# Margin Loan strategies



## RazzaDazzla (8 August 2008)

I have had shares since my parents bought some for me when I was little. Current portfolio (SGB, TAH, SUN) is worth about $30k. Has been as high as $50K.

Have approx $20K cash.

No debt (Just a credit card I use for personal and business use and control pretty well).

I have trade ETO previously and am interested in other products such as ASX CFDs, ETOs, futures and perhaps Minis.

Am thinking of diving into a $50K Margin loan @ ~10.5%. This would mean max weekly interest of ~$100.

I would look at jumping into say 5 stocks at $10K each or more practically 1,000 units each.

I would then consider setting stops, or for added security purchasing puts on those shares.

I would also consider writing calls over the long stocks to offset the cost of the puts.

-ve's
-interest rates are higher now than 12 months ago
-risk of margin call (minimised by stop losses or purchasing puts)
-need capital growth & Dividends to be higher than cost of interest, puts and brokerage
-would be hard to purchase the 1000 required units (for the puts and calls) on high price stocked. Stock price would need to be <$10 otherwise my put protection would be over hedged and writing calls would be partially naked

+ve's
+'forces' me to save (need to pay the loan off)
+leverage
+brokerage, puts, interest is tax deductible
+profit from calls would offset cost of puts

I would look at using mainly technical analysis for purchasing shares.

When share price moved up, i could get exercised on the call for a profit and sell the put for some residual value. Or I could roll the call and put.

If share price dropped, I would exercise the put, or sell the stock and put seperately.

After one of those events I would move to another stock.

A couple of questions:
-Assuming looking to purchase a $50K portfolio and a LVR on all shares of 75%. Does that mean I would only need to borrow $37,500 and would need to provide the other $12,500 myself? Thus my weekly interest would only be ~$75.

-I assume the margin loan is like a line of credit fr purchasing shares. I only pay interest on the amount I actually do draw down correct?

-With my put protection stratergy I should be 100% protected from a margin call? Do some lenders then give me a 100% LVR if I protect with puts? If so, which lenders?

-Any recomendations on lenders which would allow this kind of stratergy?

-Has anyone tried this or a similar stratergy? Any success? failures? stories?

-Am I completley nuts in looking to borrow to invest in an overall bear market?

-Should I look at paying off the loan? or simply pay the interest?

I am aware that this kind fo stratergy is more of a long term one. I am not expecting any 'home runs'. But if I can ferret away a few bucks a week and own a $50,000 portfolio I'd be quite happy.

Any feedback would be greatly appreciated.


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## white_goodman (8 August 2008)

im pretty sure the margin loan acts like a facility where you only pay interest when you draw down(buy) the stock and the loan is gone once you sell the stock, though i may be wrong


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## RazzaDazzla (8 August 2008)

Thanks White,

Yeah, that makes sense.

Any thoughts on my stratergiy as a whole?


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## CanOz (8 August 2008)

If i were you Razza, knowing what i know now, i would do the following:

Bank my money at the best IR in Australia.

Sign up to Nick's - The Chartist OR a similar educational service.

Do Nick's courses.

Trade with the power setups that Nick provides, OR any other competent advisory service, eg. Leavitt Brothers, in order to understand fully swing trading at its finest.

I tried to learn myself, and after some inital success in 2006 i lost allot on CFD's. I re-capitalised and re-educated myself. Then i put together a new trading plan. We haven't looked back since and have been profitable through the last 6 months. 

We use the margin facility through Interactive Brokers.

Cheers,


CanOz
The above is not advice, but merely an opinion.


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## RazzaDazzla (8 August 2008)

Thanks,

I assume you are a happy subscriber to Nicks The Chartist. (hopefully you're not an employee of Nicks)

Negatting my stock picks, does my stratergy sound like a goer?


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## CanOz (8 August 2008)

RazzaDazzla said:


> Thanks,
> 
> I assume you are a happy subscriber to Nicks The Chartist. (hopefully you're not an employee of Nicks)
> 
> Negating my stock picks, does my strategy sound like a goer?




