Leveraging with options vs margin

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Leveraging with options vs margin

Post by skierincolorado »

Marseille07 wrote: Tue May 04, 2021 11:33 pm
skierincolorado wrote: Tue May 04, 2021 11:21 pm
Marseille07 wrote: Tue May 04, 2021 11:07 pm
watchnerd wrote: Tue May 04, 2021 11:06 pm
Marseille07 wrote: Tue May 04, 2021 11:04 pm That's why I'm talking about long-term results being 1.2x of 1x...obviously if you're unlucky then you can underperform 1x.
Gotcha.

Full disclosure time:

How much SSO or UPRO are you holding?
Nothing. As I said upthread, the real "killer" is drawdowns and we already know SSO did -80%, UPRO did -97% in 2008. I'm not going to touch either with a 10-ft pole.
This would happen with any form of extreme leverage. The daily rebalancing of UPRO would actually fair better than somebody who started at 3x leverage in 2008 and then rebalanced less frequently. They would be 100% wiped out long before the bottom even hit.

Holding 50% UPRO alongside 50% of an unleveraged fund like VXUS allows one to rebalance periodically to maintain more sane levels of leverage than 3x. The unleveraged VXUS stops you from even getting close to a 97% drawdown.
I generally don't consider rebalancing when measuring the quality of investments. Holding 50% UPRO would still lose -97% (of 50%) in 2008, and it's actually bigger with rebalancing because you'd be selling VXUS and buying UPRO on the way down (the "throwing good money after bad" situation).

The net loss won't be -97% I agree, but how much edge you gain by mixing in VXUS is questionable.
The whole problem with upro is the leverage is way too much. Combining it with another unleveraged position is mathematically exactly equivalent to holding the spy with less leverage. Upro doesnt go back to 2008, but sso does and half sso and half vxus has max drawdown of 70% - the same as a portfolio leveraged 1.5x.
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Leveraging with options vs margin

Post by skierincolorado »

Astones wrote: Tue May 04, 2021 11:30 pm From the replies I realize this is a rather complex topic, so I'll need to spend some time evaluating several strategies.
I guess I'll have to study a little these leverage ETFs as well.

My initial hope was that I could do something as simple as move 20% of my Fidelity portfolio into an Interactive broker account, get a margin loan of the same amount, use those money to buy VT and forget about it for few years. It's clear that unfortunately life is not that simple :(

Anyway, thanks for the useful infos.
I’d you qualify for the 1.6% or less, that would be an acceptable plan. Using box spreads or futures would be better if we are talking about significant funds. Futures are surprisingly simple and effective in a tax advantages account.
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Leveraging with options vs margin

Post by Marseille07 »

skierincolorado wrote: Wed May 05, 2021 9:35 am The whole problem with upro is the leverage is way too much. Combining it with another unleveraged position is mathematically exactly equivalent to holding the spy with less leverage. Upro doesnt go back to 2008, but sso does and half sso and half vxus has max drawdown of 70% - the same as a portfolio leveraged 1.5x.
When I said UPRO did -97% in 2008 I was talking about a simulated backtest. I wasn't clear.

I understand what you're saying wrt creating synthetic SPY exposure using UPRO and VXUS. However, I'm not a big fan of adding rebalancing into the equation because rebalancing often presents us with misleading results. It's not directly related to this discussion, but I've seen people seriously argued that rebalancing EOM as opposed to at-signal would give them extra juice because PV said so.

In any case, -70% would be too much in my book - if you're accumulating it might be OK, but a big no-no if you're decumulating.
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Leveraging with options vs margin

Post by skierincolorado »

Marseille07 wrote: Wed May 05, 2021 9:43 am
skierincolorado wrote: Wed May 05, 2021 9:35 am The whole problem with upro is the leverage is way too much. Combining it with another unleveraged position is mathematically exactly equivalent to holding the spy with less leverage. Upro doesnt go back to 2008, but sso does and half sso and half vxus has max drawdown of 70% - the same as a portfolio leveraged 1.5x.
When I said UPRO did -97% in 2008 I was talking about a simulated backtest. I wasn't clear.

I understand what you're saying wrt creating synthetic SPY exposure using UPRO and VXUS. However, I'm not a big fan of adding rebalancing into the equation because rebalancing often presents us with misleading results. It's not directly related to this discussion, but I've seen people seriously argued that rebalancing EOM as opposed to at-signal would give them extra juice because PV said so.

In any case, -70% would be too much in my book - if you're accumulating it might be OK, but a big no-no if you're decumulating.
Agreed. UPRO is a reasonable way to leverage equities for someone with a high risk appetite. But as you also point out the rebalancing makes it less simple than it seems at first. At least with SSO the rebalancing would be less frequent (or not at all if someone is looking for full 2x leverage).
chris319
Posts: 1659
Joined: Thu Jan 28, 2021 5:04 pm

Re: Leveraging with options vs margin

Post by chris319 »

UPRO is a reasonable way to leverage equities for someone with a high risk appetite.
Studies have shown, and my own research confirms, that 2x is the sweet spot. 3x works well in bullish times, but bull markets don't last forever. 2x works better when the bear comes out of his cave.
Financial decisions based on emotion often turn out to be bad decisions.
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Leveraging with options vs margin

Post by Marseille07 »

chris319 wrote: Wed May 05, 2021 9:28 pm
UPRO is a reasonable way to leverage equities for someone with a high risk appetite.
Studies have shown, and my own research confirms, that 2x is the sweet spot. 3x works well in bullish times, but bull markets don't last forever. 2x works better when the bear comes out of his cave.
Yes, but I saw your other thread where you were freaking out on down days. Be sure you can really handle the drawdowns that come with 2x.

