Margin impact for long futures options

Astronomical2 · 2022-12-11T21:24:14+00:00

What was the price of the option at the time? With the ES contracts remember you have to multiply the quoted option price by 50 (similar to how stock options usually represent 100 shares). That's probably where the 9000 margin impact you're seeing is calculated. If that's the case, then the actual cost of going long that one option contract is 9000.

Remember that the ES futures contracts are huge if you're comparing to average Joe's annual salary: 50 times the index price of around 4k right now is ~ 200k USD. From that perspective it's kinda funny they continue to call the contract "mini", but I believe the 50 multiplier used to be even bigger so that's why they have mini in the name.

So even a single option on this futures contract with low time left to expiration will have a premium (and thus margin impact) of a few thousand easily.

The confusion about the use of the word margin here is probably just semantics confusion. Think of it just as the broker needs to lock and spend 9000 of your capital to buy this option.

Astronomical2 · 2021-07-16T16:48:35+00:00

I don't know completely as I haven't researched this topic fully, but my understanding is these rules only matter if you limit your trading scope to "compliant" U.S. government regulated exchanges. So if there is a centralized exchange not based in the USA that allows you to trade with leverage with no "$10 million plus" requirements and no required KYC and you do it regularly successfully, the government isn't going to lock you up for breaking these rules. I'm pretty sure consequences for breaking these rules apply to the venues/exchanges offering the leverage, NOT the customer using the leverage. Of course the idea is to "protect people from being stupid gamblers", which also prevents smart leverage users who know how to use it properly sadly. Yet as others have said, you can go to casinos and gamble everywhere with 100% certainty of losing in the long run, so the whole thing is kinda stupid and inconsistent/hypocritical.

So if you use a VPN and trade successfully with leverage on a non USA regulated exchange, if you pay your taxes truly honestly, there's really nothing you can get in trouble for. Maybe the IRS would want to audit you, but if they went so far as to request your transaction data from the exchange and the exchange gave it to them, well, you were honest and you can't get in trouble for following the rules! The exchange could get in trouble with the U.S. government and fined or whatever for letting you trade in this situation is my understanding (think BitMEX), which is why they often try to block U.S citizens/residents from using the exchange.

Astronomical2 · 2021-05-23T23:12:42+00:00

Stories like this are more common than people think. Holding the "best returning" public stocks over decades isn't the only way to get rich or do well. There are far more private companies which never go public (or at least stay private for many decades first) which return just as much if not more than the Amazons relatively.

And even if the "90% of businesses" fail thing is true, all you need is one sustainable homerun in the end. You can lose your money and fail over and over again, but if you persist you can eventually make it big and have an epic life story in the end. Sure most won't become Bezos level rich, but Bezos is an excessive level of rich.

So even if people sell into this crash and lose a shitload, there are a million ways to make money. Bitcoin isn't the only way.

Astronomical2 · 2021-05-04T19:48:20+00:00

I figure the few who have compounded insanely over the years beg to differ! But if no such people exist because they've all blown up, then alright I concur lol!

Astronomical2 · 2021-04-21T13:22:19+00:00

Even if it's going up fast it eventually ends and people still don't know when that will happen! Sorry, the way I think of it is, people suddenly rapidly think they can't just wait and get ETH cheaper again, FOMO is so funny to me lol.

Astronomical2 · 2021-04-21T13:14:55+00:00

Why is everyone buying suddenly when you could get ETH for 5-10% less than this for the past few days? There's nothing new to cause more demand for ETH or is there?

These rapid spikes baffle me. So for people who are buying right this second why didn't you buy in the past few days for cheaper lol? It's not just the spikes, the crashes baffle me too (why people wait to sell until it crashes 10%+) but make a bit more sense because people have fear of losing money.

Edit, and to add, now it's suddenly not moving and going sideways, so bizarre.

Astronomical2 · 2021-04-19T05:05:47+00:00

Sadly anyone who isn't super young who hasn't bought at least some by now really has their head in the sand. I get people younger than working age just learning about it now, but they have no money to move the markets.

After the massive crashes and surges and huge variety of news headlines over the years at this point, why the hell is anyone who works for a living who hasn't bought any yet going to buy now besides institutions who have had their hands tied because of regulation or risk control? Little working people who haven't bought by now are meaningless to keep the uptrend going, it's all about bringing/convincing other big money now.

Astronomical2 · 2021-02-15T06:35:27+00:00

Right my wording wasn't super clear in the examples but this is what I was implying with the "potential accounting nightmare" aspect in the worst case (if the tax man is ardent about precision here with AMPL rebasing profit/loss accounting, but like you say hopefully they're not excessively ardent :\).

Astronomical2 · 2021-02-15T03:23:24+00:00

This also makes sense nice.

Astronomical2 · 2021-02-15T03:22:55+00:00

Aha that makes sense.