Nick has employee's? 

Yes, happy subscriber of 3 years indeed. 

I don't trade options, so i can't comment on your defensive strategy. I can say though when starting out, i feel that simple is better. If you trade equities with a margin loan, and use the loan *not to increase risk, but to increase positions*, if a market gets into a trend one would have to be a complete dolt not to make money, its that easy. Margin calls are not a worry if you protect your positions with Stop Losses and don't take out too many positions. IB will liquidate you before a margin call.

When the market churns or consolidates, then you must be able to take some  draw down on your open profits or trading account.

I think Nick has a trial period, its really worth checking out.

www.thechartist.com.au

Cheers,


CanOz


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## tech/a (8 August 2008)

> Negatting my stock picks, does my stratergy sound like a goer?




Theory and practice.
My honest opinion.
You'll go down in a heap.
You have no M/Management.
You "think" your protecting your investments but with such a small capital base You'll likely bleed to death.
Losing on time decay on your oppies(You have limited trade options) and in this market get severely churned.

Id back Canaussieuk
Ive know Nick 12 yrs and the best Ive seen.


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## RazzaDazzla (8 August 2008)

tech/a said:


> Theory and practice.
> My honest opinion.
> You'll go down in a heap.
> You have no M/Management.
> ...




Bugger! Posted a reply, but it didn't work! Damn work computers! Here I go again...

Firstly, thanks for the feedback Tech/a.

Secondly, good to hear some more postiive feedback re. Nick.

Can you expand on what you mean by I have no money management? If I was trading, I understand what you mean e.g. risking 2% of capital per trade. As i'm looking to invest in a select choice of 5-10 bluechip/ASX 200 stocks, I do not see what sort of money management I should/could be using. Whilst I will be looking to pick stocks at their current bottom by using T/A, I will not be trading 'speculative' stocks.

Can you also explain what you mena by I will bleed to death? I wish (like i'm sure most others do) they could click their fingers and have $500,000 starting capital. I understand the time decay of the put option I will be purchasing and I also understand the time decay of the call option I will be writing over my shares.

Perhaps I am complicating things to much with the options and should just stick to trusting stop losses, but I am a little afraid of some disaster occuring and me being blown out of the water by a large overnight gap. Thus why I was looking at put options ot protect me. Then, offset the cost of the puts by writing calls at a price I would be happy to sell at.

Sorry if I have misunderstood you.

Cheers
Ryan


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## cordelia (8 August 2008)

RazzaDazzla said:


> Bugger!
> 
> Can you expand on what you mean by I have no money management? If I was trading, I understand what you mean e.g. risking 2% of capital per trade. As i'm looking to invest in a select choice of 5-10 bluechip/ASX 200 stocks, I do not see what sort of money management I should/could be using. Whilst I will be looking to pick stocks at their current bottom by using T/A, I will not be trading 'speculative' stocks.




I am no expert in trading but I have plenty of experience in losing money and by the sounds of your statement above you will soon be an expert in losing money too....

Before you start trading you need to have knowledge otherwise you will be taken advantage of by others with far more money and nerve. You also need to acknowledge that along the way way you will lose money. If you can't face that thought and make provision for it don't trade...

The advice about Nick Radge and The Chartist is probably the best you will get. Go to the site and take a look. If you subscribe you will have access to some excellent articles that will help you....It's well worth the monthly fee...The money you spend educating yourself will ultimately save you money


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## RazzaDazzla (8 August 2008)

Thanks for the replies thus far ladies and gents.

but... To say "you will likely loose money" isn't that helpful.

as i stated before, I am not question, nor asking advice on stock selection (though thanks for suggesting the chartist, i will most likely check him out) but my query has been on the stratergy of utilising the margin loan.

can anyone offer feedback on the stratergy and not merley say "oh, you will fail!". Info on what aspect of the STRATERGY will fail would be more helpful than a blanket response.

