Lowest cost way to get leveraged equity exposure

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
Topic Author
packer16
Posts: 1306
Joined: Sat Jan 04, 2014 2:28 pm

Lowest cost way to get leveraged equity exposure

Post by packer16 » Thu Jan 16, 2020 11:05 am

I have seen many threads about leveraged equity exposure but none appear to determine what is the cheapest way to get access to this exposure. You can buy leveraged ETFs but they have fees (about 1%) and slippage over time in terms of advertised performance and actual performance. So the other ways are margin (which I have seen IB as being the cheapest @ 2 to 3%) or from futures. Has any one used the futures route and how have you been able to size the positions if you don't have a large account. How have folks gotten exposure in an IRA. TIA.

Packer
Buy cheap and something good might happen

redstar
Posts: 60
Joined: Thu Jul 13, 2017 11:15 pm

Re: Lowest cost way to get leveraged equity exposure

Post by redstar » Thu Jan 16, 2020 11:50 am

If you want a 1.5X balanced fund that does not reset leverage daily, look at NTSX (expense ratio 0.2). A bogleheads thread about it is here:
viewtopic.php?f=10&t=256020
Inside a non-taxable account (like an IRA), you could also look at the 2X balanced mutual fund PSLDX, but it has a higher expense ratio. Ally has low minimums for PSLDX.

If you go the futures route, there are micro e-minis (MES) which are worth 5 times the S&P 500 index instead of the normal e-mini (which is 50 times the index). This is a notional value of ~$16,530. Remember that you will need to post collateral for this. Today, it looks like this might be around a minimum of $1,065 for one Micro E-mini of S&P 500 at IB, although you will certainly want more than that. In an IRA, which IB would support, you would need a minimum of 3 times as much, so $3,195. A reasonable amount of leverage might be 1.5X, which would mean putting $11,020 in the IB account as collateral.

The other (more advanced way) that you could do it is with LEAP options such as SPY. 305pelusa has detailed how to do that with a combined naked put and call in this thread (where they also evaluate the implied borrowing rate):
viewtopic.php?f=10&t=274390
I don't think you can write naked puts in most IRAs, so you couldn't get the cheap borrowing rate inside an IRA with this strategy. However, you could just buy the call, which would cost more, but would include downside protection.

Based on everything I've read, the implied borrowing rate with futures should be cheaper than using options. The downside is that they requiring rolling every few months. I would probably just buy and hold NTSX or PSLDX and not worry about it, if those allocations fit your needs.

alex_686
Posts: 5154
Joined: Mon Feb 09, 2015 2:39 pm

Re: Lowest cost way to get leveraged equity exposure

Post by alex_686 » Thu Jan 16, 2020 12:11 pm

Home Mortgage. It is indirect, but you are still leverageing your entire portfolio.

User avatar
danielc
Posts: 939
Joined: Sun Dec 10, 2017 4:48 am
Location: Iowa, USA
Contact:

Re: Lowest cost way to get leveraged equity exposure

Post by danielc » Thu Jan 16, 2020 9:59 pm

redstar wrote:
Thu Jan 16, 2020 11:50 am
If you want a 1.5X balanced fund that does not reset leverage daily, look at NTSX (expense ratio 0.2). A bogleheads thread about it is here:
viewtopic.php?f=10&t=256020
Inside a non-taxable account (like an IRA), you could also look at the 2X balanced mutual fund PSLDX, but it has a higher expense ratio. Ally has low minimums for PSLDX.

If you go the futures route, there are micro e-minis (MES) which are worth 5 times the S&P 500 index instead of the normal e-mini (which is 50 times the index). This is a notional value of ~$16,530. Remember that you will need to post collateral for this. Today, it looks like this might be around a minimum of $1,065 for one Micro E-mini of S&P 500 at IB, although you will certainly want more than that. In an IRA, which IB would support, you would need a minimum of 3 times as much, so $3,195. A reasonable amount of leverage might be 1.5X, which would mean putting $11,020 in the IB account as collateral.

The other (more advanced way) that you could do it is with LEAP options such as SPY. 305pelusa has detailed how to do that with a combined naked put and call in this thread (where they also evaluate the implied borrowing rate):
viewtopic.php?f=10&t=274390
I don't think you can write naked puts in most IRAs, so you couldn't get the cheap borrowing rate inside an IRA with this strategy. However, you could just buy the call, which would cost more, but would include downside protection.

Based on everything I've read, the implied borrowing rate with futures should be cheaper than using options. The downside is that they requiring rolling every few months. I would probably just buy and hold NTSX or PSLDX and not worry about it, if those allocations fit your needs.
I am seriously tempted to buy PSLDX. A backtest shows that it really does behave a lot like a leveraged S&P 500. Is there a reason why it has to be held in a taxable tax-deferred account?
Last edited by danielc on Thu Jan 16, 2020 10:50 pm, edited 1 time in total.

rascott
Posts: 1274
Joined: Wed Apr 15, 2015 10:53 am

Re: Lowest cost way to get leveraged equity exposure

Post by rascott » Thu Jan 16, 2020 10:37 pm

danielc wrote:
Thu Jan 16, 2020 9:59 pm
redstar wrote:
Thu Jan 16, 2020 11:50 am
If you want a 1.5X balanced fund that does not reset leverage daily, look at NTSX (expense ratio 0.2). A bogleheads thread about it is here:
viewtopic.php?f=10&t=256020
Inside a non-taxable account (like an IRA), you could also look at the 2X balanced mutual fund PSLDX, but it has a higher expense ratio. Ally has low minimums for PSLDX.

