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BlueHorseshoe

Bespoke Leverage

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Hi,

 

I was wondering whether anyone who has a wider knowledge of the derivatives universe than I do could suggest any instrument that offers a moderate amount of leverage?

 

As far as I am aware there is a complete jump from the x3 ETFs to the Futures that are 50:1. The ETFs are obviously geared towards Buy-and-Hold, and the Futures towards very short term traders with smaller accounts or longer term traders with lots of capital.

 

Is there anything in the gap between these?

 

Thanks,

 

BlueHorseshoe

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Just because the leverage is there does not mean you have to use it, hence anything with 50 to 1 means that its just the maximum.

It is up to you to have determine what leverage you want 'in between' and while providers may offer instruments, I dont know if there is much of a market for them to be offering too many varying structures/products just because.....

Plus dont forget the various futures leverage does change depending on volatility and exchange margins.

Brokers also may offer various leverage in different accounts - sometimes they offer portfolio accounts with more leverage based on offsetting positions (one long one short) or simply cash accounts that need to be fully funded.

Basically - there are already enough options available.

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Just because the leverage is there does not mean you have to use it, hence anything with 50 to 1 means that its just the maximum.

It is up to you to have determine what leverage you want 'in between' and while providers may offer instruments, I dont know if there is much of a market for them to be offering too many varying structures/products just because.....

Plus dont forget the various futures leverage does change depending on volatility and exchange margins.

Brokers also may offer various leverage in different accounts - sometimes they offer portfolio accounts with more leverage based on offsetting positions (one long one short) or simply cash accounts that need to be fully funded.

Basically - there are already enough options available.

 

Hi SIUYA,

 

Thanks for your reply. I'm confused . . . :confused:

 

I understand that you don't have to use the leverage, but trading an ES contract with a $12.5 tick value means that (as I write) you'd need about $76,000 in the account not to require any leverage. A single share of the SPY ETF (also un-leveraged) is currently about $152. What lies between the two in terms of borrowed funding, anything?

 

Or to put it another way, if my worst drawdown using a 3:1 ETF is 15% and I'm happy to weather a 30% drawdown, how can I get 6:1 leverage? To get that on a single ES contract requires $13,000 deposited, but if I want to hold a portfolio of 10 similar instruments then that's $130,000 - a bit more than I can afford!

 

Any suggestions are much appreciated.

 

BlueHorseshoe

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maybe i am confused.

 

For the ES - if no leverage is requiring $76,000 in an account BUT you only have to have (I dont trade the ES so i am guessing at $5000).... $5000 per contract so you can have a wide range of leverage options if you have the full $76,000 (between 1 to 76/5=15 contracts)

So you can have anywhere between 1-15 times in this example here.

If you want 6 times, then deposit only $35000 to trade 6 contracts, and leave the rest in a separate bank account maybe?

 

For your example of getting 6:1 from a 3:1 instrument - well either a broker allows you to buy on margin, OR you borrow twice as much externally and deposit twice the amount more money. No different - look at total exposure.

 

If you are then talking about holding 10 similar instruments well then you will effectively be holding 10 times 1 instrument. Thats a lot of leverage - some brokers offer portfolio margin accounts that use offsets, but even then they still usually dont offer too much leverage - they have limits. A 30% drawdown if you are leveraged three times will see your account pretty much gone!

I reckon you are correct that one way of viewing it is how much can you borrow separate to the broker - this is not the easiest way, but a way of looking at it.

 

Whats to stop you borrowing 100k against a house that worth 500k with house equity of 400k then leveraging that up 10 times and trading like you have 1 mil....do you have 10 times leverage, or not???

or do you only have 400k leveraged to 1mil.

With 100k in an account you can probably manage to control that pretty easily. Make 10% a year on a mil, but its 100k on the account - sell that to someone!

 

(I am conservative and look at over all exposure - not just how many contracts can I trade, but everyone is different)

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maybe i am confused.

 

For the ES - if no leverage is requiring $76,000 in an account BUT you only have to have (I dont trade the ES so i am guessing at $5000).... $5000 per contract so you can have a wide range of leverage options if you have the full $76,000 (between 1 to 76/5=15 contracts)

So you can have anywhere between 1-15 times in this example here.

If you want 6 times, then deposit only $35000 to trade 6 contracts, and leave the rest in a separate bank account maybe?

 

For your example of getting 6:1 from a 3:1 instrument - well either a broker allows you to buy on margin, OR you borrow twice as much externally and deposit twice the amount more money. No different - look at total exposure.