Cheers


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## wayneL (8 August 2008)

RazzaDazzla said:


> I understand the time decay of the put option I will be purchasing and I also understand the time decay of the call option I will be writing over my shares.
> 
> Perhaps I am complicating things to much with the options and should just stick to trusting stop losses, but I am a little afraid of some disaster occuring and me being blown out of the water by a large overnight gap. Thus why I was looking at put options ot protect me. Then, offset the cost of the puts by writing calls at a price I would be happy to sell at.




A few points here.

* Your strategy will only make sense on shares if you already own them.

* At times it will be suboptimal (i.e. a strong bull run)

* If you do the above on your long term holdings and you have capital gains in hand, do not allow your short call to be assigned as you will precipitate a CGT event. Just roll the call up and or out, or take the loss on repurchasing the call.

* If you do not already own the shares, it makes no sense to buy shares on margin to do the above. You can achieve the synthetic equivalent via a vertical or diagonal spread with much smaller capital usage.

Spend some time leaning more about options and particularly synthetics. I can recommend "Options - The Hidden Reality" by Charles Cottle for the purpose. (available from www.theriskdoctor.com )


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## RazzaDazzla (9 August 2008)

wayneL said:


> * If you do not already own the shares, it makes no sense to buy shares on margin to do the above. You can achieve the synthetic equivalent via a vertical or diagonal spread with much smaller capital usage.




Sorry, I do not understand by what you mean here. "If you do not already own the shares, it makes no sense to buy shares on margin to do the above."

Also, by achieving the synthetic equivlent, are you talking about for example purchasing a long dated call some 12 months in advance and then writing calls each month to synthethise being long a stock and writing covered calls over it?

At the end of the day, I would be using the margin loan like a mortgage, it would be 'forcing' me to save money and at the end of x years I would own a $50k portfolio + dividends and capital growth it has earnt which would hopefully be worth a lot more than $50K + the interest charges.


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## wayneL (9 August 2008)

RazzaDazzla said:


> Sorry, I do not understand by what you mean here. "If you do not already own the shares, it makes no sense to buy shares on margin to do the above."



Precisely because of your following question.



RazzaDazzla said:


> Also, by achieving the synthetic equivlent, are you talking about for example purchasing a long dated call some 12 months in advance and then writing calls each month to synthethise being long a stock and writing covered calls over it?



Yes.

Long stock + long put is synthetically equivalent to a long call of same strike and expiry. Long stock + long put *=* long call.

Therefore: Long stock + long put + short call = Long call + short call

The only difference is in the consideration of cost of carry. The stock collar interest will be payg, whereas in the diagonal spread interest will be paid up front via additional call premium. But cost of carry with a margin loan will ultimately be higher.



RazzaDazzla said:


> At the end of the day, I would be using the margin loan like a mortgage, it would be 'forcing' me to save money and at the end of x years I would own a $50k portfolio + dividends and capital growth it has earnt which would hopefully be worth a lot more than $50K + the interest charges.




If that is your goal, this might not be your best bet, not in a systematic way anyway. Probably better using some sort of medium/long term trend following system would be better.


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## cordelia (9 August 2008)

RazzaDazzla said:


> can anyone offer feedback on the stratergy and not merley say "oh, you will fail!". Info on what aspect of the STRATERGY will fail would be more helpful than a blanket response.
> 
> Cheers




In reality, no one has specifically declared "that you will fail". Previous posts have suggested steps you can take to enhance your results...If you are looking for someone to tell you how to trade you will never have confidence in your own abilities...

Further, posting a message in a public forum doesn't always afford the response you desire. It's up to you to decide whether or not to take the advice..

Also, don't overlook the fact, that for every person who takes the time to respond to your request for information there are probably fifty others looking on who can't be bothered....