If you go the futures route, there are micro e-minis (MES) which are worth 5 times the S&P 500 index instead of the normal e-mini (which is 50 times the index). This is a notional value of ~$16,530. Remember that you will need to post collateral for this. Today, it looks like this might be around a minimum of $1,065 for one Micro E-mini of S&P 500 at IB, although you will certainly want more than that. In an IRA, which IB would support, you would need a minimum of 3 times as much, so $3,195. A reasonable amount of leverage might be 1.5X, which would mean putting $11,020 in the IB account as collateral.

The other (more advanced way) that you could do it is with LEAP options such as SPY. 305pelusa has detailed how to do that with a combined naked put and call in this thread (where they also evaluate the implied borrowing rate):
viewtopic.php?f=10&t=274390
I don't think you can write naked puts in most IRAs, so you couldn't get the cheap borrowing rate inside an IRA with this strategy. However, you could just buy the call, which would cost more, but would include downside protection.

Based on everything I've read, the implied borrowing rate with futures should be cheaper than using options. The downside is that they requiring rolling every few months. I would probably just buy and hold NTSX or PSLDX and not worry about it, if those allocations fit your needs.
I am seriously tempted to buy PSLDX. A backtest shows that it really does behave a lot like a leveraged S&P 500. Is there a reason why it has to be held in a taxable account?

Do you mean NOT in a taxable account?

It spits out huge distributions, you only want this in a tax advantaged account. Most brokers won't even allow you to buy it outside of an IRA. And actually only a handful of brokers you can buy it at all

SovereignInvestor
Posts: 521
Joined: Mon Aug 20, 2018 4:41 pm

Re: Lowest cost way to get leveraged equity exposure

Post by SovereignInvestor » Thu Jan 16, 2020 10:39 pm

In the money call options of longest duration. They implicitly have you borrow at the.the risk free rate.

rascott
Posts: 1274
Joined: Wed Apr 15, 2015 10:53 am

Re: Lowest cost way to get leveraged equity exposure

Post by rascott » Thu Jan 16, 2020 10:39 pm

Futures or LEAPs are the cheapest way to gain leverage. You are borrowing somewhere near the tbill rate with these products.... though it can vary at times

Can get micro contacts in the $15k range (nominal exposure) now via futures market. In the "old" days.... your minimum exposure would be 10x that.




Not really an ideal time to leverage the SP500, IMO
Last edited by rascott on Thu Jan 16, 2020 10:43 pm, edited 2 times in total.

User avatar
White Coat Investor
Posts: 14343
Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Re: Lowest cost way to get leveraged equity exposure

Post by White Coat Investor » Thu Jan 16, 2020 10:41 pm

Where have I heard this before....oh yea!

viewtopic.php?t=5934
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

User avatar
danielc
Posts: 939
Joined: Sun Dec 10, 2017 4:48 am
Location: Iowa, USA
Contact:

Re: Lowest cost way to get leveraged equity exposure

Post by danielc » Thu Jan 16, 2020 10:49 pm

rascott wrote:
Thu Jan 16, 2020 10:37 pm
Do you mean NOT in a taxable account?

It spits out huge distributions, you only want this in a tax advantaged account. Most brokers won't even allow you to buy it outside of an IRA. And actually only a handful of brokers you can buy it at all
Yes, that's what I meant. Thank you.

Ferdinand2014
Posts: 1014
Joined: Mon Dec 17, 2018 6:49 pm

Re: Lowest cost way to get leveraged equity exposure

Post by Ferdinand2014 » Thu Jan 16, 2020 10:51 pm

30 year mortgage.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

rascott
Posts: 1274
Joined: Wed Apr 15, 2015 10:53 am

Re: Lowest cost way to get leveraged equity exposure

Post by rascott » Thu Jan 16, 2020 11:00 pm

danielc wrote:
Thu Jan 16, 2020 10:49 pm
rascott wrote:
Thu Jan 16, 2020 10:37 pm
Do you mean NOT in a taxable account?

It spits out huge distributions, you only want this in a tax advantaged account. Most brokers won't even allow you to buy it outside of an IRA. And actually only a handful of brokers you can buy it at all
Yes, that's what I meant. Thank you.

It was something like 10%+ yield last year. You'd get killed on taxes in a taxable account.

guyinlaw
Posts: 218
Joined: Wed Jul 03, 2019 9:54 am

Re: Lowest cost way to get leveraged equity exposure

Post by guyinlaw » Thu Jan 16, 2020 11:06 pm

Most people leverage up when they buy a house 5X - 10X . Stocks have much higher volatility and borrowing can be more expensive, so one has to be extra-careful.

1. Before you start seriously leveraging-- using micro e-mini Futures or SPY Leaps, please do read lifecycle investing book and/or their paper.