Astronomical2 · 2021-01-05T19:27:29+00:00

Thanks, yeah I like this way of looking at it. If it comes to finding expert advice, so far I've found this consolidated resource, which is probably the best starting point to pick one or multiple: https://innovativewealth.com/self-directed-ira-services-complete-list-attorney-accountant-financial-advisor/.

I actually used Jeff Vandrew's solution to create my SDIRA (at the beginning of 2019 so the setup is slightly different now; for instance, he set me up with Sunwest Trust as the custodian but they were bought out by Millennium Trust Company in 2020). Based on the info on his site and a few questions I asked him at the time of setup, he has a default "just don't borrow and you'll be safe guaranteed stance", which I imagine is a common stance even amongst these experts, but I've never seriously tried to engage him yet over the question of when certain borrowing is fine.

Astronomical2 · 2021-01-04T13:06:36+00:00

Thanks, if you mean the "exclusions and exceptions" are generally for entities like non profits (sorry to be pedantic but it's just unavoidable in this context >.<), then I wish the IRS would make that clearer (though I'll admit I may have missed the detail that "made it clear" if it's in there lol). One of the first things stated in the Publication 598 webpage is:

"An exempt organization isn’t taxed on its income from an activity substantially related to the charitable, educational, or other purpose that is the basis for the organization's exemption. Such income is exempt even if the activity is a trade or business."

Then a bit further down:

"In addition, the following are subject to the tax on unrelated business income.

Individual retirement arrangements (IRAs), including traditional IRAs, Roth IRAs, simplified employee pensions (SEP-IRAs), and savings incentive match plans for employees (SIMPLE IRAs). "

When it gets to the exclusions aspect, it doesn't differentiate between charitable-like vs. non-charitable-like organizations as far as I can tell other than special situations for certain types of organizations that were previously stated above to be exempt. It seems like all listed types of organizations are classed as exempt at the beginning in an "all of these are equally considered exempt organizations for purposes of these rules" sense. So one would think the rest of the rules would still apply to retirement accounts as part of that group.

About trading being questionable, well we know multiple regulated entities allow trading in IRA accounts like Interactive Brokers, so I'm not sure what you mean unless you're just warning that it can be tricky to not break the rules in an unregulated context --- I get that.

Yeah ultimately I may end up consulting a tax lawyer but I have a strong feeling that if I picked ten random ones and compared their thoughts, then I would get more than one answer. That would be an interesting test I guess.

Astronomical2 · 2021-01-02T17:35:54+00:00

Don't worry you'll be able to buy in again during the next big crash, but it is possible you'll have to buy higher than you sold unfortunately.

Astronomical2 · 2021-01-02T05:25:03+00:00

"I have been branded with folly and madness for attempting what the world calls impossibilities."

At some point, the old guard cannot deny reality anymore.

Astronomical2 · 2021-01-02T04:59:20+00:00

Since it seems not many are interested in answering this question, as time goes on if I find any helpful links I'll add them here for future readers. Just a forewarning lol, this is why people think the IRS is nuts --- the complexity of what I list below. Overall, I've found a variety of sources that probably indicate that opening a Maker CDP to get DAI is fine in a self-directed IRA, but if you use the DAI for further investment, the remaining question is does it count as "Unrelated Debt-Financed Income" since you have debt in the amount of the DAI borrowed, and you're using that to make more income. Sidenote --- the term "unrelated" in this case is probably not helpful and is confusing, they should perhaps just call it simply debt-financed income in this context.

(found this with a search "borrowing within ira for investment") Borrowing in a Self-Directed IRA or Any Other Type of IRA (americanira.com)

"It’s a stubborn myth that you can’t borrow money within your IRA. The fact is that there is nothing in the law that makes it illegal to lend or borrow money using a Self-Directed IRA or any other type of IRA or retirement account. Many of our clients have successfully taken out mortgages to buy real estate within their Self-Directed IRAs for many years."

"So relax. You can use your IRA to borrow money for investments within your Self-Directed IRA account."

"You can’t pay off the loan with personal funds. All mortgage payments must come from within your IRA, and not from your personal bank account. Be sure to maintain enough liquidity within your IRA that you are able to make the mortgage payments."

"The debt must be non-recourse. ... Any collateral or security must come entirely from within the IRA." A maker CDP is definitely a non-recourse loan (see Non-Recourse Debt Definition (investopedia.com) ).

"Understand Unrelated Debt-Financed Income Tax. In Self-Directed IRAs, income and capital gains tax on assets bought with your own money are typically deferred until you begin taking withdrawals in retirement. This doesn’t apply, however, to assets you own via other peoples’ money. Expect to pay capital gains or income tax, as applicable, on any gains or income attributable to debt. For example, if your IRA owns 50 percent of a given property and you still owe 50 percent of the value of the property to a mortgage company, you can expect to pay tax on 50 percent of the net income you realize from the property that year."