In my book -70% is too much and all the sweet spot talk goes out the window. It's a moot point if you can't hold tight and end up selling at the bottom.
TheCleverest
Posts: 66
Joined: Sat Dec 26, 2015 10:14 am

Re: Leveraging with options vs margin

Post by TheCleverest »

skierincolorado wrote: Tue May 04, 2021 10:43 pm

3) Unless you are highly leveraged, you can get diversification by using UPRO for your leverage and then just owning more VXUS and VB, for example. You still end up at nearly identical exposure as 50% VXUS, 100% VTI if targeting 1.5x leverage.

Thanks for taking the time to comment. I'm still having trouble understanding how I could leverare international (you stated VXUS) and still get international to have 2x leverage with LTEFs. Maybe I'm missing something.

You stated one could diversify into the international funds via futures. May I please ask what the symbol is or where I can buy these futures? I'm interested in learning more...
No use in being clever - have to be the cleverest
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Leveraging with options vs margin

Post by skierincolorado »

TheCleverest wrote: Wed May 05, 2021 10:31 pm
skierincolorado wrote: Tue May 04, 2021 10:43 pm

3) Unless you are highly leveraged, you can get diversification by using UPRO for your leverage and then just owning more VXUS and VB, for example. You still end up at nearly identical exposure as 50% VXUS, 100% VTI if targeting 1.5x leverage.

Thanks for taking the time to comment. I'm still having trouble understanding how I could leverare international (you stated VXUS) and still get international to have 2x leverage with LTEFs. Maybe I'm missing something.

You stated one could diversify into the international funds via futures. May I please ask what the symbol is or where I can buy these futures? I'm interested in learning more...
Say you have 100k and want 2/3 exposure domestic 1/3 international. Without leverage you would have 33k intl and 67k domestic.

With 1.5x (50k) margin loan you would end up at 50k intl and 100k domestic.

But you could accomplish the exact same exposure by buying 50k of intl and 50k of SSO (LETF).

The intl isn't 'leveraged' but that's irrelevant. What matters is what assets you actual own ... which is identical. It would require somewhat more frequent rebalancing to keep close to the 1/3 2/3 ratio.

Read the Lifecycle Investing thread for info on futures. The most common broker is probably Interactive Brokers for trading futures. What you would probably want to be buying is micro S&P 500 futures with symbol MES. Each contract is $5 * price of S&P500, so right now ~21k. Usually requires like 10% collateral. Implied financing costs run about .5% including foregone dividends.
chris319
Posts: 1659
Joined: Thu Jan 28, 2021 5:04 pm

Re: Leveraging with options vs margin

Post by chris319 »

Futures give me the willies. I'll stick with my LETF's, thank you.
Financial decisions based on emotion often turn out to be bad decisions.
acegolfer
Posts: 3029
Joined: Tue Aug 25, 2009 9:40 am

Re: Leveraging with options vs margin

Post by acegolfer »

Astones wrote: Tue May 04, 2021 5:47 pm It seems to me that there are mainly two possibilities:
There's a 3rd possibility and I think it's better than option. Use S&P 500 index futures (https://www.cmegroup.com/trading/equity ... lobex.html).

If your account allows option trading, you probably can trade futures too.

Why futures over option?
1. 60/40 rule. (unlike options, most of your gains are taxed at long term rate)
2. No time decaying. (options have theta)
3. Simpler to implement (you only need to pick the expiration, where with options, you also have to pick strike price)
TheCleverest
Posts: 66
Joined: Sat Dec 26, 2015 10:14 am

Re: Leveraging with options vs margin

Post by TheCleverest »

skierincolorado wrote: Thu May 06, 2021 12:30 pm
TheCleverest wrote: Wed May 05, 2021 10:31 pm
skierincolorado wrote: Tue May 04, 2021 10:43 pm

3) Unless you are highly leveraged, you can get diversification by using UPRO for your leverage and then just owning more VXUS and VB, for example. You still end up at nearly identical exposure as 50% VXUS, 100% VTI if targeting 1.5x leverage.

Thanks for taking the time to comment. I'm still having trouble understanding how I could leverare international (you stated VXUS) and still get international to have 2x leverage with LTEFs. Maybe I'm missing something.

You stated one could diversify into the international funds via futures. May I please ask what the symbol is or where I can buy these futures? I'm interested in learning more...
Say you have 100k and want 2/3 exposure domestic 1/3 international. Without leverage you would have 33k intl and 67k domestic.

With 1.5x (50k) margin loan you would end up at 50k intl and 100k domestic.

But you could accomplish the exact same exposure by buying 50k of intl and 50k of SSO (LETF).

The intl isn't 'leveraged' but that's irrelevant. What matters is what assets you actual own ... which is identical. It would require somewhat more frequent rebalancing to keep close to the 1/3 2/3 ratio.

Read the Lifecycle Investing thread for info on futures. The most common broker is probably Interactive Brokers for trading futures. What you would probably want to be buying is micro S&P 500 futures with symbol MES. Each contract is $5 * price of S&P500, so right now ~21k. Usually requires like 10% collateral. Implied financing costs run about .5% including foregone dividends.
Thanks for the detailed response. With all due respect, we do not see eye to eye on this.

My goal is 2:1 leverage for the entire portfolio. I don't see how leveraging strictly UPRO accomplishes this. I get that if I wanted 50:50 US and INT I could use a 3x fund to get 2x. If I did this for both US and INT then I'd still have funds available to invest which would not be in equities. And that is something I don't want since the addl monies from my paycheck are considered the 'cash' part already.

To me, leverage means having the ability to invest *more* than I currently have.

If I don't leverage international or emerging markets then I cannot effectively have more 'purchase power'. For example, in the example you provided, if I had 100k and wanted 50% US and 50% international I could buy unleveraged funds and get access to 100k of equities. However, I want *200k* of equities. Therefore, in order to employ more capital than I currently have, I have to use some form of leverage.

