1

For how long, and where, is your money "safe"?

Options Trading

2

Phenomenon of counter-party risk

I get emails almost every week that ask: What safeguards exist to protect the invested capital?

Since this is a critical issue, you might want to closely examine it.

Unfortunately, only a few people recognize the phenomenon of counter-party risk.

Everyone is aware of the risks of trading, but only a few traders lay a high emphasis on the selection of the partner, even though the counter-party risk is at least as important as the risk of the trading strategy.

In the field of capital insurance, it is a very important question whether a certain partner is regulated or not, and what reinsurance it has.

Let us first examine the partner with whom I and many others trade stock options and other products.

3

Interactive Brokers

'Securities' accounts of clients are insured by the SIPC (Securities Investor Protection Corporation) up to $500,000, while cash is protected up to $250,000.

That means, if there is only cash in the account and no securities, the guarantee is limited to 250. I suspect that it is enough for most average traders. The term "securities" account means that all stock market ETFs, shares and options for those are covered by the insurance.

However, futures and futures options are not insured at all! As I understand, in case of the other market participants, the situation is the same: "securities" are insured, futures are not!

Insurance of course only covers the client if the brokerage firm goes bankrupt. If the market drops, no one and nothing insures that...

Otherwise, the above refers to most of the reputable, regulated stock brokers, max. the sizes of the limits vary. However, the situation is quite different in case of a non-regulated FX broker.

4

Forex Brokers

In this case, the existence and extent of the insurance is entirely aleatoric....

Most Forex brokerage firms offer only minimal or 0 capital insurance. Take for example FXCM that is one of the biggest. There the insurance limit is £50,000, which is regulated by FSCS. Each broker may have its own regulations. As each case is unique, it's worth checking out before you open an account, how much the reinsurance is and which institution regulates the given company, e.g. FSA.

Considering the above, we can see that the variance can be quite high in terms of insurance. It is worth spending some time on this to find out some details about the firm where you want to open an account. Of course, this is also a matter of capital size, as a €500 FX account does not need to be insured ...

5

Feel free to ask me!

Email: gery@optionsrules.comMy webpage: http://www.optionsrules.com/

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