EFP Exchange For Physical

[moksha99]

I am trying to understand the EFP product
http://www.onechicago.com/
http://www.interactivebrokers.com/en/trading/pdfhighlights/PDF-ExchPhysical.php


but not sure understand 100%
Can anybody help
1)So buying a EFP = Sell existing stock ( not short) and Buy SSF
Doing this the cash from the sale of the Stock comes back to me and 20% of it is used for the Long SSF correct?
Or do I get some cash when buying and EFP?
SO what exactly happens at expiry? The SSF and Stock prices is supposed to settle at same point so do I have to get the stock at that point?
2) What is the max risk?

3) EFP on SPY ETF....is there a SSF on the SPY itself?

 

[dgdowney]

Hello,
If you are carrying long Stock you have tied up your money (borrowed from yourself) and possibly borrowed from your broker. If so you are absorbing 'cost of carry' in the form of an interest rate. You may be able to carry the position on more favorable financing terms by executing an EFP whereby you simultaneously Sell the Stock and Buy the SSF. The Sale of the stock will bring cash into your account and you will be required to post a 20% performance bond which can be met with T-Bills or cash. T-bills are best as the interest (however small) continues to produce yield for you.

Each day the SSF position is 'marked to market' by the OCC f/k/a Options Clearing Corp and if the contract moved in your favor then monies will be deposited in cash into your account and debited from the seller. This continues up until expiration when the contract goes to delivery and you will be required to re-purchase the stock at the then current price. If the Stock had gone higher while you held the SSF the Marked to Market variation monies are available to use for the purchase.

The key point here is that the stock and SSF positions are delta equivalents but the SSF may have a lower interest rate priced in which will save you money on financing.

The risk of holding the futures are two fold:
1. Interest rates may drop while you are holding the SSF which will force the price of the SSF lower without any move in the stock which will result in a variation payment by the long holder in cash.

2. The dividend (if any) may be increased or initiated which will cause the SSF to decline absent any movement in the stock resulting in a variation payment by the long. This risk can be eliminated by using the OCX.NoDivRisk contract which does not price the dividend into the future but rather adjusts for it on the morning of ex-Date. These contracts all in in the "1D" ...ie: IBM1D or AAPL1D. IBKR refers to them as Dividend Protected.

Best.

David

but not sure understand 100%
Can anybody help
1)So buying a EFP = Sell existing stock ( not short) and Buy SSF
Doing this the cash from the sale of the Stock comes back to me and 20% of it is used for the Long SSF correct?
Or do I get some cash when buying and EFP?
SO what exactly happens at expiry? The SSF and Stock prices is supposed to settle at same point so do I have to get the stock at that point?
2) What is the max risk?

3) EFP on SPY ETF....is there a SSF on the SPY itself?[/QUOTE]

 

[dgdowney]

Sorry,

Yes there are SSF on SPY in both the 1C and 1D contract. In addition they come in two different multipliers of either 100 or 1000. The 100 size will have an "M" for mini in the symbol so SPY1D=1000 SPYM1D=100.

Best

David
but not sure understand 100%
Can anybody help
1)So buying a EFP = Sell existing stock ( not short) and Buy SSF
Doing this the cash from the sale of the Stock comes back to me and 20% of it is used for the Long SSF correct?
Or do I get some cash when buying and EFP?
SO what exactly happens at expiry? The SSF and Stock prices is supposed to settle at same point so do I have to get the stock at that point?
2) What is the max risk?

3) EFP on SPY ETF....is there a SSF on the SPY itself?[/QUOTE][/QUOTE]