Two important takeaways for me - 1. Keep leverage below 2X. 2. need to keep at it over more than decade

They did a lot of simulations and lots of data showing 90% probability... They used data from US markets, Japanese markets as examples...

http://lifecycleinvesting.net/book.html

https://poseidon01.ssrn.com/delivery.ph ... 23&EXT=pdf

2. Stocks are in a 10y bull run and all investors have recency bias. We might think we have high risk tolerance but cannot be sure about overselves.. do read forum post of people going through 2008 GFC

viewtopic.php?p=321851#p321851 <-- User "Markettimer" troubles with excess leverage during GFC
viewtopic.php?t=25126

3. Ben Felix did a video discussing leverage - discusses the lifecycle investing paper/book.

https://www.youtube.com/watch?v=Ll3TCEz4g1k

4. Futures might be less expensive than SPY Leaps. I have bought micro e-mini futures for S&P500 and Russell 2000.

Rolling is quite easy, and can be automated.. Because I have to roll it every 3 months, I get tempted to fiddle with the allocation and/or close out some of the positions.

Leaps are easier to use in IRA accounts , Only IB allows Futures in IRA, but with extra collateral.

5. People have been experimenting with risk parity implementation ... Hedgefundie (leveraged ETFs) or buying treasury futures to build a NTSX like implementation for your whole portfolio.. I buy a small no of 2y and 5Y treasury futures..

Risk both these is when stock drop at the same time as interest rates rise..

viewtopic.php?f=10&t=256020&p=4953607#p4953607

User avatar
305pelusa
Posts: 1311
Joined: Fri Nov 16, 2018 10:20 pm

Re: Lowest cost way to get leveraged equity exposure

Post by 305pelusa » Thu Jan 16, 2020 11:07 pm

packer16 wrote:
Thu Jan 16, 2020 11:05 am
I have seen many threads about leveraged equity exposure but none appear to determine what is the cheapest way to get access to this exposure. You can buy leveraged ETFs but they have fees (about 1%) and slippage over time in terms of advertised performance and actual performance. So the other ways are margin (which I have seen IB as being the cheapest @ 2 to 3%) or from futures. Has any one used the futures route and how have you been able to size the positions if you don't have a large account. How have folks gotten exposure in an IRA. TIA.

Packer
In my thread, I actually have several posts detailing the borrowing rates from ITM calls, call-put parity, LETFs, margin and even Futures. Another poster already commented the link to the thread. You’ll have to dig a little though.

IB’s margin rate is incredibly competitive. For taxable, it’s probably the cheapest choice. My only concern is the rate could go up at any time though. It’s like a variable rate “mortgage” in that respect

User avatar
JoMoney
Posts: 8180
Joined: Tue Jul 23, 2013 5:31 am

Re: Lowest cost way to get leveraged equity exposure

Post by JoMoney » Thu Jan 16, 2020 11:22 pm

I have not used futures, but I have used buying deep in the money call options. If you buy it deep enough, the "delta" gets high enough that any change in the asset it represents price gets reflected in the option price, and since you're putting up less than 100% of the money it would cost to buy the asset represented by the call, you get synthetic leverage. It only requires buying calls (and selling them to close), so it doesn't require margin and can be done inside a IRA with access to 'Level 2 options trading' (I believe even Vanguard allows this). There's no risk of losing more than the cost of purchasing the call (if it falls too far it just expires worthless), so that may be a benefit over margin.
There's a lot I don't understand about options though, and I really don't need to be more than 100% in stocks, it was just something I played with for awhile and decided the "playing" was more likely to get me into trouble I don't need... but it does appear that options are now trading for "free" + a trivial contact price with many brokers.

You can "size" your position buy simply holding cash, the syntheticly leveraged deep in the money call, and a non-leveraged traditional fund to rebalance with.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

User avatar
whodidntante
Posts: 7124
Joined: Thu Jan 21, 2016 11:11 pm
Location: outside the echo chamber

Re: Lowest cost way to get leveraged equity exposure

Post by whodidntante » Thu Jan 16, 2020 11:34 pm

guyinlaw wrote:
Thu Jan 16, 2020 11:06 pm
Only IB allows Futures in IRA, but with extra collateral.
TDA allows it. One could also use a self-directed IRA.

User avatar
Phineas J. Whoopee
Posts: 9033
Joined: Sun Dec 18, 2011 6:18 pm

Re: Lowest cost way to get leveraged equity exposure

Post by Phineas J. Whoopee » Fri Jan 17, 2020 12:38 am

If you have a substantial asset, like for example a house or intellectual property, borrow against it and invest the proceeds in equities. I don't recommend taking such an action, but am merely answering OP's question.
PJW

SovereignInvestor
Posts: 521
Joined: Mon Aug 20, 2018 4:41 pm

Re: Lowest cost way to get leveraged equity exposure

Post by SovereignInvestor » Fri Jan 17, 2020 12:12 pm

JoMoney wrote:
Thu Jan 16, 2020 11:22 pm
I have not used futures, but I have used buying deep in the money call options. If you buy it deep enough, the "delta" gets high enough that any change in the asset it represents price gets reflected in the option price, and since you're putting up less than 100% of the money it would cost to buy the asset represented by the call, you get synthetic leverage. It only requires buying calls (and selling them to close), so it doesn't require margin and can be done inside a IRA with access to 'Level 2 options trading' (I believe even Vanguard allows this). There's no risk of losing more than the cost of purchasing the call (if it falls too far it just expires worthless), so that may be a benefit over margin.
There's a lot I don't understand about options though, and I really don't need to be more than 100% in stocks, it was just something I played with for awhile and decided the "playing" was more likely to get me into trouble I don't need... but it does appear that options are now trading for "free" + a trivial contact price with many brokers.

