I think it's high because you can borrow at similar or even lower rates than LETFs, and not even pay that expense ratio 0_ogokuisthebest wrote: ↑Thu Feb 11, 2021 1:03 pmWhy is 0.91% considered high when it provides 2/3x leverage. Many leverage ETF's usually have around this much ER. I'm using 3x etfs all of them have ~0.9% ER which are globally diversified. Is it possible to go above 2x leverage using margin and non leveraged ETF?Steve Reading wrote: ↑Wed Feb 10, 2021 7:36 pm The reason is that SSO has a high expense ratio and if you use margin with regular ETFs, you can actually diversify globally (instead of just the S&P 500). But it's a close race and if you opted for LETFs, that's likely fine as well (the book mentions them as an option).
A 16.66% drop causes a 50% drop in the value of the 3x LETF, which wipes out the equity of an account leveraged 2:1.gokuisthebest wrote: ↑Thu Feb 11, 2021 1:03 pmCan you tell me how its 16% drop and not 33% to wipe out the account? For the usual 3x account 33% is obvious but even for 6x leverage the underlying ETF's are still 3x, only our capital has increased now.Steve Reading wrote: ↑Wed Feb 10, 2021 7:36 pm First of all, you can't buy a 3x LETF with 2:1 margin at IBKR. The maintenance margin of UPRO is 75%, not 25%. But say you could, for math sakes. If you did have 6:1 leverage, then a 16% drop in the index will fully wipe out all of your money. And you'd get a margin call well before that.
I think around 1.5-2x leverage is enough, I really would follow the book here.
What about the margin call, am i correct that we get margin call at 11.11% drop in my earlier example?
I searched online and found inconsistent results like 50%, 75%, 90% margin maintenance for leveraged ETF's. is there any way to get margin for each ticker on IBKR?
You can check the maintenance margin of LETFs by directly purchasing them in IBKR with the paper trading account.
1) An E-Mini contract gives access to 50 shares of S&P 500. So you miss out on two dividend, each of about 1.94%/4 = 0.485%. So that's 0.00485*2*979.26*50 = $475. You're right that they're mistaken there. They pro-rated the dividend (0.0194/12*5*979.26*50 = ~$395), but that's not what you should actually do.gokuisthebest wrote: ↑Thu Feb 11, 2021 1:03 pm
Edit: I figured the futures has their own tickers like MES for micro E-mini S&P500 which is currently trading at ~3800-3900. Also theres MES ∞ which is probably the auto-rollover feature in IBKR.
- I have the book in google playstore pages 114-115 in Chapter 8 -> "Another Approach", the next section is "Investing with ProFunds UltraBull". Maybe the playstore book is in a different format compared to say kindle ebook?
- how do i check the s&p micro/mini contract prices in IBKR, whats the window name? i can only see options chain. and how does keeping $9,772 bring the total leverage to 2:1? if 'c' is the contract price and 5x leverage gives us 5c exposure. we add 's' cash => c + s gives us 5c + s exposure. 2x leverage implies 5c + s = 2*(c + s). so s = 3*c. that means i should have 3c as cash and additional c to purchase the contract that means total of 4c to start the account with 2x leverage implementation. i dont think i understand how to calculate leverage tbh
- The contract eg. in the book is from July 27, 2009 to December. Shouldnt it be 5 months from Aug-Dec? so the implied iR should be (1.004)^(5/12) = 1.0096 = 0.96%
- I live in singapore(not a US citizen) and theres no capital gains tax but theres dividend tax of 30%(can be brought down to 15% if Irish domicile which isnt worth the effort).
1 MES 18 Jun 2021 @3900 gives exposure to 19500USD which is 5:1, if my calculation in step 2 above are correct, i should maintain 3*c=3*3900=11700 USD cash. maybe short term treasury is better? Since this will be a leverage play, does margin come into account here?
2) i'm not familiar with futures on IBKR, so can't help you with tickers. An E-Micro gives you access to 5 shares of the S&P 500, which is like having exposure to $19500, that's right. The ratio of this exposure to your collateral is the leverage. If you have $9,772 and the index drops 10%, your contract will cause a loss of $1950, so you'll end up with 9772-1950 = $7822. Notice that 7822/9772 = 80%. So a 10% drop in the index caused a 20% drop in your account balance, so you know you have 2:1 leverage.
3) It would be 1.2% if it were 4 months, and 0.96% for five months. Looks like they mistakenly thought there were only 4 months from July to December haha. There are mistakes throughout the book, it's good you're paying attention!
4) If you don't have to pay taxes on the gains of futures, then that seems like the best choice. They're the cheapest way to borrow and would have no expense ratio. Since interest rates are zero, there isn't even an opportunity cost to having money in cash as collateral so futures seem like a strong contender in your case.