nashvillehorizon 

Hi Ron, Since you trade mostly futures, I assume all your gain/loss will be under section 1256. Do you set up a LLC for trading? Or just trade under your individual account?

I currently trade under an individual account.

I had a LLC when I had a hedge fund.

ron99 

I currently trade under an individual account. I had a LLC when I had a hedge fund.

I assume That would be a lot of income tax if it is under individual account. Do you plan to move to no income tax state?

Many/most brokers will require you to post a personal guarantee if trading in a LLC hence negating the legal/bankruptcy protection the LLC provides you.

I'm not sure about your question on taxes. I live in a no income tax state and trade in my individual name. All futures are taxed as section 1256 contracts and hence are treated as 60% long term capital gains and 40% short term capital gains which for me is much more favorable than being taxed as income. I have a management LLC which I pay to manage my business. The LLC in turn pays for my medical, pension and gives me a salary. The salary I receive is then taxed at income rates AND incurs full self employed SS taxes. The combination of the medical & pension and the fact that the management fee is offset against the short term capital gains means this is still tax effective despite having to pay SS tax. (The SS tax is only paid on the salaries not on the whole management fee).

SMCJB 

Many/most brokers will require you to post a personal guarantee if trading in a LLC hence negating the legal/bankruptcy protection the LLC provides you. I'm not sure about your question on taxes. I live in a no income tax state and trade in my individual name. All futures are taxed as section 1256 contracts and hence are treated as 60% long term capital gains and 40% short term capital gains which for me is much more favorable than being taxed as income. I have a management LLC which I pay to manage my business. The LLC in turn pays for my medical, pension and gives me a salary. The salary I receive is then taxed at income rates AND incurs full self employed SS taxes. The combination of the medical & pension and the fact that the management fee is offset against the short term capital gains means this is still tax effective despite having to pay SS tax. (The SS tax is only paid on the salaries not on the whole management fee).

The reason I was curious about his tax setup and if he plans to relocate because this is the level of taxes for individual account: the state income tax, federal tax and NIIT tax (if MAGI over $250k). Section 1256 helps out with 40/60 ratio but after all, those taxes added up. In the mean time, if trading under Corp, it would be 21% federal tax and state in come tax. I may be wrong but a rough calculation, seems like the individual account pays for more tax.

But aren't C-Corp dividends taxed, meaning you'll pay tax at the C-Corp level and then again at the individual level?

SMCJB 

But aren't C-Corp dividends taxed, meaning you'll pay tax at the C-Corp level and then again at the individual level?

Yes that is correct. But the point is somehow rich people can structure their Corp to lower their income and tax. For example, George Soros makes less than $75,000 on his personal return (that is why he got $1,200 stimulus check).

For all you would be options traders out there. Interesting post/videos in another thread about pin risk. Don't know what pin risk is? If your trading options you definitely need to.

datahogg 

Anyone who trades options at any time should view one or both of these videos on U-Tube. Pin risk for stocks. Video 2 explains this. There are 90 min. after close of market on expiration day where an option could be exercised by the owner leaving you with a large short position over the week end and huge losses. Not paying attention or saving minimal $ over commissions ,etc can be deadly. The SPX is cash settled which (as far as I know) eliminates pin risk for SPX. Now for futures (ES, NQ, etc.) . There is pin risk for futures. If you are caught in a vertical (for example pinned ) between the short and long at expiration, you must take possession of the underlying (on the side that is in the money). Which in this case if a futures contract. Again you will have a large directional bias over the weekend with the possibility of huge losses. The solution is easy. Close out all positions before expiration. My broker tells me that he gets a good number of calls after expiration day about pin risk losses.

Just entering the selling FOP game. I have a question about margins.

I am using interactive brokers and I wanted to sell a HXEM2 put around last week but was surprised by the interactive brokers margin requirement.

How do I figure out the SPAN requirement more easily? I looked into the CME file and supposedly one can write a parser. Is there an easier way? To know more concretely how much more is interactive brokers is requiring for margin. (Sorry for my ignorance if this has already been covered in this thread.)

Is there a way to lower margins for interactive brokers or the only way is to use another broker?

@henry86401

If you sell options, call or put, unprotected, no matter if they are against stocks, futures or in your case ETF, you expose yourself and the broker to the highest possible risk.

Thus, every broker, no matter where, will protect itself by charging you the full margin that it can.

If you want to have a smaller margin, then you must sell the options protected, that is you make a hedge by having the underlying value in your portfolio.

Example in your case: You first buy your "Horizons Emerging Markets Equity Index ETF" and after it is in the trading account you sell your options against it.

Depending on the delta you sell, the number of options you sell can vary.

If you want to lower the margin even more, then you can buy the underlying value first, wait until it has increased in value and at the next significant correction you sell the calls.

But as I said before: As long as you sell unprotected options every broker will give you the full margin and with the examples I have shown here, if it is not clear, you have to check in advance with the brokerage house if they even include this kind of trade in their margin calculations.

Symple

henry86401 

Just entering the selling FOP game. I have a question about margins. I am using interactive brokers and I wanted to sell a HXEM2 put around last week but was surprised by the interactive brokers margin requirement. How do I figure out the SPAN requirement more easily? I looked into the CME file and supposedly one can write a parser. Is there an easier way? To know more concretely how much more is interactive brokers is requiring for margin. (Sorry for my ignorance if this has already been covered in this thread.) Is there a way to lower margins for interactive brokers or the only way is to use another broker?

There are different margins for different brokers.

I worked with @Carley Garner, who does an excellent job. She charges SPAN margins for short option positions. (I had to leave her, because the reporting was not suited for the Austrian tax authorities.)

Interactive Brokers charges significantly higher margin for naked short option positions. You can reduce this margin by a large amount selling option spreads (= sell a put option and buy a put option with the same expiry date at a lower strike).

Best regards, Myrrdin