Author Topic: Put spreads locked up cash at Vanguard  (Read 619 times)

MustacheAndaHalf

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Put spreads locked up cash at Vanguard
« on: March 24, 2021, 02:08:39 AM »
I recently opened some "put spreads" at Vanguard.  If you don't know what a put spread is... well, neither does Vanguard!  They did not detect my positions as put spreads.

A put spread is a prediction that a stock will fall.  The higher priced put is bought, and a lower priced put is sold to help reduce the cost.  So you might buy a GME put with a $150 strike, and then sell a GME put with a $50 strike.  So you have +1 put at $150, and -1 put at $50.

When GME drops below $50, the -1 put costs you $10... but the +1 put gains $10.  Once you've paid the initial price, your risk is losing the investment.  Vanguard, unfortunately, treats this put spread as two isolated purchases.

Vanguard sees -1 put on GME at $50/sh, for 100 shares, and then calculates the maximum risk of $5,000 and locks up $5,000 of cash ($50 -> $0 x 100 shares).  I was really surprised when I added up the maximum loss in all the short positions, and it exactly matched the cash Vanguard had locked up in my account.

Silly me, I assumed Vanguard was as good as IBKR at detecting put spreads.  At IBKR, I have several put spreads with no margin required.  IBKR detects that my short position exactly matches a long position at a higher price, so there's no additional money or risk involved.

Seems like Vanguard isn't the place to set up put spreads or call spreads.

MustacheAndaHalf

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Re: Put spreads locked up cash at Vanguard
« Reply #1 on: March 24, 2021, 05:09:43 AM »
So with that, I have 3 pet peeves at Vanguard using options:

(1) You must buy/sell in increments of $0.05/sh, which becomes a $5.00 increment per contract.  Others are bidding $1.17, you have to bid $1.15 or $1.20.

(2) Options chain requires selecting dates & prices, and even then is out of date.  I recall selecting several to display, and was amazed that none of them had any time value.. because the price had changed, and all their data was outdated.  An options chain on a broker's website is supposed to be live, since you're about to make buy/sell decisions based on it.

(3) Opening a put spread causes your "short put" to be treated as a worst case scenario, and locks up that much cash.  Selling a put at $30, then buying a put at $50, involves a fixed, up front risk.  As the $30 put becomes more valuable, so does the $50 put.  It's annoying when I've learned more about put spreads than my broker!  (IBKR handles it correctly - it first shows the additional risk, but within hours detects the put spread and displays no money is required).

bwall

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Re: Put spreads locked up cash at Vanguard
« Reply #2 on: March 24, 2021, 06:34:49 AM »
When I read this, it makes me think that Vanguard isn't options friendly for a reason.

Surely they have the knowledge, but they (for whatever reason), don't *want* to.

secondcor521

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Re: Put spreads locked up cash at Vanguard
« Reply #3 on: March 24, 2021, 07:36:17 AM »
Yeah, there are people who want to trade (like OP) and people who want to buy and hold (like me).  (Maybe OP also likes to buy and hold some as well, I dunno.)

But Vanguard is definitely geared towards buy and hold types.  This is an overall strategy / value of the company.  It informs their marketing, their website / platform, their customer service, their investment products, and their policies, among other things.

If you want to trade, there are other brokerage companies out there who want to serve that target market and will do a better job for you.  And Vanguard will pretty much tell you that themselves.

MustacheAndaHalf

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Re: Put spreads locked up cash at Vanguard
« Reply #4 on: March 24, 2021, 08:29:20 AM »
Maybe instead of a "trading desk" that places trades, Vanguard just has a "buy and hold desk" that tells people not to sell.  :)  It's a fair point to say options trading is out of character for Vanguard clients.

But Vanguard did take the effort to display an "options chain", which lists various expiration dates, and various strike prices, and the cost to buy and sell.  In my opinion, they did a worse job than free apps and Yahoo Finance, but they did make an effort to have it.  So I think they want to have the capability, so they're not missing a competitive feature.  At any rate, they put in some effort that is specific to options trading.

While I have an account at IBKR (which handles put spreads correctly), I'm keeping my Roth IRA at Vanguard.  So if I want to open put spreads anywhere else, they would be in taxable accounts.

