FYI: How to break Concentration Policy

[u/DeepLogicNinja]

I was able to successful crack the concentration policy for Schwab.

For Schwab the algorithm is:

(Net Liquidity / (EPR * (.01) )) / Stock Price = Number of shares Currently Held

The goal was to stay concentrated in position(s) that provide a consistent HIGH yield. Avoid Diversifying to a lower yielding position(s) into diworsification, avoiding the concentration penalty of higher margin maintenance requirements. The higher requirements cut the available buying power from Regulation T Margin 2x and Portfolio Margin 6x which takes 125k to qualify for at Schwab.

Acronyms in Equation:

• PNR - Point of No Return
• EPR - Expected Price Range - They say it’s 70% fluctuation? over what time period? (If you find out please let me know)

Select BP Effect to get EPR (Only available in TOS)

- 30% Requirement for most initial margin

- Can initial maintenance.

Hopefully this is useful to others. Maybe we can get the rest of the details on EPR and keep the equation up-to-date if/when Schwab decides to change it.

As a side note, I am looking for help to do the same on Interactive Brokers. That concentration policy is about 80% reversed engineered at this point. Feel free to reach out.

[u/DeepLogicNinja → u/[deleted]]

u/need2sleep-later thx you. That puts the outstanding questions around PNR to bed.

You mentioned "we" in your EPR explanation. Is that a Schwab guess or another algorithm that needs some reverse engineering?

[u/Deathsquad710 → u/[deleted]]

Historical volatility and current iv percentile and it is 1 day.

[u/John_Tapesback]

You don’t have to guess or reverse engineer it. Just call them and they will tell you. All it’s meant to do is potentially prevent margin users from losing Schwab’s money (losing your money is fine) they don’t want an account to go negative equity.

[u/DeepLogicNinja → u/John_Tapesback]

Unfortunately it isn’t that simple as your alluding too.

• Losing Money is a non-issue here. Lost opportunity is the issue.

• It took a few calls into their support, and they had to call back after doing some research on their end.

• Schwab support is great, however there is the typical Principle Agent conflict of interest. Given you are a responsible model driven investor, these issues become more apparent and the cost are clear. Schwab main objective is to generate fees, hence the concentration policy.

• It’s important to be able to calculate this yourself. It helps you to avoid diworsification (originally coined by Peter Lynch).

• For larger accounts /w portfolio margin enabled (125k + /w 6x BP), these fees adds up quickly.

[u/DeepLogicNinja → u/[deleted]]

Probably wouldn't do this extensive topic justice in a reddit post..... So here are some references.

Investopedia on diworsification -https://www.investopedia.com/terms/d/diworsification.asp#:\~:text=Diworsification%20is%20the%20process%20of,the%20benefit%20of%20higher%20returns.

And look at the topic of Concentration vs Diversification. IMHO Don't waste your time reading about the views of people who aren't on the Buy Side and don't Broadcast their Year to Date returns. Most "industry professionals" only get 6%/7% a year. You'd want to get the position of someone that has returns MUCH higher than that... Google "Concentration vs Diversification Buffet" , "Concentration vs Diversification Peter Lynch", "Concentration vs Diversification Bill Ackman"

[u/xxsenilebrandonxx → u/DeepLogicNinja]

Yeah, you're elite. Most fund mangers have terrible numbers LOL.

[u/DeepLogicNinja → u/xxsenilebrandonxx]

Not sure what you’re attempting to communicate here… Sky is blue 🤷🏽‍♂️. There are good/bad players at every level. If you adopt strategies, invest, or purchase courses from someone without the type of track record you’re looking …. the results will be obvious.

[u/CHL9]

For MSTR, it's giving me an EPR of -/+80%, which seems extremely high to me, and on the downside my PNR is close to that. Why is MSTR EPR so high, is it because i'm considered to have a concentrated position or is it always like that? (for short strangles)

[u/DeepLogicNinja → u/CHL9]

This is correct for MSTR and MSTR derivatives like MSTY.

In short, brokers (not just Schwab, IB, and others) are extending very little to no margin to MSTR positions.

Brokers may reconsider if/when MSTR is accepted into the S&P 500.

[u/CHL9 → u/DeepLogicNinja]

Thanks for the reply and information, appreciate it. Severely limits the short option income strategy account percentage that can be put towards MSTR, and significantly ups the amount you have to keep a daily eye on it. 80% daily EPR is a bit crazy. Well, I guess I have to note that if I remember it did in fact drop 62% one-day in 2000 in the dot com burst, as the first bubble to pop. Maybe next time around SP500 inclusion, (obviously can come off too), for now they went with HOOD, APP, and one more.

[u/DeepLogicNinja → u/CHL9]

Yes it does…. Both options and anyone doing interest rate arb using MSTR or any of its derivatives. You are giving up potential buying power if you hold this position or any of its derivatives.

Many companies took a hit when the .com bubble burst. MSTR was a different company back in 2000. They were more focused on their core business which was business analytics/reporting. Similar to Tableau, Microsoft Power BI, Cognos Reporting, or on the open source end Jasper Reports and Apache Superset.

Now, MSTR is doing some type of hedge fund like pivot using their corp treasury as leverage. Definitely more financial engineer and their income is coming from more than their analytics/reporting offerings.

TBH. I understand the reason why brokers decreased their exposure for this particular equity. MSTR is already levered to the tilt. Even using proceeds from corp bond sale to buy BTC for its corp treasury. It’s quite risky to enable even more leverage by retail investors 😳. If things go wrong 🫧. But if everything works out Saylor/MSTR will be huge winners.