You can "size" your position buy simply holding cash, the syntheticly leveraged deep in the money call, and a non-leveraged traditional fund to rebalance with.

Good points. Deep ITM calls are great. A deep ITM call is like buying SPY borrowing at t bill rate and then buying OTM put at same strike. The more deeper ITM the call in first example the more OTM the implied put is which means less decay and therefore more leverage.

User avatar
305pelusa
Posts: 1311
Joined: Fri Nov 16, 2018 10:20 pm

Re: Lowest cost way to get leveraged equity exposure

Post by 305pelusa » Fri Jan 17, 2020 12:38 pm

SovereignInvestor wrote:
Fri Jan 17, 2020 12:12 pm
JoMoney wrote:
Thu Jan 16, 2020 11:22 pm
I have not used futures, but I have used buying deep in the money call options. If you buy it deep enough, the "delta" gets high enough that any change in the asset it represents price gets reflected in the option price, and since you're putting up less than 100% of the money it would cost to buy the asset represented by the call, you get synthetic leverage. It only requires buying calls (and selling them to close), so it doesn't require margin and can be done inside a IRA with access to 'Level 2 options trading' (I believe even Vanguard allows this). There's no risk of losing more than the cost of purchasing the call (if it falls too far it just expires worthless), so that may be a benefit over margin.
There's a lot I don't understand about options though, and I really don't need to be more than 100% in stocks, it was just something I played with for awhile and decided the "playing" was more likely to get me into trouble I don't need... but it does appear that options are now trading for "free" + a trivial contact price with many brokers.

You can "size" your position buy simply holding cash, the syntheticly leveraged deep in the money call, and a non-leveraged traditional fund to rebalance with.

Good points. Deep ITM calls are great. A deep ITM call is like buying SPY borrowing at t bill rate and then buying OTM put at same strike. The more deeper ITM the call in first example the more OTM the implied put is which means less decay and therefore more leverage.
You mean *less leverage right?

SovereignInvestor
Posts: 521
Joined: Mon Aug 20, 2018 4:41 pm

Re: Lowest cost way to get leveraged equity exposure

Post by SovereignInvestor » Fri Jan 17, 2020 3:19 pm

305pelusa wrote:
Fri Jan 17, 2020 12:38 pm
SovereignInvestor wrote:
Fri Jan 17, 2020 12:12 pm
JoMoney wrote:
Thu Jan 16, 2020 11:22 pm
I have not used futures, but I have used buying deep in the money call options. If you buy it deep enough, the "delta" gets high enough that any change in the asset it represents price gets reflected in the option price, and since you're putting up less than 100% of the money it would cost to buy the asset represented by the call, you get synthetic leverage. It only requires buying calls (and selling them to close), so it doesn't require margin and can be done inside a IRA with access to 'Level 2 options trading' (I believe even Vanguard allows this). There's no risk of losing more than the cost of purchasing the call (if it falls too far it just expires worthless), so that may be a benefit over margin.
There's a lot I don't understand about options though, and I really don't need to be more than 100% in stocks, it was just something I played with for awhile and decided the "playing" was more likely to get me into trouble I don't need... but it does appear that options are now trading for "free" + a trivial contact price with many brokers.

You can "size" your position buy simply holding cash, the syntheticly leveraged deep in the money call, and a non-leveraged traditional fund to rebalance with.

Good points. Deep ITM calls are great. A deep ITM call is like buying SPY borrowing at t bill rate and then buying OTM put at same strike. The more deeper ITM the call in first example the more OTM the implied put is which means less decay and therefore more leverage.
You mean *less leverage right?
Long ITM Call at strike X is same as leveraged long SPX by borrowing at risk free rate and then buying OTM put at X strike.

The deeper ITM the call is the further OTM the implied married put wth long SPX is...and owning SPX with a married put that is further OTM is closer to just owning SPX unhedged. If you have put at 0 it is like not having any protection.

So it is more leverage.

User avatar
305pelusa
Posts: 1311
Joined: Fri Nov 16, 2018 10:20 pm

Re: Lowest cost way to get leveraged equity exposure

Post by 305pelusa » Fri Jan 17, 2020 3:32 pm

SovereignInvestor wrote:
Fri Jan 17, 2020 3:19 pm
305pelusa wrote:
Fri Jan 17, 2020 12:38 pm
SovereignInvestor wrote:
Fri Jan 17, 2020 12:12 pm
JoMoney wrote:
Thu Jan 16, 2020 11:22 pm
I have not used futures, but I have used buying deep in the money call options. If you buy it deep enough, the "delta" gets high enough that any change in the asset it represents price gets reflected in the option price, and since you're putting up less than 100% of the money it would cost to buy the asset represented by the call, you get synthetic leverage. It only requires buying calls (and selling them to close), so it doesn't require margin and can be done inside a IRA with access to 'Level 2 options trading' (I believe even Vanguard allows this). There's no risk of losing more than the cost of purchasing the call (if it falls too far it just expires worthless), so that may be a benefit over margin.
There's a lot I don't understand about options though, and I really don't need to be more than 100% in stocks, it was just something I played with for awhile and decided the "playing" was more likely to get me into trouble I don't need... but it does appear that options are now trading for "free" + a trivial contact price with many brokers.

