Our trading administration: all you need to know

1. News:

• In the weekend of 15 and 16 April 2023 we migrated to a new trading administration.

2. Frequently Asked Questions:

It is crystal clear that our migration to a new trading administration leads to questions on your end. Below we listed a few questions and answers. Updates and add-ons will surely follow.

What actual consequences will the switch to using the Average Purchase Price (APP) have?

Under our new trading administration system, we will indicate the Average Purchase Price (APP) for each holding in a portfolio (and therefore no longer the Break Even Price (BEP)).

This changes the yield on positions where the BEP and the APP are different. The yield on a position is determined by comparing the current price of the instrument to the APP.

Note that this will only be visible for positions where one or more partial sales have already been executed in the past. Whenever you sell the whole of a holding, it is like “pressing the reset button”.

The calculation method for the Average Purchase Price (APP) does not take any account of transaction costs and/or taxes. Only the purchase and/or sale prices are relevant.

What is the difference between an Average Purchase Price and a Break Even Price?

Over the years, we have noticed that customers have often been surprised by the way the break-even price (BEP) is calculated and are actually expecting to see an average purchase price (APP). Here is an example, to show the difference in calculation between BEP and APP clearly.

Example

You buy a number of X shares in several tranches

• First purchase: 100 units X at 10^EUR .
• Second purchase: 100 units X again, this time at 15^EUR .

In this case, the calculation of BEP and APP is identical:

(100 units * 10^EUR ) + (100 units * 15^EUR )/200 units = ( 1000^EUR + 1500^EUR )/200 units = 2500^EUR /200 units = 12,50^EUR

==> The BEP is 12,50^EUR & the APP is 12,50^EUR .

As soon as you sell part of your position, there will be a difference between the BEP and APP. A partial sale has no impact on your APP. The APP remains EUR 12.5, but the BEP changes.

If, in our example, share X has risen to EUR 20 and you decide to sell half of your position, you will have:

200 units for an investment value of EUR 2,500 and sell 100 X units at 20^EUR per share -> This sale will therefore generate EUR 2,000.

The calculation of the BEP is then as follows:

(2500^EUR – 2000^EUR )/(200 units – 100 units) = 500^EUR /100 units = 5^EUR .

==> In this case, the BEP has just been reduced from 12,50^EUR to 5^EUR (while the APP is still 12,50^EUR ).

Why did the BEP drop?

BEP indicates the price at which you need to sell the remaining securities in order to break even on the remaining holding. In other words, to make neither a profit nor a loss on your original investment. The BEP is therefore a very different thing to the average purchase price (APP). Not better, not wrong. Just a completely different way of looking at the same reality. Whenever a BEP turned negative – because this is very possible – we received a lot of queries from our customers.

Back to our example:

Suppose that the partial sale of 100 units of share X was made at EUR 30:

• Starting situation: 200 units X for an investment value of 2500^EUR (APP is 12,50^EUR per item)
• Transaction: Partial sale of 100 units X at EUR 30 each (3000^EUR ).

The calculation of the BEP is then:

(2500^EUR – 3000^EUR )/(200 units – 100 units) = -500^EUR /100 units = - 5^EUR

==> The BEP has just turned negative and stands at -5^EUR , which is totally logical. After all, you have already recovered 500 euros more than your initial expenditure. So a negative BEP is actually very positive news.

Just note that there are no transaction costs and/or taxes taken into account in the calculation method of either a BEP or an APP. Only the purchase and/or sale prices are relevant.

For option traders: how will our risk calculation model with regard to options be changing?

Our new option model estimates the value of your option positions based on 16 different scenarios. Each of these scenarios represents a specific price movement and change in the volatility of the underlying asset.

Both aspects are important to estimate the value of an option. The new margin calculation selects the scenario with the most negative impact to calculate your margin requirement. If several underlying assets are involved, the margin requirement is equal to the sum of the margin requirements for each underlying asset separately.

What does this new option model mean in practice?

You can expect:

• The margin requirement under the new option model to be higher for some short options. This may well be the case for option investors with one-sided positions (e.g. uncovered short positions only).
• The margin requirement under the new model will be higher than in the existing model for far-out-of-the-money short put options.
• Long option positions may also be closed if there is insufficient cash available in your securities account to close your short positions. This could happen if the most negative scenario (of the 16 different scenarios in the model) materialises on the market – or if an even more extreme market situation arises.
• We recommended that when opening new short option positions, you avoid being too aggressive in how you use your margin. This way, you will have sufficient cash available to be able to close positions.

In summary, the new stock market management approach and the new options model will generally require investors in short options to hold more cash.