And yes, I've read the Lifecycle Investing book and excellent thread thread. I use IB. I still have yet to find international broad indexes that are easy to trade for US based investor, though.
No use in being clever - have to be the cleverest
User avatar
Lee_WSP
Posts: 10346
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Leveraging with options vs margin

Post by Lee_WSP »

TheCleverest wrote: Fri May 07, 2021 9:28 am
skierincolorado wrote: Thu May 06, 2021 12:30 pm
TheCleverest wrote: Wed May 05, 2021 10:31 pm
skierincolorado wrote: Tue May 04, 2021 10:43 pm

3) Unless you are highly leveraged, you can get diversification by using UPRO for your leverage and then just owning more VXUS and VB, for example. You still end up at nearly identical exposure as 50% VXUS, 100% VTI if targeting 1.5x leverage.

Thanks for taking the time to comment. I'm still having trouble understanding how I could leverare international (you stated VXUS) and still get international to have 2x leverage with LTEFs. Maybe I'm missing something.

You stated one could diversify into the international funds via futures. May I please ask what the symbol is or where I can buy these futures? I'm interested in learning more...
Say you have 100k and want 2/3 exposure domestic 1/3 international. Without leverage you would have 33k intl and 67k domestic.

With 1.5x (50k) margin loan you would end up at 50k intl and 100k domestic.

But you could accomplish the exact same exposure by buying 50k of intl and 50k of SSO (LETF).

The intl isn't 'leveraged' but that's irrelevant. What matters is what assets you actual own ... which is identical. It would require somewhat more frequent rebalancing to keep close to the 1/3 2/3 ratio.

Read the Lifecycle Investing thread for info on futures. The most common broker is probably Interactive Brokers for trading futures. What you would probably want to be buying is micro S&P 500 futures with symbol MES. Each contract is $5 * price of S&P500, so right now ~21k. Usually requires like 10% collateral. Implied financing costs run about .5% including foregone dividends.
Thanks for the detailed response. With all due respect, we do not see eye to eye on this.

My goal is 2:1 leverage for the entire portfolio. I don't see how leveraging strictly UPRO accomplishes this. I get that if I wanted 50:50 US and INT I could use a 3x fund to get 2x. If I did this for both US and INT then I'd still have funds available to invest which would not be in equities. And that is something I don't want since the addl monies from my paycheck are considered the 'cash' part already.

To me, leverage means having the ability to invest *more* than I currently have.

If I don't leverage international or emerging markets then I cannot effectively have more 'purchase power'. For example, in the example you provided, if I had 100k and wanted 50% US and 50% international I could buy unleveraged funds and get access to 100k of equities. However, I want *200k* of equities. Therefore, in order to employ more capital than I currently have, I have to use some form of leverage.

And yes, I've read the Lifecycle Investing book and excellent thread thread. I use IB. I still have yet to find international broad indexes that are easy to trade for US based investor, though.
The only reason to choose 3x over 2x is if you had a balanced leveraged portfolio and one component didn’t have a levered option.

If you assume there was no levered tips for example, you’d need 50% upro and 50% tips to get to 150%/50%.
User avatar
Lee_WSP
Posts: 10346
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Leveraging with options vs margin

Post by Lee_WSP »

acegolfer wrote: Fri May 07, 2021 6:17 am
Astones wrote: Tue May 04, 2021 5:47 pm It seems to me that there are mainly two possibilities:
There's a 3rd possibility and I think it's better than option. Use S&P 500 index futures (https://www.cmegroup.com/trading/equity ... lobex.html).

If your account allows option trading, you probably can trade futures too.

Why futures over option?
1. 60/40 rule. (unlike options, most of your gains are taxed at long term rate)
2. No time decaying. (options have theta)
3. Simpler to implement (you only need to pick the expiration, where with options, you also have to pick strike price)
Leaps can be held longer than a year. Otherwise, this is correct, but that fact probably changes the math since options now have the smaller tax drag.
TheCleverest
Posts: 66
Joined: Sat Dec 26, 2015 10:14 am

Re: Leveraging with options vs margin

Post by TheCleverest »

Lee_WSP wrote: Fri May 07, 2021 10:09 am
TheCleverest wrote: Fri May 07, 2021 9:28 am
skierincolorado wrote: Thu May 06, 2021 12:30 pm
TheCleverest wrote: Wed May 05, 2021 10:31 pm
skierincolorado wrote: Tue May 04, 2021 10:43 pm

3) Unless you are highly leveraged, you can get diversification by using UPRO for your leverage and then just owning more VXUS and VB, for example. You still end up at nearly identical exposure as 50% VXUS, 100% VTI if targeting 1.5x leverage.

Thanks for taking the time to comment. I'm still having trouble understanding how I could leverare international (you stated VXUS) and still get international to have 2x leverage with LTEFs. Maybe I'm missing something.

You stated one could diversify into the international funds via futures. May I please ask what the symbol is or where I can buy these futures? I'm interested in learning more...
Say you have 100k and want 2/3 exposure domestic 1/3 international. Without leverage you would have 33k intl and 67k domestic.

With 1.5x (50k) margin loan you would end up at 50k intl and 100k domestic.

But you could accomplish the exact same exposure by buying 50k of intl and 50k of SSO (LETF).

The intl isn't 'leveraged' but that's irrelevant. What matters is what assets you actual own ... which is identical. It would require somewhat more frequent rebalancing to keep close to the 1/3 2/3 ratio.

Read the Lifecycle Investing thread for info on futures. The most common broker is probably Interactive Brokers for trading futures. What you would probably want to be buying is micro S&P 500 futures with symbol MES. Each contract is $5 * price of S&P500, so right now ~21k. Usually requires like 10% collateral. Implied financing costs run about .5% including foregone dividends.
Thanks for the detailed response. With all due respect, we do not see eye to eye on this.