 

If you are then talking about holding 10 similar instruments well then you will effectively be holding 10 times 1 instrument. Thats a lot of leverage - some brokers offer portfolio margin accounts that use offsets, but even then they still usually dont offer too much leverage - they have limits. A 30% drawdown if you are leveraged three times will see your account pretty much gone!

I reckon you are correct that one way of viewing it is how much can you borrow separate to the broker - this is not the easiest way, but a way of looking at it.

 

Whats to stop you borrowing 100k against a house that worth 500k with house equity of 400k then leveraging that up 10 times and trading like you have 1 mil....do you have 10 times leverage, or not???

or do you only have 400k leveraged to 1mil.

With 100k in an account you can probably manage to control that pretty easily. Make 10% a year on a mil, but its 100k on the account - sell that to someone!

 

(I am conservative and look at over all exposure - not just how many contracts can I trade, but everyone is different)

 

Hi SIUYA,

 

I think that's pretty much the answer I was expecting, but it's useful to compare my understanding - leverage is the sort of "boring" thing that books like to skip over.

 

I've been looking at a long-only trend-following type strategy with ETFs that ought to be suitable for a retirement account. The average yearly return in testing is about 8% but the drawdowns are relatively small (and unlike a stock, I can't see an ETF tracking all commodities or world real estate etc falling to zero), so I was wondering whether it is possible to get more juice out of it with a little leverage. But clearly the increased return is going to be hit by the cost of borrowing (wherever that's from).

 

Thanks for your help!

 

BlueHorseshoe

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Hi SIUYA,

 

I think that's pretty much the answer I was expecting, but it's useful to compare my understanding - leverage is the sort of "boring" thing that books like to skip over.

 

I've been looking at a long-only trend-following type strategy with ETFs that ought to be suitable for a retirement account. The average yearly return in testing is about 8% but the drawdowns are relatively small (and unlike a stock, I can't see an ETF tracking all commodities or world real estate etc falling to zero), so I was wondering whether it is possible to get more juice out of it with a little leverage. But clearly the increased return is going to be hit by the cost of borrowing (wherever that's from).

 

Thanks for your help!

 

BlueHorseshoe

 

The other great miss use of leverage is in quoting returns as well - today i made 500% - tomorrow I lost the lot!

Its boring and skipped over because often its a tough one to explain to people as everyone has their idea about what is safe, whats not, what is leverage, what not.....try telling people how to use lots of leverage using options with little exposure these days - they think you are selling sub prime, even if you are not.

 

The only book I know of that will help you do exactly what you are describing is this one

http://www.amazon.co.uk/Practical-Guide-ETF-Trading-Systems/dp/1906659273

 

(There may be others) I have not read this but have seen enough reviews from people who I know trade like this that it has some relevant information to be worthwhile.

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The other great miss use of leverage is in quoting returns as well - today i made 500% - tomorrow I lost the lot!

Its boring and skipped over because often its a tough one to explain to people as everyone has their idea about what is safe, whats not, what is leverage, what not.....try telling people how to use lots of leverage using options with little exposure these days - they think you are selling sub prime, even if you are not.

 

The only book I know of that will help you do exactly what you are describing is this one

A Practical Guide to ETF Trading Systems: A systematic approach to trading exchange-traded funds: Amazon.co.uk: Anthony Garner: Books

 

(There may be others) I have not read this but have seen enough reviews from people who I know trade like this that it has some relevant information to be worthwhile.

 

 

 

Thanks for the recommendation - that looks good! Amazon are listing it alongside the Ivy Portfolio which is one of the other good books I've read on this topic.

 

Cheers!

 

BlueHorseshoe

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Hi,

 

I was wondering whether anyone who has a wider knowledge of the derivatives universe than I do could suggest any instrument that offers a moderate amount of leverage?

 

As far as I am aware there is a complete jump from the x3 ETFs to the Futures that are 50:1. The ETFs are obviously geared towards Buy-and-Hold, and the Futures towards very short term traders with smaller accounts or longer term traders with lots of capital.

 

Is there anything in the gap between these?

 

Thanks,

 

BlueHorseshoe

 

The more is supposed period of holding the asset (and the more is amount of investment) the less is leverage. Standard rule of investment game.

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The more is supposed period of holding the asset (and the more is amount of investment) the less is leverage. Standard rule of investment game.

 

I guess investing in any avenue is always associated with certain risks so it is good to understand those risks while investing in any where.

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