You can "size" your position buy simply holding cash, the syntheticly leveraged deep in the money call, and a non-leveraged traditional fund to rebalance with.

Good points. Deep ITM calls are great. A deep ITM call is like buying SPY borrowing at t bill rate and then buying OTM put at same strike. The more deeper ITM the call in first example the more OTM the implied put is which means less decay and therefore more leverage.
You mean *less leverage right?
Long ITM Call at strike X is same as leveraged long SPX by borrowing at risk free rate and then buying OTM put at X strike.

The deeper ITM the call is the further OTM the implied married put wth long SPX is...and owning SPX with a married put that is further OTM is closer to just owning SPX unhedged. If you have put at 0 it is like not having any protection.

So it is more leverage.

Perhaps you and I define leverage differently. Let’s see:
If you buy a call with a strike price half of the index, the call will cost about half of the index (a little more but let’s just round for now). How much leverage would you say this gives you? And why?

Now instead, let’s opt for a deeper call with a strike price that is 20% of the index. How much leverage would you say you have here and why?

SovereignInvestor
Posts: 521
Joined: Mon Aug 20, 2018 4:41 pm

Re: Lowest cost way to get leveraged equity exposure

Post by SovereignInvestor » Fri Jan 17, 2020 4:12 pm

Yeah your right. I think Im using wrong word.

You're right. Higher strike has more leverage as profit per movement of underlying. The trade off is higher theta burn.

Lower strike has more risk and less leverage but less theta burn. Thanks for pointing it out

User avatar
305pelusa
Posts: 1311
Joined: Fri Nov 16, 2018 10:20 pm

Re: Lowest cost way to get leveraged equity exposure

Post by 305pelusa » Fri Jan 17, 2020 4:34 pm

SovereignInvestor wrote:
Fri Jan 17, 2020 4:12 pm
Yeah your right. I think Im using wrong word.

You're right. Higher strike has more leverage as profit per movement of underlying. The trade off is higher theta burn.

Lower strike has more risk and less leverage but less theta burn. Thanks for pointing it out
Agreed

User avatar
JoMoney
Posts: 8180
Joined: Tue Jul 23, 2013 5:31 am

Re: Lowest cost way to get leveraged equity exposure

Post by JoMoney » Fri Jan 17, 2020 9:11 pm

SovereignInvestor wrote:
Fri Jan 17, 2020 12:12 pm
JoMoney wrote:
Thu Jan 16, 2020 11:22 pm
I have not used futures, but I have used buying deep in the money call options. If you buy it deep enough, the "delta" gets high enough that any change in the asset it represents price gets reflected in the option price, and since you're putting up less than 100% of the money it would cost to buy the asset represented by the call, you get synthetic leverage. It only requires buying calls (and selling them to close), so it doesn't require margin and can be done inside a IRA with access to 'Level 2 options trading' (I believe even Vanguard allows this). There's no risk of losing more than the cost of purchasing the call (if it falls too far it just expires worthless), so that may be a benefit over margin.
There's a lot I don't understand about options though, and I really don't need to be more than 100% in stocks, it was just something I played with for awhile and decided the "playing" was more likely to get me into trouble I don't need... but it does appear that options are now trading for "free" + a trivial contact price with many brokers.

You can "size" your position buy simply holding cash, the syntheticly leveraged deep in the money call, and a non-leveraged traditional fund to rebalance with.

Good points. Deep ITM calls are great. A deep ITM call is like buying SPY borrowing at t bill rate and then buying OTM put at same strike. The more deeper ITM the call in first example the more OTM the implied put is which means less decay and therefore more leverage.
Why buy the put? Just buying the deep in the money call will give cheap leverage, and if it's deep enough almost no 'delta' time/decay anyway.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

SovereignInvestor
Posts: 521
Joined: Mon Aug 20, 2018 4:41 pm

Re: Lowest cost way to get leveraged equity exposure

Post by SovereignInvestor » Fri Jan 17, 2020 10:15 pm

JoMoney wrote:
Fri Jan 17, 2020 9:11 pm
SovereignInvestor wrote:
Fri Jan 17, 2020 12:12 pm
JoMoney wrote:
Thu Jan 16, 2020 11:22 pm
I have not used futures, but I have used buying deep in the money call options. If you buy it deep enough, the "delta" gets high enough that any change in the asset it represents price gets reflected in the option price, and since you're putting up less than 100% of the money it would cost to buy the asset represented by the call, you get synthetic leverage. It only requires buying calls (and selling them to close), so it doesn't require margin and can be done inside a IRA with access to 'Level 2 options trading' (I believe even Vanguard allows this). There's no risk of losing more than the cost of purchasing the call (if it falls too far it just expires worthless), so that may be a benefit over margin.
There's a lot I don't understand about options though, and I really don't need to be more than 100% in stocks, it was just something I played with for awhile and decided the "playing" was more likely to get me into trouble I don't need... but it does appear that options are now trading for "free" + a trivial contact price with many brokers.