My goal is 2:1 leverage for the entire portfolio. I don't see how leveraging strictly UPRO accomplishes this. I get that if I wanted 50:50 US and INT I could use a 3x fund to get 2x. If I did this for both US and INT then I'd still have funds available to invest which would not be in equities. And that is something I don't want since the addl monies from my paycheck are considered the 'cash' part already.

To me, leverage means having the ability to invest *more* than I currently have.

If I don't leverage international or emerging markets then I cannot effectively have more 'purchase power'. For example, in the example you provided, if I had 100k and wanted 50% US and 50% international I could buy unleveraged funds and get access to 100k of equities. However, I want *200k* of equities. Therefore, in order to employ more capital than I currently have, I have to use some form of leverage.

And yes, I've read the Lifecycle Investing book and excellent thread thread. I use IB. I still have yet to find international broad indexes that are easy to trade for US based investor, though.
The only reason to choose 3x over 2x is if you had a balanced leveraged portfolio and one component didn’t have a levered option.

If you assume there was no levered tips for example, you’d need 50% upro and 50% tips to get to 150%/50%.
Thanks, Lee.

Yes, I'd like 2x leverage only and not 3x.
No use in being clever - have to be the cleverest
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Leveraging with options vs margin

Post by skierincolorado »

TheCleverest wrote: Fri May 07, 2021 9:28 am
skierincolorado wrote: Thu May 06, 2021 12:30 pm
TheCleverest wrote: Wed May 05, 2021 10:31 pm
skierincolorado wrote: Tue May 04, 2021 10:43 pm

3) Unless you are highly leveraged, you can get diversification by using UPRO for your leverage and then just owning more VXUS and VB, for example. You still end up at nearly identical exposure as 50% VXUS, 100% VTI if targeting 1.5x leverage.

Thanks for taking the time to comment. I'm still having trouble understanding how I could leverare international (you stated VXUS) and still get international to have 2x leverage with LTEFs. Maybe I'm missing something.

You stated one could diversify into the international funds via futures. May I please ask what the symbol is or where I can buy these futures? I'm interested in learning more...
Say you have 100k and want 2/3 exposure domestic 1/3 international. Without leverage you would have 33k intl and 67k domestic.

With 1.5x (50k) margin loan you would end up at 50k intl and 100k domestic.

But you could accomplish the exact same exposure by buying 50k of intl and 50k of SSO (LETF).

The intl isn't 'leveraged' but that's irrelevant. What matters is what assets you actual own ... which is identical. It would require somewhat more frequent rebalancing to keep close to the 1/3 2/3 ratio.

Read the Lifecycle Investing thread for info on futures. The most common broker is probably Interactive Brokers for trading futures. What you would probably want to be buying is micro S&P 500 futures with symbol MES. Each contract is $5 * price of S&P500, so right now ~21k. Usually requires like 10% collateral. Implied financing costs run about .5% including foregone dividends.
Thanks for the detailed response. With all due respect, we do not see eye to eye on this.

My goal is 2:1 leverage for the entire portfolio. I don't see how leveraging strictly UPRO accomplishes this. I get that if I wanted 50:50 US and INT I could use a 3x fund to get 2x. If I did this for both US and INT then I'd still have funds available to invest which would not be in equities. And that is something I don't want since the addl monies from my paycheck are considered the 'cash' part already.

To me, leverage means having the ability to invest *more* than I currently have.

If I don't leverage international or emerging markets then I cannot effectively have more 'purchase power'. For example, in the example you provided, if I had 100k and wanted 50% US and 50% international I could buy unleveraged funds and get access to 100k of equities. However, I want *200k* of equities. Therefore, in order to employ more capital than I currently have, I have to use some form of leverage.

And yes, I've read the Lifecycle Investing book and excellent thread thread. I use IB. I still have yet to find international broad indexes that are easy to trade for US based investor, though.
I'm not sure what part you're confused on. With 100k without leverage the most you could do is 33k intl and 67k domestic. Using UPRO you could do 50k intl and 50k SSO. Through your SSO shares you own 100k SPY. Thus in total you own 50k intl and 100k domestic... 150k total... which is more money than you actually have.

It's the exact same exposure/ownership of stock as if you took out a 50k loan on margin and but 17k intl and 33k domestic with it.
chris319
Posts: 1659
Joined: Thu Jan 28, 2021 5:04 pm

Re: Leveraging with options vs margin

Post by chris319 »

Marseille07 wrote: Wed May 05, 2021 9:31 pm
Yes, but I saw your other thread where you were freaking out on down days. Be sure you can really handle the drawdowns that come with 2x.

In my book -70% is too much and all the sweet spot talk goes out the window. It's a moot point if you can't hold tight and end up selling at the bottom.
I said "mildly deflated" in my other thread. That's not "freaking out" by any measure. Quote me accurately if you're going to quote me.

We had a big swoon last year and I didn't sell one single share.
Financial decisions based on emotion often turn out to be bad decisions.
calwatch
Posts: 1431
Joined: Wed Oct 02, 2013 1:48 am

Re: Leveraging with options vs margin

Post by calwatch »

If you can take the tax drag I think futures would be the best option, but IB's interest rates are not bad and you can better control the amount of leverage you want to take by purchasing the appropriate amount of shares of VTI, assuming you can deduct the investment interest. I don't really like levered ETFs due to the daily reset. Yes, they can compound much higher if you get five or six up days in a row, but if you get five or six down days they compound lower.
TheCleverest
Posts: 66
Joined: Sat Dec 26, 2015 10:14 am

Re: Leveraging with options vs margin

Post by TheCleverest »

skierincolorado wrote: Fri May 14, 2021 11:17 pm
TheCleverest wrote: Fri May 07, 2021 9:28 am
skierincolorado wrote: Thu May 06, 2021 12:30 pm
TheCleverest wrote: Wed May 05, 2021 10:31 pm
skierincolorado wrote: Tue May 04, 2021 10:43 pm

3) Unless you are highly leveraged, you can get diversification by using UPRO for your leverage and then just owning more VXUS and VB, for example. You still end up at nearly identical exposure as 50% VXUS, 100% VTI if targeting 1.5x leverage.

