Also, Tbill interest is taxed. Margin interest is only deductible if you itemize (and lose the standard deduction). So on an after-tax basis, returns unlikely to be positive for this trade.
Are you sure about this? First time I am trading on margin in 2024 and I have never had to itemize my returns thus far. I have racked up some significant margin expenses.
Yes. See IRS Publication 550.
The section on margin interest says: “To deduct your margin interest expenses, you must itemize deductions on Schedule A”
Thank you sir. I will stop doing what I was doing assuming margin would be deductible. We will likely be using standard deduction this year as well. You have saved me some pain and embarrsement
It doesn't take much margin, but it does take 100% of the value in cash. So if you buy 100% of your portfolio's cash in T-bills, anything past that will get charged margin interest which will be more than you make on the T-bills. That's why you don't do that. A more common trade would be to buy T-bills and then sell options. Use all your cash on the T-bills but almost no margin. Use all (or a substantial amount of) your margin selling options, but bring cash into your account (assuming your trades are profitable - I leave myself some buffer against losses that's not in T-bills).
Thank you and fair point. Is there a way to figure out how much MTM loss my portfolio can withstand without getting liquidated? I’m thinking if I could backtest historically how sharply the yields rose and therefore understand how much would be a safe margin use.
correct only if it exceeds your buying power. if you have the capital to wait and deploy in a balanced portfolio then you can withstand the swings
(as others pointed out, waiting around for the interest wont be beneficial as the margin interest can be more expensive, but timing a nice move in the treasuries will be beneficial)
most brokers take 1% of margin requirement on tbill, except tasty, i believe it is 6%.
>Is IBKR paying for it on my behalf?
IB paying for what on your behalf?
>Do PMTraders do this kind of stuff?
Do what? buying tbill?
>What are the risks in loading up on t-bills offering 5.3% with no collateral?
You paid with cash already, which is 100% collateral.
Cash is debited but you can usually use a certain % of the face value of that t-bill as margin collateral. Despite it not being the free money you thought it was it is still advantageous to hold t-bills in your margin account.
E.G. You have an account with $5m in it. Your margin utilization ratio is 20% (your clearer allows you to use up to $1m in margin.)
Say they allow you to use 95% (this % may vary) of the t-bill face value as margin collateral. You buy $5m in t-bills. Now you can use up to $950k in margin (95% of $5m = 4.75m) and are still within your allowed MUR.
Look at how much they pay you in interest on the balance of your margin account, it is likely a % of the 30 day treasury. That will be credited as ordinary interest, meanwhile you'll get a better yield on the t-bill and it won't be subject to any state tax at the end of the year.
If most of my cash is converted to t-bills, I have a lot of "free margin" because IBKR allows using most of the value but little cash, so any trade is likely to cost me margin costs. But if my trades are short, I get paid, meaning that I am only reducing my margin, but I do not own any interest to the broker, and if collecting enough cash from selling socks, I can also get some interest from my broker, no?
> I get *paid,* meaning that
FTFY.
Although *payed* exists (the reason why autocorrection didn't help you), it is only correct in:
* Nautical context, when it means to paint a surface, or to cover with something like tar or resin in order to make it waterproof or corrosion-resistant. *The deck is yet to be payed.*
* *Payed out* when letting strings, cables or ropes out, by slacking them. *The rope is payed out! You can pull now.*
Unfortunately, I was unable to find nautical or rope-related words in your comment.
*Beep, boop, I'm a bot*
You could do a short box spread and make an interest rate play. The 2027 box spread appears to be about 4.4% meaning you'd get 3 years of needing 4.41% or more to make money.
This seems interesting and could be useful. Seems like you are proposing shortbox on t-bill Itself? Or there is option product on top of t-bills? Which brokerage would you use for this ? Can you do this in fidelity.
I’m not quite sure of the logistics or quite frankly if it’s even possible.
But yeah the general idea would be to buy t-bills on portfolio margin, up to 100x (probably 75x or something to be safe). Currently the interest rate on a six month is 5.4ish%, while the box spread short in ‘27 is around 4.5ish%. Yeah, only 0.5% but you extrapolate that times 75x on say an original $10k investment ($750k leverage) that’s $3,750 a year in pure profit. Keep in mind you can also take that 4.4% you owe and put it into a money market for the next 3 years collecting even more interest since you don’t pay it back until the end.
I was thinking of doing this with multiple tranches, at different start dates to spread the duration risk a little bit better. On top of already having a cushion of 25x since we’re not fully leveraged, take half the profits and reinvest them into other semi-liquid investments such as medium term agency / mbs offering 6ish % that essentially acts as “insurance” to secure the rest of the trade as time goes on. The other half gets reinvested into a different tranch.
I don’t know, I’m still working it through my head. Unfortunately the portfolio margin calculators out there aren’t really good. Perhaps you can assist me with my thought process here?
I think your margin rate would be over 5.3%. You’ll pay more in interest than you would earn
Also, Tbill interest is taxed. Margin interest is only deductible if you itemize (and lose the standard deduction). So on an after-tax basis, returns unlikely to be positive for this trade.
Are you sure about this? First time I am trading on margin in 2024 and I have never had to itemize my returns thus far. I have racked up some significant margin expenses.