You can "size" your position buy simply holding cash, the syntheticly leveraged deep in the money call, and a non-leveraged traditional fund to rebalance with.

Good points. Deep ITM calls are great. A deep ITM call is like buying SPY borrowing at t bill rate and then buying OTM put at same strike. The more deeper ITM the call in first example the more OTM the implied put is which means less decay and therefore more leverage.
Why buy the put? Just buying the deep in the money call will give cheap leverage, and if it's deep enough almost no 'delta' time/decay anyway.
The put was mentioned being buying say a 2000 strike SPX call option is the same as borrowing at risk free rate, then buying SPX and then buying a SPX 2000 put option.

User avatar
JoMoney
Posts: 8180
Joined: Tue Jul 23, 2013 5:31 am

Re: Lowest cost way to get leveraged equity exposure

Post by JoMoney » Fri Jan 17, 2020 11:00 pm

SovereignInvestor wrote:
Fri Jan 17, 2020 10:15 pm
...
The put was mentioned being buying say a 2000 strike SPX call option is the same as borrowing at risk free rate, then buying SPX and then buying a SPX 2000 put option.
Sorry... I guess the complexity of the example through me off.
Anyways, I'm sure there are some other complexities to it (caveat emptor), but buying a deep in the money call seems like an easy, widely available, way to leverage that doesn't require margin and can be done in an IRA.
I was thinking, there might even be an advantage doing it this way if prices fell drastically moving the call to move closer to being 'at the money' and the time value 'delta' would become a factor, it might actually cushion the fall and create a benefit where the call could be sold (with the higher delta time value) and then rolled back in to an even deeper in the money call with less/no delta.... ?
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

User avatar
305pelusa
Posts: 1311
Joined: Fri Nov 16, 2018 10:20 pm

Re: Lowest cost way to get leveraged equity exposure

Post by 305pelusa » Fri Jan 17, 2020 11:26 pm

JoMoney wrote:
Fri Jan 17, 2020 11:00 pm
SovereignInvestor wrote:
Fri Jan 17, 2020 10:15 pm
...
The put was mentioned being buying say a 2000 strike SPX call option is the same as borrowing at risk free rate, then buying SPX and then buying a SPX 2000 put option.
Sorry... I guess the complexity of the example through me off.
Anyways, I'm sure there are some other complexities to it (caveat emptor), but buying a deep in the money call seems like an easy, widely available, way to leverage that doesn't require margin and can be done in an IRA.
I was thinking, there might even be an advantage doing it this way if prices fell drastically moving the call to move closer to being 'at the money' and the time value 'delta' would become a factor, it might actually cushion the fall and create a benefit where the call could be sold (with the higher delta time value) and then rolled back in to an even deeper in the money call with less/no delta.... ?
You mean *theta right?

User avatar
JoMoney
Posts: 8180
Joined: Tue Jul 23, 2013 5:31 am

Re: Lowest cost way to get leveraged equity exposure

Post by JoMoney » Sat Jan 18, 2020 12:28 am

305pelusa wrote:
Fri Jan 17, 2020 11:26 pm
..

You mean *theta right?
Yes. Thanks.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

Park
Posts: 691
Joined: Sat Nov 06, 2010 4:56 pm

Re: Lowest cost way to get leveraged equity exposure

Post by Park » Sat Jan 18, 2020 12:39 am

Image

The S&P500 assets to equity ratio is about 4. So there's lots of leverage when you buy an S&P500 index fund. The companies that make up the S&P500 can often borrow on better terms than the individual investor, and their borrowing costs will be tax deductible. Finally, you're not personally liable for corporate debt, despite owning part of the corporation. About the only way for an individual investor to go bankrupt is with leverage, but that can't happen when your only exposure to leverage is through owning company shares.

If you want more exposure to leverage than the S&P500 or a total market index fund, a tilt to small cap value will expose you to companies that tend to have more debt. I haven't seen the data on that; that's secondhand from others.

A retail investor will tend to use leverage where the cost of the leverage is floating (example is margin loan) or short term (example is futures). Companies tend to have a greater ability to obtain leverage where the cost is fixed over a greater length of time. A fixed term loan isn't an inflation hedge, but instead is one of the ways to profit from unexpected inflation. I believe that is a reason given for why small cap value did well compared to the total market in the 1970s. Of course, a fixed term loan will hurt you with deflation, and small cap value paid the price for that in the Depression. But with a fiat currency, I'm more worried about unexpected inflation than unexpected deflation.

I'm not saying that leverage (margin loans, futures, options) is a bad idea. But think carefully, before deciding that you want more leverage than that which a 100% stock portfolio will expose you to. Especially when that leverage exposure is costing you less than 0.1%.

Park
Posts: 691
Joined: Sat Nov 06, 2010 4:56 pm

Re: Lowest cost way to get leveraged equity exposure

Post by Park » Thu Jan 23, 2020 8:41 pm

I'm presently reading "The Sceptical Investor" by John Stepek:

"If you use leverage, you are transforming volatility risk - risk that sceptical investors can ignore to their advantage - into a genuine risk, one that can cause the permanent loss of capital. That why so many people lose so much money spread betting - even when their long term view is correct, the short term involves too much volatility to be capable of remaining in a position."