Thanks for taking the time to comment. I'm still having trouble understanding how I could leverare international (you stated VXUS) and still get international to have 2x leverage with LTEFs. Maybe I'm missing something.

You stated one could diversify into the international funds via futures. May I please ask what the symbol is or where I can buy these futures? I'm interested in learning more...
Say you have 100k and want 2/3 exposure domestic 1/3 international. Without leverage you would have 33k intl and 67k domestic.

With 1.5x (50k) margin loan you would end up at 50k intl and 100k domestic.

But you could accomplish the exact same exposure by buying 50k of intl and 50k of SSO (LETF).

The intl isn't 'leveraged' but that's irrelevant. What matters is what assets you actual own ... which is identical. It would require somewhat more frequent rebalancing to keep close to the 1/3 2/3 ratio.

Read the Lifecycle Investing thread for info on futures. The most common broker is probably Interactive Brokers for trading futures. What you would probably want to be buying is micro S&P 500 futures with symbol MES. Each contract is $5 * price of S&P500, so right now ~21k. Usually requires like 10% collateral. Implied financing costs run about .5% including foregone dividends.
Thanks for the detailed response. With all due respect, we do not see eye to eye on this.

My goal is 2:1 leverage for the entire portfolio. I don't see how leveraging strictly UPRO accomplishes this. I get that if I wanted 50:50 US and INT I could use a 3x fund to get 2x. If I did this for both US and INT then I'd still have funds available to invest which would not be in equities. And that is something I don't want since the addl monies from my paycheck are considered the 'cash' part already.

To me, leverage means having the ability to invest *more* than I currently have.

If I don't leverage international or emerging markets then I cannot effectively have more 'purchase power'. For example, in the example you provided, if I had 100k and wanted 50% US and 50% international I could buy unleveraged funds and get access to 100k of equities. However, I want *200k* of equities. Therefore, in order to employ more capital than I currently have, I have to use some form of leverage.

And yes, I've read the Lifecycle Investing book and excellent thread thread. I use IB. I still have yet to find international broad indexes that are easy to trade for US based investor, though.
I'm not sure what part you're confused on. With 100k without leverage the most you could do is 33k intl and 67k domestic. Using UPRO you could do 50k intl and 50k SSO. Through your SSO shares you own 100k SPY. Thus in total you own 50k intl and 100k domestic... 150k total... which is more money than you actually have.

It's the exact same exposure/ownership of stock as if you took out a 50k loan on margin and but 17k intl and 33k domestic with it.
Skier thanks for taking the time to follow up.

I don't mean to be obtuse. Perhaps we agree?

Hypothetically speaking I'd like to invest 100k and get exposure to 200k of equities split 50:50 for US and international. I do not want to use 3x funds so there goes UPRO. I could see using 50k into something like a 2x US fund and then 50k split into a EM and International fund.
No use in being clever - have to be the cleverest
User avatar
Lee_WSP
Posts: 10346
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Leveraging with options vs margin

Post by Lee_WSP »

TheCleverest wrote: Mon May 17, 2021 1:13 pm
Hypothetically speaking I'd like to invest 100k and get exposure to 200k of equities split 50:50 for US and international. I do not want to use 3x funds so there goes UPRO. I could see using 50k into something like a 2x US fund and then 50k split into a EM and International fund.
No, here's the math as to why


(2 x 50,000) + (1 x 50,000) does not equal 200,000. It equals 150,000

Stated in terms of the investments


50k SSO + 50k EM = 150k daily exposure = 1.5x leverage
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Leveraging with options vs margin

Post by skierincolorado »

TheCleverest wrote: Mon May 17, 2021 1:13 pm
skierincolorado wrote: Fri May 14, 2021 11:17 pm
TheCleverest wrote: Fri May 07, 2021 9:28 am
skierincolorado wrote: Thu May 06, 2021 12:30 pm
TheCleverest wrote: Wed May 05, 2021 10:31 pm

Thanks for taking the time to comment. I'm still having trouble understanding how I could leverare international (you stated VXUS) and still get international to have 2x leverage with LTEFs. Maybe I'm missing something.

You stated one could diversify into the international funds via futures. May I please ask what the symbol is or where I can buy these futures? I'm interested in learning more...
Say you have 100k and want 2/3 exposure domestic 1/3 international. Without leverage you would have 33k intl and 67k domestic.

With 1.5x (50k) margin loan you would end up at 50k intl and 100k domestic.

But you could accomplish the exact same exposure by buying 50k of intl and 50k of SSO (LETF).

The intl isn't 'leveraged' but that's irrelevant. What matters is what assets you actual own ... which is identical. It would require somewhat more frequent rebalancing to keep close to the 1/3 2/3 ratio.

Read the Lifecycle Investing thread for info on futures. The most common broker is probably Interactive Brokers for trading futures. What you would probably want to be buying is micro S&P 500 futures with symbol MES. Each contract is $5 * price of S&P500, so right now ~21k. Usually requires like 10% collateral. Implied financing costs run about .5% including foregone dividends.
Thanks for the detailed response. With all due respect, we do not see eye to eye on this.

My goal is 2:1 leverage for the entire portfolio. I don't see how leveraging strictly UPRO accomplishes this. I get that if I wanted 50:50 US and INT I could use a 3x fund to get 2x. If I did this for both US and INT then I'd still have funds available to invest which would not be in equities. And that is something I don't want since the addl monies from my paycheck are considered the 'cash' part already.

