With the margin requirements for a typical broker like Interactive Brokers, you can achieve about 10x leverage like that.
With margin borrowing, you’ll only be able to get up to about 1.5x. Moreover, since you’re not buying OTM calls (you’re buying them at the money), you avoid the problem that OTM options seem to have low expected returns.
Futures are similar—you can get about 10x leverage. On a liquid index I’d expect you’d be able to buy one year futures, so you’d only need to trade your position once every 6-12 months.
With margin borrowing, you’ll only be able to get up to about 1.5x.
Why not 2X? Ordinary margin accounts have an initial margin requirement of only 50%.
I’m wary of options because
the OTM pricing problems make me at least nervous that the same could be true to a lesser degree for ATM options
options need to be sold or exercised, whereas stocks bought on margin could, if prices don’t drop substantially, be held for many years until you donate them, so that you never pay capital-gains tax (and can possibly deduct margin interest).
Futures are similar—you can get about 10x leverage. On a liquid index I’d expect you’d be able to buy one year futures, so you’d only need to trade your position once every 6-12 months.
But you’d have to watch them closely, because if the index declined 10%, you’d have to sell your whole account.
Do you have thoughts on more than 2:1 leverage? Does the implied interest rate change with higher leverage ratios?
My understanding is that the same isn’t true of OTM options. Also, you know your costs up-front as Paul explains below.
Another benefit is that spreads are much smaller.
On more than 2:1 leverage unfortunately I haven’t done the analysis. I’d start by looking at 2yr option prices on interactive brokers and working out the implied costs to construct a synthetic long.
Rather than just buying out of the money call options, you could make a synthetic long position. http://www.theoptionsguide.com/synthetic-long-stock.aspx
With the margin requirements for a typical broker like Interactive Brokers, you can achieve about 10x leverage like that.
With margin borrowing, you’ll only be able to get up to about 1.5x. Moreover, since you’re not buying OTM calls (you’re buying them at the money), you avoid the problem that OTM options seem to have low expected returns.
Futures are similar—you can get about 10x leverage. On a liquid index I’d expect you’d be able to buy one year futures, so you’d only need to trade your position once every 6-12 months.
Thanks!
Why not 2X? Ordinary margin accounts have an initial margin requirement of only 50%.
I’m wary of options because
the OTM pricing problems make me at least nervous that the same could be true to a lesser degree for ATM options
options need to be sold or exercised, whereas stocks bought on margin could, if prices don’t drop substantially, be held for many years until you donate them, so that you never pay capital-gains tax (and can possibly deduct margin interest).
But you’d have to watch them closely, because if the index declined 10%, you’d have to sell your whole account.
Do you have thoughts on more than 2:1 leverage? Does the implied interest rate change with higher leverage ratios?
Sorry, my mistake, I mean about 2x.
My understanding is that the same isn’t true of OTM options. Also, you know your costs up-front as Paul explains below. Another benefit is that spreads are much smaller.
On more than 2:1 leverage unfortunately I haven’t done the analysis. I’d start by looking at 2yr option prices on interactive brokers and working out the implied costs to construct a synthetic long.