---
I've tried a little experiment to confirm my understanding is accurate.  My prediction is that Vanguard is holding the maximum loss of my (shorted) put options, until I close the position.  So I closed one contract, and it freed up that maximum cash minus the cash I spent to close the position.  It matched to the penny, which makes me 99% confident Vanguard is locking up cash for options sold short.

yachi

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Re: Put spreads locked up cash at Vanguard
« Reply #5 on: March 24, 2021, 08:52:27 AM »
I haven't checked recently, but for the span of at least a month, I couldn't put a sell order on some calls because I had sell orders on calls with a different strike price (same underlying stock).  Apparently it's a known bug that it sometimes does this, and I have to call to put my order in.

Re: live stock prices.  If you have an unfilled order for an option, you can see live prices by viewing the order.  Other than that, they are delayed.  It actually costs a brokerage money to provide live stock and option prices, Vanguard determined it's not in their best interest to do it.

My Pet Peeve is how Vanguard values my stock options.  Calls can sometimes go days or weeks without a sell.  Vanguard will happily tell me my options are worth the 'last' price even when the Bid and Ask prices are both 20% higher.

My other Pet Peeve: They can't get performance graphs right.  Insisting on showing a half-month period where your balance goes from 0 to your actual balance at the start of the period you're looking at.  See my YTD performance graph.


MustacheAndaHalf

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Re: Put spreads locked up cash at Vanguard
« Reply #6 on: March 24, 2021, 09:02:47 AM »
@yachi - I haven't hit the locked up options yet, but I've mostly bought calls.

As to live data, when I go to purchase a call option, they display bid-ask prices inside a box in the upper left.  I can click "refresh"... are you saying that's not live?

Maybe you mean their options chain, which I've stopped using - definitely stale.

I hear you on the options valuation.  My spreadsheets actually have two columns: Vanguard's price, and the price I estimate from bid-ask prices.  They can be really far off if there's no activity... like $8 vs $22 far off.  I find it annoying, too.

If you look at your performance graph, on the left side there's amounts.  So you're actually revealing a lot about your gains by posting that graph.  I've avoided posting my performance graph for that reason.  What I've discovered is that Vanguard only updates performance graphs once a month.  So when my retirement account performance was literally exponential (doubling.. tripling), Vanguard's numbers lagged far behind.  Check it right before the end of March, and when it updates in April, and you'll at least confirm that's what is going on.

secondcor521

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Re: Put spreads locked up cash at Vanguard
« Reply #7 on: March 24, 2021, 09:23:50 AM »
Vanguard may make some concessions in some areas by providing some functionality, but overall their heart really isn't in serving active traders.  They're really hoping that the active traders go elsewhere.

In 2020, I made a total of 12 trades across five Vanguard accounts.  Five of those were rebalancing from bonds to stocks in March.  Three were Roth conversions.  Two were rebalancing in my kids' college accounts.  One was a sale in a taxable account for spending money.  And one was moving money out of an ESA to contribute to a 529 - basically for a tax deduction.  So I made a transaction every 152 account-days.  And 2020 was a hectic year for me.

yachi

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Re: Put spreads locked up cash at Vanguard
« Reply #8 on: March 24, 2021, 12:44:23 PM »
@yachi - I haven't hit the locked up options yet, but I've mostly bought calls.

As to live data, when I go to purchase a call option, they display bid-ask prices inside a box in the upper left.  I can click "refresh"... are you saying that's not live?

Maybe you mean their options chain, which I've stopped using - definitely stale.

I hear you on the options valuation.  My spreadsheets actually have two columns: Vanguard's price, and the price I estimate from bid-ask prices.  They can be really far off if there's no activity... like $8 vs $22 far off.  I find it annoying, too.

If you look at your performance graph, on the left side there's amounts.  So you're actually revealing a lot about your gains by posting that graph.  I've avoided posting my performance graph for that reason.  What I've discovered is that Vanguard only updates performance graphs once a month.  So when my retirement account performance was literally exponential (doubling.. tripling), Vanguard's numbers lagged far behind.  Check it right before the end of March, and when it updates in April, and you'll at least confirm that's what is going on.

