial margin covers a much larger move in the instrument. Regards, Ian
  12. Hi Chris, Thanks for your thoughts on the matter. Losses are certainly a cost of doing business, but the small losses issue was a very real finding in the original ESMA analysis. Many spread betters put their stops so close to the market that they will frequently get stopped out by a move that is nothing more than market noise. Part of this is poor trading strategy, but I think a greater part is due to an attempt to risk manage overly leveraged instruments. I think you are absolutely right that we have a very real risk of the ESMA changes impacting the IG business model in a negative way, and this could cause our costs to go up as a pool of accounts is forced to leave the market. But I think IG will be fighting that battle, in their own interests, so we should focus our comments on what would be the best outcome for account holders. What I will say is on the spread bet business model is that I am not interested in my having low costs due to the industry having bad practises elsewhere which make them outsize profits from less knowledgeable account holders. e.g. I will support the closing of binary option products in favour of my paying higher costs, because I do not believe these products have a positive expectation for any account holder. On guaranteed stops, I am afraid I do not understand your logic. How do guaranteed stops help either the margin requirement or trader profitability? The only time the "guarantee" part of the stop comes into play is if the market gaps significantly, which is a rare event. Sure if there is a big gap, it is going to hurt some folk badly (just as players in the "real" markets would hurt), but it is also a super infrequent event, even for those that with positions that have long hold times. As IG are effectively taking the other side of a trade whenever they offer a guaranteed stop, these stops will force IG to widen spreads in order to build up an insurance pot to deal with the scenario where they are hit by a tail risk event. So we will all pay that cost, when our individual strategies might mean that it's virtually impossible we'd be at risk of such a market event. And in cases where our strategy is at risk, it is almost certainly better for the account holder to be building up their own insurance pot than just giving that money to someone else to keep forever. What am I missing? My point re: costs is that spread bets are already way, way more expensive compared to the futures market. Going back to my oil example: I trade oil on Globex via Interactive Brokers. One contract on Globex is currently equivalent to about a $10 spread bet . My costs on that transaction is a 1c market spread, plus about $4 in roundtrip transaction costs. Total cost $14. . A $10 bet on oil at IG (who have some of the tightest spreads around) will have a 3c spread: so 1c * $10 for the market spread, plus 2c * $10 = $20 transaction cost to IG. Total cost $30. I have used $ through out for simplicity, but the costs are even higher if you translate the bet point spread using £ What I will say is that I think for bet sizes less than a futures contract, the spread bet cost model is actually okay as a $4 roundtrip on a $1 bet would obviously be horrendous, which would be the case if transaction costs were fixed / split out of the spread as per futures I think you misunderstood a little the intent of my message if you feel I am suggesting the picture will be rosy. I agree with IG that this could be a very big issue for the industry. The purpose of my message was to encourage account holders to think about what is important to them, rather than simply following IG's lead and saying "leverage is coming down to far" without a clear reason. To be honest, I think most of the comments in this thread are shouting "keep leverage high" without explaining how it benefits their trading. I fully understand how high leverage keeps the spread bet firm's profits high (to be clear, I want the firms to be profitable and offer a great service), but it's not obvious to me why very high leverage is beneficial for account holders. Regards, Ian
  13. Guys, When ESMA speak about investor risk, they are talking about the risk of many small losses (as well as risk of ruin / blow up) The biggest reason for many small losses is high leverage. High leverage forces investors to place stops close to the market, as they cannot afford the market to move many ticks before their risk management kicks in. Who wins when stops get hit? Not the retail investor. For anyone trading more than the minimum bet size, they can simply scale down their sizing to continue trading. For example, if DAX margins increase 10x and you were betting £10, now you bet £1. Individual wins and losses are smaller, so return on equity is lower (for those making a profit), but your ability to make a profit has not changed. If you are trading the minimum bet size and cannot handle the increased margin, then I think ESMA have a point and you should question whether these are the right instruments for you. If we have to choose, reduced leverage is better than guaranteed stops for retail investors .There is no free lunch - the only way IG can implement guaranteed stops across the board is to increase spreads across the board. i.e. transaction costs go up for everyone go up. Transaction costs are the biggest drag on long terms performance. The spreads (how IG makes money) are already very high compared to what one pays with direct market access to a futures exchange. For example, oil has a spread of 3c typically on IG, I have never seen Globex trade at more than a 1c spread. Transaction cost = 2c x bet size!! I am very sure that, for me personally, the route to maximum profitability is a) having a system that has an edge in my chosen markets, and b) a trading platform with the lowest possible transaction costs. Leverage levels not the biggest issue, imo. Regards, Ian
  14. It is a martingale system. The definition of a martingale system is one where bet size is increased exponentially in the event of losses, which is what you show above. That you have tweaked how frequently you double bet size is irrelevant to the definition. I would strongly recommend anyone considering this strategy to first understand the underlying math. Wikipedia has decent background. oilfxpro wrote: It is not martingale, martingale requires a doubling of size, immediately after a loss .This method places bigger bets after 4 losses.This is different.
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