IB Daily Exposure Fee

C2
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Has anyone encountered the Interactive Broker’s daily exposure fee?

I am trading a C2 options strategy, which sells naked calls, and was surprised to learn my IB brokerage account will be assessed a daily exposure fee beginning next week although my account has more than sufficient margin for the positions held. It appears trading the strategy at 100% will incur about a $10 to $12 risk fee per calendar day, not just the days the market is open, so this could easily cost over $300 per month in risk exposure fees.

IB indicates the fee could be reduced or eliminated altogether by reducing positions or increasing equity but this is a heads up that returns for these types of systems could be skewed substantially since equity requirements are more than stated in C2 stats for some systems (I am also assuming the daily exposure fees are not included in C2 return calculations).

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IB imposes the fee because they want you to pay them for taking on the risk that your entire account blows up and goes negative over night or through the weekend and that they will be on the hook for covering your obligations.

The exposure fee increases geometrically with the estimated shortfall such that the exposure fee can go up to thousands of dollars per day if the shortfall is in the high single millions, even if you have a 20 million dollar account. If you’re worried about $10 a day now, wait until you start getting charged $1000s per day.

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I assume these systems write Calls on volatility ETPs? Because I never had that issue when I was writing options on normal stocks.
Performance of the former is skewed indeed if the age is less than 2 years.

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Have the same problem at IB. The solution seems to be to make the positions covered with bought options that are way out of the money (covered call/put). Sure, eats up a little of the profit potential, but I think it’s the way to go to curtail nearly unlimited risk (consider the impact on the markets had North Korea’s missle actually hit Japan over night and not fallen short…).

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CoreyR,

I believe you are talking about my strategy Tempus Fugit

You are absolutely right that IB may charge an exposure fee based on a proprietary algorithm not disclosed and subject to change.

This exposure fee depends also on the account characteristics (account size, portion allocated to strategy relative to account size).

Some other options strategies here on C2 are also subject to this exposure fee.

From what I understood from IB, volatility instruments in general are subject to the exposure fee test (but it would not be the case for options on stocks for example).

However, IB exposure fee calculation does not factor in the risk management of the strategy (stop loss for example) because IB will consider only extreme events in their stress tests, for example a large overnight move that would go through the stop loss.

There is no way for me to know in advance if a subscriber will have to pay an exposure fee or not.

From the feedback I have from subscribers, the exposure fee for my system, if applied, would cost around 1% performance per month.

To be fair, I have included this information in the system description now (will be updated in a few days after C2 compliance team review the text).

I also agree with you that C2 should make it possible to view the performance numbers with those fees included if they apply.

Regarding my strategy, I try to manage risk with stop loss and by trading really far OTM to minimize risk, usually with a strike price at 80%, 100% or more of the current price to limit the possibility of an overnight move going through the stop loss and by using proprietary quantitative models that target a probability of OTM expiration of more than 99%. But there is no risk free strategy, especially if you target more than 5% return per month.

If you look at all volatility strategies (options, ETP…) here on C2 and compare the performance and drawdowns of the past months, you will see that my strategy has performed quite well especially by managing drawdowns the last few months during some daily VIX spikes of around 50%.
But I know that there will be some higher drawdowns at some point in time, anybody that would tell you the contrary would just be a liar. You have to accept some DD if you are willing to do 5% or more per month provided that the DD will not erase all the past performance, which would be useless.
But only time will tell and my strategy is still quite young (note even 6 months) to make any assumption about this.

In my opinion, volatility investments are high risk, high reward strategies and as a CFA charterholder, I would recommend that everybody has to assess his/her own risk taking ability before considering trading any strategy.
You cannot expect high return without taking any risk.

My goal here on C2 is to provide an income strategy that will fit the need of certain subscribers that want a small part of their portfolio to be diversified in options and the current price tag of 99$ (with a free trial right now) seems fair to me.

CoreyR, I will PM you to solve this issue (can offer you a refund on your subscription) if you feel you had not received the necessary information from me.

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Volatility strategies are everywhere here now and very few hedge the risks they are taking. I suspect there will be some sort of ugly washout for volatility at some point. I’ve been fairly conservative with my exposure to volatility systems and reduced it even further recently. If you’re doing something that is getting an exposure fee from IB they think you are taking significant risks and I’d seriously consider hedging or doing something else.

https://www.interactivebrokers.com/en/index.php?f=14718#universal-exposure

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The strategy might also be MCProTrader. I received the same warning when trading that system.

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This fee serves to protect IB’s exposure, so there is no need for them to consider stop losses that are only relevant when there is a market. In those cases, they can close client’s position when margin requirements are not met. They have no such ability with a gap move and as you mentioned, when it happens, your stop loss will not stop the loss.

Don’t you trade it yourself? I guess you could see the effect if you did.

Regarding your positions - I see you sell calls on VIX with strikes as low as 17 or even 16. This is just a matter of time.

As I hope everyone knows, we are currently in a period of exceptionally low volatility so performance over the last months is far from reflecting the risks.

I hope you tested your strategy on more volatile years.

Regarding 5%+ a month, yes, I agree this can only be achieved with risky systems. I am yet to see a system that does that consistently without at least 25% - 30% DD on the way. I prefer to get 2%-3% a month from a strategy and reach 5%+ using a combination of strategies.

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Clem,

Indeed it is your system I had in mind when starting this thread since I am a new subscriber. My primary purpose was not to single you out but to help educate other potential subscribers regarding any system which trades these instruments so they can assess all aspects of a strategy such as the actual costs, expected returns, and risks before they become subscribers.

I knew going in this was a very high risk system but receiving a notice from Interactive Brokers with the results of their stress test showing “worst case loss” at about 5 times the strategy’s equity was an eye-opener and obviously their daily exposure fee email summary serves as a constant reminder of the risk involved as well as adding to the real cost of the strategy. I also realize their stress testing is probably searching for an extreme “black swan” type of event but they do occur.

I agree your strategy has performed well consistently with remarkably low drawdowns so far given some of the extreme VIX spikes we have seen recently. And, of course, time will tell if that remains the case.

I am unsure where I will go from here but I will contact you via PM to discuss further.

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The IB Risk Desk hears the ticking sound along with many of us who have been around a long time…

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