Big Time Lurker, First Time Poster Looking to Develop My Game

Discussion in 'Options' started by ChicagoPizzainCali, Jan 11, 2018.

  1. DeltaRisk


    You’ve got to understand what haircut is and how it relates to portfolio margin.
    They are NOT the same thing.

    PM is margin with that comes margin calls,
    haircut is more or less like PM but you’re dealing with the exchanges. It’s easier to explain for me a little later.

    The portfolio margin calculator is incredibly useful on that website also.
    I use it quite often.

    Haircut and PM are really the only way I’ve seen any trader make anything substantial.

    Really the whole document is exhausting to read, but the part on net capital is important. That is haircut.
    All of the other regulatory stuff is nonsense if you don’t own a B/D.

    I’ll PM you when I can, but read from the website I posted and then finish reading the document. It’ll make more sense afterwards.
    #21     Jan 12, 2018
    AlexxS likes this.
  2. AlexxS


    Phew, this took a bit longer than I expected. It really is exhausting to read (especially if your native language is not English and you are not familiar with legal-lingo), but interesting nontheless. I hope the OP does not mind me positing a short summary of the document as it relates to haircut. To those more knowledable than me: Feel free to correct me where I'm wrong.

    The document deals with the question of how to compute a broker-dealer's regulatory net capital. There are several methods, but they all start with the GAAP (generally accepted accounting principles). A broker-dealer has to first determine its equity in accordance with GAAP. GAAP liabilities deducted from GAAP assets result in GAAP equity. The broker-dealer must mark to market all securities and commodities positions daily. Unrealized gains are added to equity and losses are subtracted from equity. The GAAP equity is then subject to an adjustment that considers a situation in which a broker-dealer's GAAP equity needs to be liquidated emergently. Liabilities are subordinated to the claims of creditors (this includes you, the customer) and then added back to GAAP equity (this process is a bit more complicated and takes into account income tax liabilities, accrued liabilities and various assets that are not readily convertible into cash that need to be deducted from GAAP equities, but for the sake of keeping this short, I won't go into detail). All of this results in the so called tentative net capital.

    Tentative net capital is then reduced by haircuts (percentages of the current market value of a broker-dealer's securities and commodities positions). The haircut is based on the risk characteristics (i.e., market risk, price volatility, and liquidity) of a particular security. For example, securities perceived as risky typically receive a large haircut (e.g., 100 percent for nonmarketable securities); those perceived as less risky generally receive a small haircut (e.g., 0 percent for short-term government securities). For options, a risk-based methodology using theoretical option pricing models calculates haircuts.

    There is also something called „undue concentration charge“. This refers to a situation where a broker-dealer has a securities position for which the market value is more than 10 percent of the broker-dealer's tentative net capital. There are very specific rules for what accounts as an undue concentration, but the limits are not that high. Those concentrated positions lead to an extra percentage of the usual haircut applied, and it is applied only to the excess portion of the total position. E.g. the additional haircut for concentrated positions in equity securities is 15 percent.

    So why does all of this matter? Obviously, a broker-dealer wants to have a small a haircut as possible. This is because with a 100 percent haircut the broker-dealer must finance 100 percent of the security's value with firm capital. The intended function of haircuts is to act as a safety margin for market fluctuations and delays encountered in liquidating securities and commodities positions. An increase in market risk, price volatility, and liquidity leads to a decrease in firm capital. If firm capital is not able to finance all of the customer positions, the broker-dealer will have to find short-term lenders in the money market. I other words: it needs credit.
    Am I on the right track or should I put on my tinfoil-hat?
    #22     Jan 18, 2018
  3. DeltaRisk


    I think you might be missing the point with regards to retail/professional trading.

    Haircut is the leverage the exchange grants to the B/D so as to not use any firm capital more than necessary. (Those are the risk arrays mentioned in the website I posted.)
    It’s not margin per se, but it functions the same way when calculating what the B/D needs to put up to their own clearing firm.
    I’m not including self clearing B/D’s as they are subject to STAN’s and answerable only to the exchange.

    It’s a contingent liability but requires no money to be put up save for the haircut and the exchange minimum when putting on positions. They use a sort of MonteCarlo simulation to predict what haircut will he required(shock 15% up & down.)
    OCC Tims also applies to stock hedges, it is a cumulative portfolio.
    (I’m not even speaking about adding futures hedges in here.)

    That’s the big point.
    Haircut(portfolio margin,) is where you will be able to find your edge.
    You need to know how to use it properly.
    #23     Jan 18, 2018
    AlexxS likes this.
  4. AlexxS


    Haha, yes, seems like I was going the wrong direction. Thanks for the clarification, I really appreciate your feedback.
    #24     Jan 21, 2018
  5. spy guy

    spy guy

    i take every profit, in the past some of my biggest losses were my own greed hoping the market would go up more, no one knows what the market is going to do in the next hour. i get in grab a profit and run. you cant lose taking a profit.
    #25     Jan 21, 2018
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    Does that mean at the end of the day if there is only +.10 profit in your open trade, you close the trade instead of holding it?
    #26     Jan 21, 2018
  7. spy guy

    spy guy

    i didnt explain good, i hold it until i feel its a good profit, sometimes this is 100.00 sometimes several thousand, its a feel i get when to get out
    #27     Jan 21, 2018
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    You go by a feel or instinct when to sell, but do you also use intra-day charts?
    #28     Jan 21, 2018
  9. Sorry I haven't checked in lately... Thanks for all the wonderful posts!

    Does anybody write a reverse calendar spread into earnings? I'm thinking the implied volatility will drop, but any details would be appreciated.
    #29     Jan 23, 2018
  10. spy guy

    spy guy

    No I take the money by feel because the market can take it back quickly
    #30     Jan 26, 2018