You seem to be looking for a specific strategy to trade but that's something you have to develop yourself......

good luck anyway


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## RazzaDazzla (9 August 2008)

wayneL said:


> Precisely because of your following question.
> 
> 
> Yes.
> ...




could you please explain why I should own the stock first before considering purchasin the same stock using a margin?

I'll have to play around with discovering for myself that Long stock + long put + short call = Long call + short call.

So no one agrees that a margin is a good way to force you to save as a mortgage forces you to save?


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## wayneL (9 August 2008)

RazzaDazzla said:


> could you please explain why I should own the stock first before considering purchasin the same stock using a margin?



No, nothing to do with my point.

I'm suggesting that - 

If you already own stock - Buy put and short call (if that is the strategy you want)

If you don't already own stock -  Buy call and short a call. It will do the same job with lower capital usage and less cost of carry.

If you don't realize the synthetic equivalence of the above, you don't know enough and I suggest further learning.


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## RazzaDazzla (9 August 2008)

wayneL said:


> No, nothing to do with my point.
> 
> I'm suggesting that -
> 
> ...




Thanks wayne, I just didn't 'comprehend' what you were trying to tell me. My bad.

So what are some margin loan stratergies then? apart from buying low, selling high (with med to long term in mind) and protecting with stops?


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## nervous investor (31 August 2008)

is the interest you pay on margin loans tax deductible


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## tech/a (31 August 2008)

Yes.


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## kenny (31 August 2008)

nervous investor said:


> is the interest you pay on margin loans tax deductible




Hi Nervous,

To be nitpicky about the answer; it probably wouldn't be deductible in some cases. For instance, say you set up a margin account with existing shareholdings then drew out funds to spend on a non-investment purpose eg. holiday, boat whatever.

Interest on borrowed funds is only deductible when the borrowings are used for investment purposes.

Opinions only; never advice.

Cheers,

Kenny


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## mtsaustralia (1 September 2008)

I would say your strategy would work, but could work better.

For example.  If you had over 100k in your account (USD) and used portfolio margining with IB, you could by a long put, buy single stock futures, and sell a short call.

This has the advantage over the original strategy as there are no margin payments on the SSF (only a very very small amount built in... much less than your call option premium), another advantage is that if the position falls, the puts can be rolled down, lowering your breakeven.  This can't be done with the long call short call strategy (synthetic).

You also get better leverage (approx 10:1) than using the sythetic version with a long ITM call option, which usually works out about 5:1

If you don't have 100k, you can still use this strategy, but they take a 20% margin against the single stock future (no interest though).

When using portfolio margin (i use interactive brokers), the ROI is the same as ROR (return on risk).  On these strategies i do quite well.


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## bassmann (11 September 2008)

Hi Razza,

If you have 30k and are thinking of opening a 50k margin facility with the intent of drawing down the 50k, this would be too leveraged for my likening (just perosnal opinion).

The way I approach things is;

a) What is my capital base, how many position will I take, what is the risk profile for each stock and what is my portfolio heat (sum of risk of all open positions).

e.g.
100k capital, 2% risk per trade, 5 positions of 20k each, risk per trade = 2k (2%) and portfolio heat = 10k, thus I am potentially exposing 10% of my capital to the market.

b) I use margin for incremental positions only so that the risk per trade is maintained at 2% of my capital, however I am exposed to leverage portfolio heat. 

e.g. 
100k capital, 100k margin, 10 positions of 20k each, risk per trade =2k (2%) but portfolio heat increases to 20k (20% of capital).

Say my portfolio heat limit is 15%, then this tells me I can only really take 7 positions with this strategy, 5 with capital and 2 on margin.


c) If you increase the position size with margin you increase the risk per trade

e.g. 
100k capital, 100k margin, 5 positions of 40k each, risk per trade =4k (4%) but portfolio heat increases to 20k (20% of capital).


I've found following these rules keeps me well in the bounds of ever encountering a margin call. You'll see with these examples its difficult to leverage over 50% unless you have extremely tight stops (that will ultimately get hit more often).

Bassmann


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