Margin Loan strategies

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.

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