To me, leverage means having the ability to invest *more* than I currently have.

If I don't leverage international or emerging markets then I cannot effectively have more 'purchase power'. For example, in the example you provided, if I had 100k and wanted 50% US and 50% international I could buy unleveraged funds and get access to 100k of equities. However, I want *200k* of equities. Therefore, in order to employ more capital than I currently have, I have to use some form of leverage.

And yes, I've read the Lifecycle Investing book and excellent thread thread. I use IB. I still have yet to find international broad indexes that are easy to trade for US based investor, though.
I'm not sure what part you're confused on. With 100k without leverage the most you could do is 33k intl and 67k domestic. Using UPRO you could do 50k intl and 50k SSO. Through your SSO shares you own 100k SPY. Thus in total you own 50k intl and 100k domestic... 150k total... which is more money than you actually have.

It's the exact same exposure/ownership of stock as if you took out a 50k loan on margin and but 17k intl and 33k domestic with it.
Skier thanks for taking the time to follow up.

I don't mean to be obtuse. Perhaps we agree?

Hypothetically speaking I'd like to invest 100k and get exposure to 200k of equities split 50:50 for US and international. I do not want to use 3x funds so there goes UPRO. I could see using 50k into something like a 2x US fund and then 50k split into a EM and International fund.
The most leverage you could get using SSO and and an unleveraged intl fund, while maintaining 50:50 exposure to domestic : intl, is 1.333x.

Put 33.3k into SSO and 66.7k into intl. You would have 66.7k exposure to domestic and 66.7k to international, for total exposure of 133.3k (1.333x leverage).

But there is no reason not to use UPRO, other than more frequent rebalancing. Using UPRO you could get to 1.5x leverage.

25k UPRO, 75k intl -> 75k domestic and 75k intl - > 150k total -> 1.5x leverage.

If you want more than 1.5x leverage and a 50:50 domestic : international ratio, you would need to find a leveraged intl etf.

If you accepted a more traditional 3 : 1 domestic : intl ratio, you could achieve your desired 2x leverage using only UPRO. 50k UPRO + 50k intl -> 150k domestic exposure + 50k intl exposure = 200k total exposure = 2x leverage.
DMoogle
Posts: 549
Joined: Sat Oct 31, 2020 10:24 pm

Re: Leveraging with options vs margin

Post by DMoogle »

Alternatively, just use if it's a taxable account. I'm doing NTSX + VXUS in my taxable account, with 1.2x margin.
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Leveraging with options vs margin

Post by skierincolorado »

skierincolorado wrote: Mon May 17, 2021 4:10 pm
TheCleverest wrote: Mon May 17, 2021 1:13 pm
skierincolorado wrote: Fri May 14, 2021 11:17 pm
TheCleverest wrote: Fri May 07, 2021 9:28 am
skierincolorado wrote: Thu May 06, 2021 12:30 pm

Say you have 100k and want 2/3 exposure domestic 1/3 international. Without leverage you would have 33k intl and 67k domestic.

With 1.5x (50k) margin loan you would end up at 50k intl and 100k domestic.

But you could accomplish the exact same exposure by buying 50k of intl and 50k of SSO (LETF).

The intl isn't 'leveraged' but that's irrelevant. What matters is what assets you actual own ... which is identical. It would require somewhat more frequent rebalancing to keep close to the 1/3 2/3 ratio.

Read the Lifecycle Investing thread for info on futures. The most common broker is probably Interactive Brokers for trading futures. What you would probably want to be buying is micro S&P 500 futures with symbol MES. Each contract is $5 * price of S&P500, so right now ~21k. Usually requires like 10% collateral. Implied financing costs run about .5% including foregone dividends.
Thanks for the detailed response. With all due respect, we do not see eye to eye on this.

My goal is 2:1 leverage for the entire portfolio. I don't see how leveraging strictly UPRO accomplishes this. I get that if I wanted 50:50 US and INT I could use a 3x fund to get 2x. If I did this for both US and INT then I'd still have funds available to invest which would not be in equities. And that is something I don't want since the addl monies from my paycheck are considered the 'cash' part already.

To me, leverage means having the ability to invest *more* than I currently have.

If I don't leverage international or emerging markets then I cannot effectively have more 'purchase power'. For example, in the example you provided, if I had 100k and wanted 50% US and 50% international I could buy unleveraged funds and get access to 100k of equities. However, I want *200k* of equities. Therefore, in order to employ more capital than I currently have, I have to use some form of leverage.

And yes, I've read the Lifecycle Investing book and excellent thread thread. I use IB. I still have yet to find international broad indexes that are easy to trade for US based investor, though.
I'm not sure what part you're confused on. With 100k without leverage the most you could do is 33k intl and 67k domestic. Using UPRO you could do 50k intl and 50k SSO. Through your SSO shares you own 100k SPY. Thus in total you own 50k intl and 100k domestic... 150k total... which is more money than you actually have.

It's the exact same exposure/ownership of stock as if you took out a 50k loan on margin and but 17k intl and 33k domestic with it.
Skier thanks for taking the time to follow up.

I don't mean to be obtuse. Perhaps we agree?

Hypothetically speaking I'd like to invest 100k and get exposure to 200k of equities split 50:50 for US and international. I do not want to use 3x funds so there goes UPRO. I could see using 50k into something like a 2x US fund and then 50k split into a EM and International fund.
The most leverage you could get using SSO and and an unleveraged intl fund, while maintaining 50:50 exposure to domestic : intl, is 1.333x.

Put 33.3k into SSO and 66.7k into intl. You would have 66.7k exposure to domestic and 66.7k to international, for total exposure of 133.3k (1.333x leverage).

But there is no reason not to use UPRO, other than more frequent rebalancing. Using UPRO you could get to 1.5x leverage.

25k UPRO, 75k intl -> 75k domestic and 75k intl - > 150k total -> 1.5x leverage.