I remember seeing a 15-minute delay on option prices when you go to purchase a call option that isn't there when you check on the order status, but looking at it now, they both say "Quotes are shown in real time during regular trading hours."

The graph makes it look like my balance shot right up from $0 in January to $225K in February, when in reality the balance was around $200k all along, they just force it to be 0 at the beginning.  You can find the same balance information in my case study, but I have a lot of options in this account, so the fact that it shows a 50K gain YTD doesn't mean it didn't suffer a 50K loss last year to offset it.

MustacheAndaHalf

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Re: Put spreads locked up cash at Vanguard
« Reply #9 on: March 25, 2021, 11:18:10 AM »
Okay, glad you have a case study that already makes that detail public knowledge.  If that wasn't the case, I was giving you the chance to edit it out (I deliberately didn't mention specific amounts).

Vanguard got back to me saying that IRAs are "level 2 margin trading", which does not include put spreads.  So each option is treated separately, as cash secured.  In a "level 3 margin trading" account, put spreads are recognized.  So it's good to know that's a downside of IRA accounts at Vanguard.

I also found a solution to my problem.  I split the put spread across accounts!  That causes cash to be locked up in my margin account, not the IRA.  So I "buy to close" put options in my IRA, and at the same time, "sell to open" the same put option in my taxable account.

Since I was both buyer and seller, there's a chance I trade with myself!  But what happened instead is that some algorithm or market maker had decided the right price, and as soon as I bought at that price, my order executed.  As soon as I sold at that price, my other order executed.  So I've moved my risky puts from my IRA into my taxable brokerage account.

MustacheAndaHalf

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Re: Put spreads locked up cash at Vanguard
« Reply #10 on: March 26, 2021, 10:51:09 AM »
@Financial.Velociraptor - While this isn't worth it's own thread, I thought you might be amused by a new take on an existing derivative.  I've discovered the "tax inverted put spread".

With this investment, I leverage my taxes.  If I'm right about the stock drop, the IRS pays me (!).  If I'm wrong, I owe the IRS money - that's the "tax inverted" part.

I buy one PUT near the money, and sell one PUT out of the money: a put spread.  But I buy inside an IRA, so there's no tax implications for the "long" position.  The short position is purchased in taxable, so whatever happens to it, happens to my taxes.

Let's say both options expire worthless.  All the IRS sees is that I sold a put option, which expired worthless, so I kept the cash.  I have a taxable gain.

Now if the stock falls through the spread, I sell the put I bought for a nice profit.  But what happens to the put I sold?  It has gone up in value quite a bit, so I take a loss in taxable.

Financial.Velociraptor

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Re: Put spreads locked up cash at Vanguard
« Reply #11 on: March 26, 2021, 02:27:03 PM »
@Financial.Velociraptor - While this isn't worth it's own thread, I thought you might be amused by a new take on an existing derivative.  I've discovered the "tax inverted put spread".

With this investment, I leverage my taxes.  If I'm right about the stock drop, the IRS pays me (!).  If I'm wrong, I owe the IRS money - that's the "tax inverted" part.

I buy one PUT near the money, and sell one PUT out of the money: a put spread.  But I buy inside an IRA, so there's no tax implications for the "long" position.  The short position is purchased in taxable, so whatever happens to it, happens to my taxes.

Let's say both options expire worthless.  All the IRS sees is that I sold a put option, which expired worthless, so I kept the cash.  I have a taxable gain.

Now if the stock falls through the spread, I sell the put I bought for a nice profit.  But what happens to the put I sold?  It has gone up in value quite a bit, so I take a loss in taxable.

haha.  I love tax shenanigans.  This is amusing.

MustacheAndaHalf

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Re: Put spreads locked up cash at Vanguard
« Reply #12 on: April 12, 2021, 09:59:11 AM »
@Financial.Velociraptor - While this isn't worth it's own thread, I thought you might be amused by a new take on an existing derivative.  I've discovered the "tax inverted put spread".

With this investment, I leverage my taxes.  If I'm right about the stock drop, the IRS pays me (!).  If I'm wrong, I owe the IRS money - that's the "tax inverted" part.