I've heard the argument made that volatility only matters, if it occurs when you plan to sell an investment. Otherwise, you can ignore it. Indeed, one can at least in theory profit from volatility (rebalancing between subasset classes aka volatility harvesting). But if you use leverage, volatility becomes a constant risk.

I would also say that there is a correlation between the use of leverage and overconfidence. I've never seen any data on this; instead, it comes from personal experience. :(

Despite all of what I"m saying, I still think that leverage can be a good idea. :happy

DeepinHeartofBogle
Posts: 4
Joined: Thu Jan 23, 2020 4:01 pm

Re: Lowest cost way to get leveraged equity exposure

Post by DeepinHeartofBogle » Fri Jan 24, 2020 7:37 pm

My wealth advisor has a pretty good strategy that uses leverage through SPY call options but the portfolio is relatively safe as it is designed to break even in down markets - or flat markets.

7% of portfolio in SPY call options - designed to capture market investment returns as if your entire portfolio is invested in the S&P 500
93% of portfolio in Investment Grade bonds

If the SPY call options expire worthless then you break even because the interest income from the bonds approximately equals the loss you take if the options expire worthless. The bond interest is about 4% per year but the options are on a 1.5 year cycle so the bonds earn roughly 6-7% interest during the 1.5 year period.

If the market takes off higher you earn the stock market returns plus the bond interest.
Last edited by DeepinHeartofBogle on Fri Jan 24, 2020 10:23 pm, edited 1 time in total.

User avatar
305pelusa
Posts: 1311
Joined: Fri Nov 16, 2018 10:20 pm

Re: Lowest cost way to get leveraged equity exposure

Post by 305pelusa » Fri Jan 24, 2020 8:33 pm

DeepinHeartofBogle wrote:
Fri Jan 24, 2020 7:37 pm
My wealth advisor has a pretty good strategy that uses leverage through SPY call options but the portfolio is relatively safe as it is designed to break even in down markets - or flat markets.

7% of portfolio in SPY call options - designed to capture market investment returns as if your entire portfolio is invested in the S&P 500
93% of portfolio in Investment Grade bonds

If the SPY call options expire worthless than you break even because the interest income from the bonds approximately equals the loss you take if the options expire worthless. The bond interest is about 4% per year but the options are on a 1.5 year cycle so the bonds earn roughly 6-7% interest during the 1.5 year period.

If the market takes off higher you earn the stock market returns plus the bond interest.
Do you know by how much the market needs to rise before those call options even make you a single dollar of profit?

MotoTrojan
Posts: 7639
Joined: Wed Feb 01, 2017 8:39 pm

Re: Lowest cost way to get leveraged equity exposure

Post by MotoTrojan » Fri Jan 24, 2020 9:32 pm

danielc wrote:
Thu Jan 16, 2020 9:59 pm

I am seriously tempted to buy PSLDX. A backtest shows that it really does behave a lot like a leveraged S&P 500. Is there a reason why it has to be held in a taxable tax-deferred account?
Bond yields dropped. They can go up too. PSLDX uses leverage to gain exposure to long bonds while maintaining 100% S&P500 exposure. It is not a way to leverage S&P500 returns. It is highly probable that the S&P500 can go sky high while PSLDX underperforms.

Make sure you understand what it is before buying.

User avatar
abuss368
Posts: 17170
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
Contact:

Re: Lowest cost way to get leveraged equity exposure

Post by abuss368 » Fri Jan 24, 2020 9:39 pm

Jack Bogle has said investors should not invest on leverage or margin.

Leverage can work great or crush an investor.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

DeepinHeartofBogle
Posts: 4
Joined: Thu Jan 23, 2020 4:01 pm

Re: Lowest cost way to get leveraged equity exposure

Post by DeepinHeartofBogle » Fri Jan 24, 2020 9:52 pm

Do you know by how much the market needs to rise before those call options even make you a single dollar of profit?
[/quote]

The options start making money as soon as the market rises even a little. He buys the options with the strike price centered around the current SPY value, laddered with the strike price for some higher than the current SPY price, and some with a strike price lower than the SPY value. It all depends what the option trading price is. My batch of options purchased about 6 months ago are sitting on gains between 100% and 200%. The cost basis of the options are relatively low because they only represent 7% of my investments but the gains relative to that can be huge.

User avatar
305pelusa
Posts: 1311
Joined: Fri Nov 16, 2018 10:20 pm

Re: Lowest cost way to get leveraged equity exposure

Post by 305pelusa » Fri Jan 24, 2020 9:59 pm

DeepinHeartofBogle wrote:
Fri Jan 24, 2020 9:52 pm

The options start making money as soon as the market rises even a little. He buys the options with the strike price centered around the current SPY value, laddered with the strike price for some higher than the current SPY price, and some with a strike price lower than the SPY value. It all depends what the option trading price is. My batch of options purchased about 6 months ago are sitting on gains between 100% and 200%. The cost basis of the options are relatively low because they only represent 7% of my investments but the gains relative to that can be huge.
Well I'm not wondering what occurs in the mean time. SPY was at 300 six months ago. At what value does SPY need to be, in a year from today when those options expire, for the options to produce a profit?