If you want more than 1.5x leverage and a 50:50 domestic : international ratio, you would need to find a leveraged intl etf.

If you accepted a more traditional 3 : 1 domestic : intl ratio, you could achieve your desired 2x leverage using only UPRO. 50k UPRO + 50k intl -> 150k domestic exposure + 50k intl exposure = 200k total exposure = 2x leverage.
If you want 2x leverage, I'd probably do 40k UPRO and 60k VXUS. That would give you ownership of 180k of equities total (1.8x leverage). You would own 120k of domestic equities (via 40k of UPRO) and 60k of international. That would be 2/3 domestic 1/3 intl.
corp_sharecropper
Posts: 590
Joined: Thu Nov 07, 2013 1:36 pm

Re: Leveraging with options vs margin

Post by corp_sharecropper »

I'm just reading the first page but I don't understand how people are advocating for LETFs over any other method of leverage. If you've done the adequate research to decide to use leverage then you're capable of managing a margin loan, futures margin, or options - all of which are way more cost effective than LETFs. To me choice is obvious, futures/options are #1, and if there is some asset that you want that doesn't have liquid futures/options then you go margin (at IB). Well, on to read so more pages.
langlands
Posts: 1093
Joined: Wed Apr 03, 2019 10:05 pm

Re: Leveraging with options vs margin

Post by langlands »

corp_sharecropper wrote: Mon May 17, 2021 9:40 pm I'm just reading the first page but I don't understand how people are advocating for LETFs over any other method of leverage. If you've done the adequate research to decide to use leverage then you're capable of managing a margin loan, futures margin, or options - all of which are way more cost effective than LETFs. To me choice is obvious, futures/options are #1, and if there is some asset that you want that doesn't have liquid futures/options then you go margin (at IB). Well, on to read so more pages.
A huge factor, at least for US investors, is the tax implications. Both futures and options are suboptimal in this regard. Futures get only 60% LTCG treatment and the capital gains are incurred every year which adds up quickly. Options have to be sold and rolled over every couple years (at least), incurring capital gains frequently. LETF can be held indefinitely like stocks, incurring only LTCG if you sell. Depending on cash inflow (salary say), it is possible for many investors to rebalance the LETFs in their portfolios solely through contributions without incurring any tax. The tax implications for margin are a little more complicated, but if you think through what must happen when you eventually deleverage, you'll see again that LETFs come out on top. (Note that this is only for investors who wish to keep a > 1 leverage ratio for the bulk of their investing life. If you're following a lifecycle type approach where you'll eventually pay down all your margin debt without being forced to sell to deleverage, then margin could be better than LETFs).

So despite the huge emphasis on borrowing costs/expenses which end up being in the range of +-1% between the different possibilities, the tax consideration is probably the most important and can lean in favor of LETFs. In tax advantaged accounts, margin/box spread financing isn't possible. In this case, I think a strong case can be made for futures.
chris319
Posts: 1659
Joined: Thu Jan 28, 2021 5:04 pm

Re: Leveraging with options vs margin

Post by chris319 »

People tend to fret about expense ratios around 1% which amount to bread crumbs, but they turn a blind eye to taxes which are much costlier.
Financial decisions based on emotion often turn out to be bad decisions.
User avatar
cos
Posts: 506
Joined: Fri Aug 23, 2019 7:34 pm
Location: Boston
Contact:

Re: Leveraging with options vs margin

Post by cos »

langlands wrote: Mon May 17, 2021 11:32 pm The tax implications for margin are a little more complicated, but if you think through what must happen when you eventually deleverage, you'll see again that LETFs come out on top. (Note that this is only for investors who wish to keep a > 1 leverage ratio for the bulk of their investing life. If you're following a lifecycle type approach where you'll eventually pay down all your margin debt without being forced to sell to deleverage, then margin could be better than LETFs).
What if I never deleverage? Does box-spread-financed portfolio margin come out on top once again?
langlands
Posts: 1093
Joined: Wed Apr 03, 2019 10:05 pm

Re: Leveraging with options vs margin

Post by langlands »

cos wrote: Tue May 18, 2021 4:24 am
langlands wrote: Mon May 17, 2021 11:32 pm The tax implications for margin are a little more complicated, but if you think through what must happen when you eventually deleverage, you'll see again that LETFs come out on top. (Note that this is only for investors who wish to keep a > 1 leverage ratio for the bulk of their investing life. If you're following a lifecycle type approach where you'll eventually pay down all your margin debt without being forced to sell to deleverage, then margin could be better than LETFs).
What if I never deleverage? Does box-spread-financed portfolio margin come out on top once again?
Hm, if you never deleverage I guess you never pay taxes in either case (ignoring dividends). But if you plan on leaving an inheritance, whether or not the stepped-up basis will still be around in 30-40 years starts to matter.

But the way compounding works, I'm not sure if never deleveraging is something you should really count on. I don't know what your income looks like, but in an optimistic scenario for stocks, a leveraged portfolio can start dwarfing any outside income.

I'm sure you've looked at the growth of UPRO over the last decade. Leveraged stocks can grow really fast. I believe you are fairly young, correct? If you keep 1.5x leveraged stocks with margin throughout your entire life, it's not too far fetched to find yourself at 70 with a $15 million portfolio and $5 million in debt ($10 million equity). I think I would feel uncomfortable having that much debt at that age and personally having to manage a leveraged portfolio of that size. What are you going to do in a downturn? You'll be forced to sell to deleverage.

