A combination order is a special type of order that is constructed of multiple separate positions, or ‘legs’, but executed as a single transaction. The legs of the combination may be comprised of the same position type (e.g. stock vs. stock, option vs. option or SSF vs. SSF) or different position types (e.g. stock vs. option, SSF vs. option or EFP). It’s important to note that many combination order types, while submitted via the IB trading platform as a combination, are not native to (i.e., supported by) the exchanges and therefore may not be guaranteed by IB. Accordingly, IB’s policy is to guarantee only Smart-Routed U.S. stock vs. option and option vs. option combination orders.
As combination orders which are not guaranteed are exposed to the risk of partial execution, both in terms of the quantity of legs and their balance, IB requires account holders to acknowledge the 'Non-Guaranteed' attribute at the point of order entry. There are two methods for setting this attribute:
The risk of such 'Non-Guaranteed' orders is illustrated through the example below:
Assume the following quotes for a Stock vs. Stock combination order to purchase shares of Microsoft (MSFT) and sell shares of Appl (AAPL).
MSFT - 26.30 bid, 26.31 offer
AAPL - 250.25 bid, 250.30 offer
A generic combination is created to buy 1 share AAPL and sell 1 share MSFT, the implied quote would be 223.94 bid, 224 offer.
The following order is entered:
Buy 200 AAPL, Sell 200 MSFT
Based on the current markets, the order would appear to be executable.
With a Non-Guaranteed combination, the 100 shares of AAPL would be placed in the client account, even though no MSFT shares were executed. The remainder of the combination order will continue to work until executed in its entirety or until it is canceled.
The following article discusses the special risks associated with hedged financing transactions which employ the traditional OneChicago single stock future contract (designated by product symbol suffix of "1C") which is eligible for adjustment on special dividends or distributions but not adjusted for ordinary dividends. The particular risk described below can be avoided through use of the Exchange's dividend protected or NoDiv product (designated by product symbol suffix of "1D") which are adjusted to remove the impact of all dividends.
Account holders transacting in EFPs, including Low Synthetic Yield positions using the OneChicago traditional single stock future ("1C" product) are advised to pay particular attention to the risks inherent in such positions, the effect of which may be to significantly alter the cost of the position. These risks generally originate from corporate actions, specifically those involving a distribution to the holder of record for the stock with no corresponding adjustment made to the futures contract deliverable.
-Sell 100 @ $13.29 on 10/29/09
-Buy 100 @ $9.50 on 11/30/09
- Buy 1 contract @ $12.50 on 10/29/09
- Sell 1 contract @ $9.49 on 11/30/09
-Buy 100 @ $3.32 on 11/30/09
In the case of a long or short SSF, the exchange margin margin requirement is equal 20% of the underlying value of the contract (initial and maintenance margin)
In the case of a hedged position (e.g., High or Low Synthetic startegy) in which a customer is long (short) a security futures contract and short (long) the underlying security, the required maintenance margin would be equal to 5% of the instrument having the higher current market value.
When a large dividend payment is forthcoming or if the underlying stock is difficult to borrow, the futures price may trade at a discount to the actual cash price.
Single Stock Futures will typically trade at a premium to the stock price because of an adjustment for interest rates. The premium reflects the interest earned on the capital saved by not posting the full value of the underlying stock (adjusted for any dividends expected to be received prior to expiration).
Single Stock Futures (SSF) may be priced using the following formula:
Futures Price = Stock Price * (1 + (Annualized Interest Rate * Days to Expiration/365)) – Present Value of Dividends due prior to expiration.
Example: On 12/12/07 MSFT closed at $35.31 and has an expected dividend of $0.11 with an ex-date of 2/12/07 (61 days). Assuming an interest rate factor of 4.5%, what is the 12/12/07 settlement price for the MSFT March 2008 SSF (97 days to maturity)?
$35.62 = $35.31 * (1 + (.045 * 97/365)) – ($0.11/(1 + (.045 * 61/365)))
US Single tock Futures (SSF) are a hybrid product, regulated jointly by the SEC and CFTC and allowed to be carried in either a securities account or commodities account. IB elects to carry all SSFs in the security side of the universal account as this is the only way that margin offset can be provided against other security products (i.e., stock, options).
US SSFs are listed at the OneChicago exchange and are cleared through OCC.
In the case of an EFP purchase, one can let the long futures contract expire and take delivery of the long stock position at expiration, roll the futures contract prior to expiration or close the contract prior to expiration.
In the case of an EFP sale, one can let the short futures contract expire and take delivery of the short stock position at expiration, roll the futures contract prior to expiration or close the contract prior to expiration.
While the High and Low Synthetic strategies are both hedged positions, the futures leg is subject to a daily cash variation of the mark-to-market gain or loss whereas the stock leg is not (mark-to-market gain or loss is reflected in account equity but there is no cash impact until the position is closed). If, for example, an account holds a High Synthetic position and the stock prices increases significantly, the resultant variation pay on the short futures leg may erode the account’s cash balance resulting in a debit balance which is subject to interest payments. The net effect in this example would be to reduce and potentially erase the earnings on the High Synthetic position
One can enter into an Exchange for Physical (EFP) to either invest excess funds or borrow funds at available synthetic rates. Synthetic rates are determined by taking the difference between the SSF and underlying stock and netting dividends to calculate an annualized synthetic implied interest rate over the period of the SSF.
High Synthetic Bid Rev Yield – represents the investment opportunity available through an EFP sale (buy stock and sell it forward at a premium higher than the interest your cash generates).
Low Synthetic Ask Rev Yield - represents the borrowing opportunity available through an EFP purchase (sell stock and buy it forward at a discount lower than the lending rate available).