Author Topic: Does Anyone use Margin in Their Personal Portfolio  (Read 12414 times)

StubbleJumper

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Re: Does Anyone use Margin in Their Personal Portfolio
« Reply #60 on: January 24, 2020, 10:46:39 AM »
The biggest leverage-fest that we've ever had on this board was probably the widespread purchase of bank LEAPs

LEAPs can be expensive.  LEAP calls are essentially margin with an embedded put option.

You can often achieve the same result (more cheaply) by buying the underlying stock on margin and writing LEAP puts to protect the downside of the margin.  Plus - if the underlying pays a dividend, you get to keep the dividend (which you don't with a call option).  Margin interest rates can be low if you use a broker like IB.  Its not out of the question that a margin+put can cost 500bp less than the exact same position via a LEAP call.

wabuffo


Yes, you really need to do the arithmetic to decide whether margin or derivatives are the better approach to lever the opportunity.  When Eric and Francis Chou pointed out the TARP warrants, they were not that well known to the investment community.  Options of 5, 6 or 7 years of duration, with the strike adjusted to reflect the value of dividends!  All of this applied base securities (the equities) that were objectively undervalued.  Those TARP warrants cost us a pile of theta, but who really cared when the bet was so asymmetric?


SJ


jgyetzer

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Re: Does Anyone use Margin in Their Personal Portfolio
« Reply #61 on: January 24, 2020, 11:04:50 AM »
I do to a very small extent - enough for margin interest deductions to negate the taxes on investment income which is not large in relation to the portfolio value.

JY