Here is why this situation is dangerous. You're probably aware that there's a lot of talk of raising capital gains taxes. A gigantic chunk, probably 80%+ of your $15 million portfolio is capital gains. If that's mostly taxed at ordinary income (as current proposals argue for), and depending on what the ordinary income tax rate is at that point, it's not too hard to imagine that nearly half of that $15 million goes to the government when you sell. So you're left with $8 million, and after paying off that $5 million debt, you're left with $3 million. This is basically my math for why LETFs are better than margin leverage if the method of deleveraging is selling. For the equivalent LETFs portfolio that is just $10 million in LETFs, after selling and paying off 50% in taxes, you're left with $5 million which is almost double.
chris319
Posts: 1659
Joined: Thu Jan 28, 2021 5:04 pm

Re: Leveraging with options vs margin

Post by chris319 »

This is basically my math for why LETFs are better than margin leverage
That's sound reasoning. In addition, the margin interest clock is ticking away the entire time you carry a debit balance. You can get some relief from the margin interest by deducting it from taxes, but you have a limit of $3,000 per year and must have offsetting investment income such as dividends or capital gains from stock sales. Stock sales in turn generate more CG tax liability.
Financial decisions based on emotion often turn out to be bad decisions.
jagadev
Posts: 3
Joined: Tue Apr 02, 2013 9:26 pm

Re: Leveraging with options vs margin

Post by jagadev »

Disclaimer: I am not licensed to provide financial or tax advice and just sharing my thought.

This thread may be old, but the question still remains with a changed situation where margin loan interest is really high like 6%.

I am thinking whether leveraging using CBOE SPX options in tax-deferred or roth accounts is better?
For example say you want to leverage by 2X and SPX is currently at 4746.75,
Say your expectation is S&P 500 will grow by 10%/yr for next 6 years.
Then if you check
mid price for $SPX 2029/12/21 $2400 Call: $2648.50
mid price for $SPX 2029/12/21 $2400 Put: $ 104.35

Whoever sells you this option is lending you 4746.75 - (2648.50 - $04.35) = $2202.6, and will take repayment of $2400 in 6 years and will also pocket dividends, say 1.5%.
He will get $4746.75 * 1.5% * (1 + 1.1 + 1.1^2 + 1.1^3 + 1.1^4 + 1.1^5) = $549.36 dividend.
So interest rate you are paying him for 6 year loan = (($2400 + $549.36) / $2202.6) ^ (1/6) - 1 = .0498 = 5%.
Fed rate for 6 years is nearly 3.9% https://home.treasury.gov/resource-cent ... value=2023
So You are getting Fed + 1%.

What you are doing,
buying $SPX 2029/12/21 $2400 call in 401K/IRA/Roth-IRA,
and selling $SPX 2029/12/21 $2400 Put in taxable margin enabled brokerage account
and calculating that your effective margin rate is 5% for next 6 years.
Expecting lesser chance of margin call.

Note: You can have various degree of leverage and not just 2X in the above strategy.
comeinvest
Posts: 2669
Joined: Mon Mar 12, 2012 6:57 pm

Re: Leveraging with options vs margin

Post by comeinvest »

jagadev wrote: Thu Dec 21, 2023 9:59 pm Disclaimer: I am not licensed to provide financial or tax advice and just sharing my thought.

This thread may be old, but the question still remains with a changed situation where margin loan interest is really high like 6%.

I am thinking whether leveraging using CBOE SPX options in tax-deferred or roth accounts is better?
For example say you want to leverage by 2X and SPX is currently at 4746.75,
Say your expectation is S&P 500 will grow by 10%/yr for next 6 years.
Then if you check
mid price for $SPX 2029/12/21 $2400 Call: $2648.50
mid price for $SPX 2029/12/21 $2400 Put: $ 104.35

Whoever sells you this option is lending you 4746.75 - (2648.50 - $04.35) = $2202.6, and will take repayment of $2400 in 6 years and will also pocket dividends, say 1.5%.
He will get $4746.75 * 1.5% * (1 + 1.1 + 1.1^2 + 1.1^3 + 1.1^4 + 1.1^5) = $549.36 dividend.
So interest rate you are paying him for 6 year loan = (($2400 + $549.36) / $2202.6) ^ (1/6) - 1 = .0498 = 5%.
Fed rate for 6 years is nearly 3.9% https://home.treasury.gov/resource-cent ... value=2023
So You are getting Fed + 1%.

What you are doing,
buying $SPX 2029/12/21 $2400 call in 401K/IRA/Roth-IRA,
and selling $SPX 2029/12/21 $2400 Put in taxable margin enabled brokerage account
and calculating that your effective margin rate is 5% for next 6 years.
Expecting lesser chance of margin call.

Note: You can have various degree of leverage and not just 2X in the above strategy.
You are attempting to buy a synthetic stock, or synthetic index in this case. The unknowns are the future dividends, securities lending income, and the future financing rate or implied financing rate spread.
All implied financing rate calculations are fuzzy because nobody knows the dividends years ahead.
Maybe I'm wrong but I don't think "consensus" dividend growth assumptions are 10%, are they? I thought they are more like 6% (economic growth plus internal leverage). The S&P 500 didn't grow 10% historically plus dividends.
The market makers have better models, and probably priced the options right according to some model.

I have not checked, but I think the bid/ask (and the effective spread between filled prices which are usually closer to the midpoint than the displayed bid/ask) are wider for options several years out; so you will have a drag in any case.
acegolfer
Posts: 3029
Joined: Tue Aug 25, 2009 9:40 am

Re: Leveraging with options vs margin

Post by acegolfer »

Since you are asking for "long term" strategy, I'd rule out options, which suffer from theta decay.
skierincolorado
Posts: 2377
Joined: Sat Mar 21, 2020 10:56 am

Re: Leveraging with options vs margin

Post by skierincolorado »

acegolfer wrote: Fri Dec 22, 2023 6:32 pm Since you are asking for "long term" strategy, I'd rule out options, which suffer from theta decay.
I think it should be possible to overlay a strategy to make it theta neutral. Also the time value could come in handy in case of a major crash.
Post Reply