cdf or installment - what is cheaper

[#1]

The answer is not so simple, because time decay calculations require me to wake up my dormant maths brain to calculate time decay on a warrant. The main issue is that a CFD's interest is calculated on the exposure value, making it quite expensive for a long term holding. How is interest calcuated on a warrant, on the total exposure?

[SimonPB]

on the laon amount .. so if share is R100 and strike is R40, then you loan R60 and pay interest in that ..

[THRESHOLD]

CFD'S are "cleaner" (just allow for the margin calls.) Also keep in mind that you are financing a higher value as the share climbs (but less as it drops) Instalments can be hugely more expensive than you might think. You finance the share price (x the instrument delta at purchase) less (instalment cost + the strike price.) The bank charges interest upfront - so the effective interest, being "frontloaded" works out to much more than the quoted rate when converted to standard compound format. (Of course your intial capital payment is much smaller as you are paying the interest upfront but there can be no comcommitant leverage advantage.) In addition to this: -the value of your instalment decays by the built in puts. -and (very importantly) your instrument varies from true depending on the underlying price relative to issue and volatility. So you may think you are paying say 9% interest and so you are but you only get to track say 90% in the movement of the share for this. In a long term cyclical bull where you roll your position or take-up the underlying, this is not really relevant; but then there are tax implications to these events. There are also restictions on the size of the dividend relative to the value paid for the instrument - so you may not get your full dividend to offset against the interest paid. The issuer will pocket it.

[#4]

Thanks Simon, so it is interest on the loan amount, and not the exposure? In other words, if the underlying rises, does my interest amount change?

[#5]

Thanks Simon, so it is interest on the loan amount, and not the exposure? In other words, if the underlying rises, does my interest amount change?

[SimonPB]

what do you mean "just allow for the margin calls" ??? margin call is the market telling you loud and clear - YOU ARE WRONG .. best thing to do when wrong is exit ..

[SimonPB]

loan amount ..

[THRESHOLD]

Not true. If your stoploss is R3 down and your margin requirment is R2. How are you wrong. Just make sure that there is enough to cover. Also: there are countless cases of shares "gapping through a stop loss." Make sure that you have enough to cover this or you might be forced out of a position prematurely. This all relates to aggressive trading anyway.

[SimonPB]

OK, that is a huge stop loss .. assively huge .. and I can;t agree on the "countless" thheory, can't remember when last I missed a stop .. but either way, gapped past or not, a stop loss is a stop loss and should be actioned regardless ..

[THRESHOLD]

Huge? Depends on how much the share costs! It might even be too small. Do you have a count on the stop losses missed at Standard Bank? It would make for interesting reading I'm sure you'd agree. The current argument aside - I have found it better to trade only in issues in which you have very high confidence. That way you can allow wider stop losses and hopefully incurr fewer losses in the long run. It also saves on trading costs. You might argue that it is tantamount to trading an investment portfolio - and you'd probably be right! But then there's nothing wrong with that.

[SimonPB]

missed stop loses is a factor of liquidity .. that's managed by only trading high liquid stocks ..

[THRESHOLD]

And if Standard Bank didn't issue deraivatives on less liquid counters perhaps your argument might be sufficient unto itself. But they do and there are opportunities here that, when managed properly, can prove very fruitful. If you wish to restict your trading to highly liquid counters traded by every bank, computer and trader out there and feel that you can pit your witts against this lot and win... by all means... Over last 20 odd years the market has robbed me of such hubris.

[SimonPB]

well our list of derivatves is smaller then anybody elses and we often get complaints right here abouut that .. as for trading against the best, well sure ..

[THRESHOLD]

So there you go then - you are happy with Standard's derivative list - which includes illiquid counters - so you can accept that these must be traded with regard for the lower beta. And trading against the best (or most) in shares that are average value - on a long-term basis, that's just plain folly.

[SimonPB]

err no that is not what I said .. I think the list should be even smaller ..

[THRESHOLD]

Make it smaller still - trade the indices.

[SimonPB]

an that's what I do .. I have only traded indices for the last 4 or so years .. just because a product is offered doesn;t mean one must take it up ..

[THRESHOLD]

I have held shares that have gone up 1000+ of percent over the last 10 years + dividends and no tax. Your approach is up or down in a given time frame by a rate greater than the cost of the instrument - or bust. I can wait in a conservative instrument, largely strip the timing element from the trade, and take my profit a year hence. The share can fall in the first 11 months - who cares. That is a problem for day traders and their ilk. Grey hair, stress... been there done that. The bank gorged itself on my errors - never again! I'm here to make money! Not to be a hero! Not to enrich the bank / broker.

[SimonPB]

sure, an now we have moved from trading to investing ??? derivatives are only for the former, not the later ..

[THRESHOLD]

Wrong. There is a grey area inbetween. If you have done your homework and believe in stock and can borrow money at prime to service your position (read trade,) then this is a perfectly acceptable approach. Many stocks move up while your index moves down. The dividend yield in the stock type I outlined from the outset will offset half the cost of finance. (Incidentally - your answers are to brief - I am doing all the typing here - and that can't be right) Just flesh them out with a few anecdotes - works a charm. Otherwise this will degenerate into:"Yes you can!" "No you can't" "'tis; 'tisn't"