Are you saying as long as SPY is above 300 a year from today, the options will have been profitable?

DeepinHeartofBogle
Posts: 4
Joined: Thu Jan 23, 2020 4:01 pm

Re: Lowest cost way to get leveraged equity exposure

Post by DeepinHeartofBogle » Fri Jan 24, 2020 10:19 pm

305pelusa wrote:
Fri Jan 24, 2020 9:59 pm
DeepinHeartofBogle wrote:
Fri Jan 24, 2020 9:52 pm

The options start making money as soon as the market rises even a little. He buys the options with the strike price centered around the current SPY value, laddered with the strike price for some higher than the current SPY price, and some with a strike price lower than the SPY value. It all depends what the option trading price is. My batch of options purchased about 6 months ago are sitting on gains between 100% and 200%. The cost basis of the options are relatively low because they only represent 7% of my investments but the gains relative to that can be huge.
Well I'm not wondering what occurs in the mean time. SPY was at 300 six months ago. At what value does SPY need to be, in a year from today when those options expire, for the options to produce a profit?

Are you saying as long as SPY is above 300 a year from today, the options will have been profitable?
I think your last statement is generally correct. For example, I purchased a $290 strike price option contract in June 2019 for $21. At this time the SPY price was also $290. The SPY is now $328 today and the option contract purchased in June is now trading at $47. This is a 123.8% gain on the option contract while the SPY value has only gone up 13% in that 7 month time frame.

User avatar
305pelusa
Posts: 1311
Joined: Fri Nov 16, 2018 10:20 pm

Re: Lowest cost way to get leveraged equity exposure

Post by 305pelusa » Fri Jan 24, 2020 10:37 pm

DeepinHeartofBogle wrote:
Fri Jan 24, 2020 10:19 pm
305pelusa wrote:
Fri Jan 24, 2020 9:59 pm
DeepinHeartofBogle wrote:
Fri Jan 24, 2020 9:52 pm

The options start making money as soon as the market rises even a little. He buys the options with the strike price centered around the current SPY value, laddered with the strike price for some higher than the current SPY price, and some with a strike price lower than the SPY value. It all depends what the option trading price is. My batch of options purchased about 6 months ago are sitting on gains between 100% and 200%. The cost basis of the options are relatively low because they only represent 7% of my investments but the gains relative to that can be huge.
Well I'm not wondering what occurs in the mean time. SPY was at 300 six months ago. At what value does SPY need to be, in a year from today when those options expire, for the options to produce a profit?

Are you saying as long as SPY is above 300 a year from today, the options will have been profitable?
I think your last statement is generally correct. For example, I purchased a $290 strike price option contract in June 2019 for $21. At this time the SPY price was also $290. The SPY is now $328 today and the option contract purchased in June is now trading at $47. This is a 123.8% gain on the option contract while the SPY value has only gone up 13% in that 7 month time frame.
Well if you paid $21 for the option, then SPY must finish at 290+21 = 311 in Dec 2020 for the option to break even. Anything above 311 and the option will produce actual profit over what you paid. Anything lower, and you will have paid more for the option than it brings back.
So SPY needs to appreciate by 7.2% in price over 18 months for the option to even make any money. Since dividends are ~2% a year, SPY needs to produce a return of 7.2+1.5*2 = 10.2% over 18 months or roughly 6.8% annualized return for the option to even break even.

In other words, in terms of upside participation (I'm ignoring downside protection for now), it is like you're investing on the S&P 500 in a leveraged manner, borrowing at 6.8% interest rate. Are you aware of this?

ChrisBenn
Posts: 38
Joined: Mon Aug 05, 2019 7:56 pm

Re: Lowest cost way to get leveraged equity exposure

Post by ChrisBenn » Fri Jan 24, 2020 11:33 pm

DeepinHeartofBogle wrote:
Fri Jan 24, 2020 7:37 pm
My wealth advisor has a pretty good strategy that uses leverage through SPY call options but the portfolio is relatively safe as it is designed to break even in down markets - or flat markets.

7% of portfolio in SPY call options - designed to capture market investment returns as if your entire portfolio is invested in the S&P 500
93% of portfolio in Investment Grade bonds

If the SPY call options expire worthless then you break even because the interest income from the bonds approximately equals the loss you take if the options expire worthless. The bond interest is about 4% per year but the options are on a 1.5 year cycle so the bonds earn roughly 6-7% interest during the 1.5 year period.

If the market takes off higher you earn the stock market returns plus the bond interest.
I you aren't aware that is pretty much what the swan etf does: https://amplifyetfs.com/Data/Sites/6/me ... tSheet.pdf
90/10. treasury/spy 70 delta leap calls

here is an comparison of it's benchmark index vs s&p 500 tr:
https://snetworkglobalindexes.com/prese ... sights.pdf

User avatar
bogglizer
Posts: 286
Joined: Tue Aug 16, 2016 8:56 pm

Re: Lowest cost way to get leveraged equity exposure

Post by bogglizer » Sat Jan 25, 2020 12:34 am

Everyone else should leverage. Makes the downturns hurt less for me.
My intellectual superiority will shortly be demonstrated here by a pithy quotation.

Post Reply