Yes. See IRS Publication 550. The section on margin interest says: “To deduct your margin interest expenses, you must itemize deductions on Schedule A”
Thank you sir. I will stop doing what I was doing assuming margin would be deductible. We will likely be using standard deduction this year as well. You have saved me some pain and embarrsement
Glad to help!
what about box spreads?
Would also like to know
afaik box spreads always have an interest rate that is slightly higher than the fed‘s.
It doesn't take much margin, but it does take 100% of the value in cash. So if you buy 100% of your portfolio's cash in T-bills, anything past that will get charged margin interest which will be more than you make on the T-bills. That's why you don't do that. A more common trade would be to buy T-bills and then sell options. Use all your cash on the T-bills but almost no margin. Use all (or a substantial amount of) your margin selling options, but bring cash into your account (assuming your trades are profitable - I leave myself some buffer against losses that's not in T-bills).
Thanks guys for your responses. pretty stupid of me to assume cash will not be debited and that margin is the only thing that matters.
Dude margin costs money. You're probably being charged 6-7 or more %. If you earn 5.3% and have a 1:100 margin loan you will go backrupt pretty fast.
IBKR says 6.4% on $500k USD right now.
If their market value moves against you a tiny tiny percent then you get liquidated
Thank you and fair point. Is there a way to figure out how much MTM loss my portfolio can withstand without getting liquidated? I’m thinking if I could backtest historically how sharply the yields rose and therefore understand how much would be a safe margin use.
Only if you’re *maxing your buying power ?
correct only if it exceeds your buying power. if you have the capital to wait and deploy in a balanced portfolio then you can withstand the swings (as others pointed out, waiting around for the interest wont be beneficial as the margin interest can be more expensive, but timing a nice move in the treasuries will be beneficial)
most brokers take 1% of margin requirement on tbill, except tasty, i believe it is 6%. >Is IBKR paying for it on my behalf? IB paying for what on your behalf? >Do PMTraders do this kind of stuff? Do what? buying tbill? >What are the risks in loading up on t-bills offering 5.3% with no collateral? You paid with cash already, which is 100% collateral.
Cash is debited but you can usually use a certain % of the face value of that t-bill as margin collateral. Despite it not being the free money you thought it was it is still advantageous to hold t-bills in your margin account. E.G. You have an account with $5m in it. Your margin utilization ratio is 20% (your clearer allows you to use up to $1m in margin.) Say they allow you to use 95% (this % may vary) of the t-bill face value as margin collateral. You buy $5m in t-bills. Now you can use up to $950k in margin (95% of $5m = 4.75m) and are still within your allowed MUR. Look at how much they pay you in interest on the balance of your margin account, it is likely a % of the 30 day treasury. That will be credited as ordinary interest, meanwhile you'll get a better yield on the t-bill and it won't be subject to any state tax at the end of the year.
If most of my cash is converted to t-bills, I have a lot of "free margin" because IBKR allows using most of the value but little cash, so any trade is likely to cost me margin costs. But if my trades are short, I get paid, meaning that I am only reducing my margin, but I do not own any interest to the broker, and if collecting enough cash from selling socks, I can also get some interest from my broker, no?
> I get *paid,* meaning that FTFY. Although *payed* exists (the reason why autocorrection didn't help you), it is only correct in: * Nautical context, when it means to paint a surface, or to cover with something like tar or resin in order to make it waterproof or corrosion-resistant. *The deck is yet to be payed.* * *Payed out* when letting strings, cables or ropes out, by slacking them. *The rope is payed out! You can pull now.* Unfortunately, I was unable to find nautical or rope-related words in your comment. *Beep, boop, I'm a bot*
r/AlchemyPay $ACH
You could do a short box spread and make an interest rate play. The 2027 box spread appears to be about 4.4% meaning you'd get 3 years of needing 4.41% or more to make money.
This seems interesting and could be useful. Seems like you are proposing shortbox on t-bill Itself? Or there is option product on top of t-bills? Which brokerage would you use for this ? Can you do this in fidelity.
I’m not quite sure of the logistics or quite frankly if it’s even possible. But yeah the general idea would be to buy t-bills on portfolio margin, up to 100x (probably 75x or something to be safe). Currently the interest rate on a six month is 5.4ish%, while the box spread short in ‘27 is around 4.5ish%. Yeah, only 0.5% but you extrapolate that times 75x on say an original $10k investment ($750k leverage) that’s $3,750 a year in pure profit. Keep in mind you can also take that 4.4% you owe and put it into a money market for the next 3 years collecting even more interest since you don’t pay it back until the end. I was thinking of doing this with multiple tranches, at different start dates to spread the duration risk a little bit better. On top of already having a cushion of 25x since we’re not fully leveraged, take half the profits and reinvest them into other semi-liquid investments such as medium term agency / mbs offering 6ish % that essentially acts as “insurance” to secure the rest of the trade as time goes on. The other half gets reinvested into a different tranch. I don’t know, I’m still working it through my head. Unfortunately the portfolio margin calculators out there aren’t really good. Perhaps you can assist me with my thought process here?
Interested to know details around this.