I buy one PUT near the money, and sell one PUT out of the money: a put spread.  But I buy inside an IRA, so there's no tax implications for the "long" position.  The short position is purchased in taxable, so whatever happens to it, happens to my taxes.

Let's say both options expire worthless.  All the IRS sees is that I sold a put option, which expired worthless, so I kept the cash.  I have a taxable gain.

Now if the stock falls through the spread, I sell the put I bought for a nice profit.  But what happens to the put I sold?  It has gone up in value quite a bit, so I take a loss in taxable.
haha.  I love tax shenanigans.  This is amusing.
Sadly I've ended my "tax inverted put spread" thanks to Vanguard's uncompromising risk management.  They lock up cash proportional to all short positions incurring a maximum loss.  So my margin account's "buying power" is a significant fraction of my account... and my amount available for withdrawal is zero.

My put spread on UPS involved selling put options at $115/share, so Vanguard reserves cash equal to UPS going bankrupt, or $11,500 per option.  Rather than deal with that, I've closed the position (at a profit) for $1.73/share.  The same with my other short options at Vanguard - I closed them all.

So, sadly, that ends the "tax inverted put spread" for me.  I have a small taxable gain on each option I sold... so now it's time to see if I take a loss on the higher priced put options I bought (in a retirement account, where it won't impact taxes).

ChpBstrd

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Re: Put spreads locked up cash at Vanguard
« Reply #13 on: April 12, 2021, 11:41:59 AM »
@Financial.Velociraptor - While this isn't worth it's own thread, I thought you might be amused by a new take on an existing derivative.  I've discovered the "tax inverted put spread".

With this investment, I leverage my taxes.  If I'm right about the stock drop, the IRS pays me (!).  If I'm wrong, I owe the IRS money - that's the "tax inverted" part.

I buy one PUT near the money, and sell one PUT out of the money: a put spread.  But I buy inside an IRA, so there's no tax implications for the "long" position.  The short position is purchased in taxable, so whatever happens to it, happens to my taxes.

Let's say both options expire worthless.  All the IRS sees is that I sold a put option, which expired worthless, so I kept the cash.  I have a taxable gain.

Now if the stock falls through the spread, I sell the put I bought for a nice profit.  But what happens to the put I sold?  It has gone up in value quite a bit, so I take a loss in taxable.
haha.  I love tax shenanigans.  This is amusing.
Sadly I've ended my "tax inverted put spread" thanks to Vanguard's uncompromising risk management.  They lock up cash proportional to all short positions incurring a maximum loss.  So my margin account's "buying power" is a significant fraction of my account... and my amount available for withdrawal is zero.

My put spread on UPS involved selling put options at $115/share, so Vanguard reserves cash equal to UPS going bankrupt, or $11,500 per option.  Rather than deal with that, I've closed the position (at a profit) for $1.73/share.  The same with my other short options at Vanguard - I closed them all.

So, sadly, that ends the "tax inverted put spread" for me.  I have a small taxable gain on each option I sold... so now it's time to see if I take a loss on the higher priced put options I bought (in a retirement account, where it won't impact taxes).

I've considered something like this as a way to combine hedging with sneaking assets into tax-advantaged accounts. I would put my hedges, such as long puts and short spreads, in tax-advantaged accounts. Then I would buy stock in taxable.

When a market correction occurs, I tax harvest in my taxable account, if possible. Meanwhile my hedges go up tax-free.

I then buy back into the market (avoiding wash sale rules) with what remains in my taxable account. I sell the highly appreciated hedge in my tax-advantaged account and buy stocks there with the proceeds. After all, corrections are the best time to buy.

The net effect is assets in taxable have decreased and assets in tax-advantaged have increased. The effect is the same as if I transferred shares from taxable to my tax-advantaged account and not paid taxes on the transfer. I may have even harvested a tax loss.

However, if the correction never happens, my hedges decay and the opposite occurs. My taxable amount would go up and tax-sheltered would go down. Worse, the decayed hedges would not help me on taxes. If hedges are priced efficiently, the play has no net value. For that reason, I never really went further with the concept.

I keep the play in my back pocket in case of clear bubble-like behavior, such as parabolic price increases. One doesn't want to be out of the market during a late-stage bubble, but one doesn't want to be un-hedged either.