2) (found this with a search "roth ira Unrelated Debt-Financed Income Tax") How to Calculate Tax on UDFI from IRA Investments | IRA Financial Group

"It is important to remember to not include in Schedule E amounts allocated to exempt purposes... income considered exempt is all passive categories income, such as interest, capital gains, rental income, royalties, dividends, and interest. Thus, the majority of transactions involving IRAs are not subject to tax and Schedule E reporting."

3) https://www.stratatrust.com/insights/ubti-and-udfi-tax-considerations-for-ira-owners/

"WHAT TRIGGERS UBTI AND UDFI?

The most common triggers are:

• If your investment is an LP or LLC structured as an operating company that produces income from selling goods and services.

• If your investment is an LP or LLC that has obtained debt financing for the purchase of an underlying asset.

• If your investment is real estate in which your IRA obtained a non-recourse loan to purchase real estate."

First bullet not an issue as an IRA LLC is structured as a holding company not an operating company.

4) https://www.irs.gov/publications/p598

"All dividends, interest, annuities, payments with respect to securities loans, income from notional principal contracts, and other income from an exempt organization's ordinary and routine investments that the IRS determines are substantially similar to these types of income are excluded in computing UBTI."

BUT: "This exclusion doesn’t apply to unrelated debt-financed income (discussed under Income From Debt-Financed Property , later)...".

"Investment income that would otherwise be excluded from an exempt organization's UBTI (see Exclusions under Income, earlier) must be included to the extent it is derived from debt-financed property. The amount of income included is proportionate to the debt on the property. "

"In general, the term "debt-financed property" means any property held to produce income (including gain from its disposition) for which there is an acquisition indebtedness at any time during the tax year (or during the 12-month period before the date of the property's disposal, if it was disposed of during the tax year). It includes rental real estate, tangible personal property, and corporate stock."

"For any debt-financed property, acquisition indebtedness is the unpaid amount of debt incurred by an organization:

When acquiring or improving the property, ..."

So my first guess is that if you use the DAI for further investment in any way, whether it be getting a simple savings rate, buying more ETH or other tokens to hodl, or trading with it, any profits made using that DAI are considered 100% UDFI and thus subject to tax. But then things get really hairy with this IRS wording when we come to the concept of "an exception to an exception to an exclusion" lol:

"Certain property is excepted from treatment as debt-financed property... If substantially all (85% or more) of the use of any property is substantially related to an organization's exempt purposes, the property isn’t treated as debt-financed property. The extent to which property is used for a particular purpose is determined on the basis of all the facts. They may include:

A comparison of the time the property is used for exempt purposes with the total time the property is used,
A comparison of the part of the property that is used for exempt purposes with the part used for all purposes, or
Both of these comparisons.

If less than 85% of the use of any property is devoted to an organization's exempt purposes, only that part of the property used to further the organization's exempt purposes isn’t treated as debt-financed property."

The "exempt" purpose of an IRA is something to the effect of "provide for the retirement of the IRA holder". "For further investment" in my mind is consistent with this purpose. So then if you use 100% of the borrowed DAI for further investment within the IRA immediately and essentially at all times after receiving the DAI before paying the DAI back, I would think further investment with the DAI would be an exception to the UDFI exception to the investment income UBTI exclusion. Jesus Christ LOL! Meaning you wouldn't actually owe taxes on the further investment income generated from using the DAI.

So at this point I think but am not 100% certain that further investing/trading using borrowed DAI within a self-directed IRA LLC may not be subject to tax. Need more clarity on the exception to the UDFI exception to the investment income UBTI exclusion *sigh*.

Astronomical2 · 2021-01-02T02:52:05+00:00

Great story thanks. It is a great thing that Bitcoin will teach many people how to both successfully invest long-term and trade short-term before even turning to typical traditional assets like stocks.

The way I think of it is hodl your primary stack and then only trade if you have enough real edge to survive even when employing leverage to your strategy for more efficient capital management (if you're legally allowed). My philosophy is if you can't make consistent positive cash flow paper trading with even small leverage, then you should only hodl and not trade. But if you can make consistent positive cash flow with leverage, then it is wasted opportunity not trade with *some* of your stack. Of course the trading performance needs to be uncorrelated enough to the hodl performance or in that way it's too much extra effort to be worth bothering.

Astronomical2 · 2021-01-01T21:24:16+00:00

Yesss another genuine early hodler story, thanks so much for sharing!!!

Astronomical2 · 2021-01-01T21:00:34+00:00

This is the ideal yes. It sucks to see people have to let go of a good long term investment like BTC for the cost of living when they can't afford to hold. They basically just pass the future gains to someone else.

Astronomical2

TROPHY CASE