Author Topic: How Much Margin?  (Read 1592 times)

uneven_cyclist

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How Much Margin?
« on: March 18, 2022, 12:41:11 PM »
Hey All,

After reading MMM's post about margin loans, I am really interested in using margin:

*For taking out a loan and buying more shares in my taxable account (ITOT ETF).
*For buying a catamaran when the time comes to retire and sail around the world.
*For other things...daily expenses?  Who knows?  What are the other possibilities?


I do have questions though:

*For folks who are using margin loans for buying shares -- speaking of a super simple approach without hedging investments using covered calls or puts or anything like that, just straight up buying ETFs -- what percentage of your portfolio is margin?  e.g. if you have $100k how large is your margin loan?  10k/10% 20k/20% etc.
*What are people using margin for beyond buying more shares and buying houses? 


Thanks all!
« Last Edit: March 18, 2022, 12:49:15 PM by uneven_cyclist »

Juan Ponce de León

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Re: How Much Margin?
« Reply #1 on: March 18, 2022, 11:23:48 PM »
These days I just use mine to buy shares when I think they're cheap, I'm usually fully invested in shares/crypto so I don't keep much actual cash around.  Once I've bought some I might be up around 40-50% LVR and that usually sets me in motion to start paying it down over time, under 30% is where I like it.

MustacheAndaHalf

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Re: How Much Margin?
« Reply #2 on: March 19, 2022, 10:56:26 AM »
A reasonable level of margin for me is about 1.25x in my margin accounts.  You should read about "margin calls" to get the basic idea - your broker can take control of your account, sell everything, and use that money to pay off the margin loan.  It's part of the margin loan agreement (and IBKR is even more aggressive, monitoring & possibly selling in real time).

Previously Interactive Brokers (IBKR) had the lowest margin rates, so I assume that's still the case.  Let's say you have $100k and borrow $20k on margin, paying 2.83%. Ignoring compounding, that's $566/yr.  But what if you invest $10k in a 3x ETF, turning $10k into $30k invested, and also giving you $20k extra invested.  Those funds charge about 1% of $30k or $300/year.  In my view it's cheaper to allocate some money to a 3x ETF than go on margin.

Financial.Velociraptor

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Re: How Much Margin?
« Reply #3 on: March 19, 2022, 05:06:06 PM »
ear.  In my view it's cheaper to allocate some money to a 3x ETF than go on margin.

For the record, IB is wise to people using this to play both ends against the middle. If  you take a margin loan and use it buy (or short) a leveraged ETF, the margin counts double/triple against your allocation.

Most brokers provide margin under "Regulation T".  You are allowed up to 150%, which is to say  if you are fully invested (100%, no cash) you can borrow another 50%.  Doing so is very dangerous as a 1% decline in your portfolio puts you in violation.  I think you have to keep in mind there are period where the broad market falls around 50% (and it happens about once every 15 years!)  so anything more than a trivial amount of margin can result in a margin violation.  I've used my margin at IB a few times (it is basically my EF). 

IB offers a "portfolio margin" option for accounts over $110k in NLV.  You can margin up to 500% with that.  You will no longer be eligible for the free equity trades pricing tier and there are other restrictions. 

MustacheAndaHalf

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Re: How Much Margin?
« Reply #4 on: March 19, 2022, 11:48:22 PM »
ear.  In my view it's cheaper to allocate some money to a 3x ETF than go on margin.
For the record, IB is wise to people using this to play both ends against the middle. If  you take a margin loan and use it buy (or short) a leveraged ETF, the margin counts double/triple against your allocation.
People should avoid that, which why I prefer "3x ETF than go on margin".  I've found all manner of 2x/3x ETFs to cover different areas of the market.  They cover various parts of the market - I've held 2x/3x ETFs for S&P 500, tech, oil & gas, regional banks, and others.

When using 3x ETFs or margin, it's important to track your exposure and losses.  Someone with 100% S&P 500 who buys UPRO (3x S&P 500) might replace 20% of their portfolio with 60% exposure.  So the overall portfolio would be (100% - 20% + 60% =) 140% exposed to the S&P 500, taking 1.4x the losses.  In my view, that's where using leverage should start: how to handle losses.

mizzourah2006

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Re: How Much Margin?
« Reply #5 on: March 21, 2022, 03:40:43 PM »
I use a bit of margin to write puts (~$30-$50k). The reason I like this is that 1. You don't actually have to pay interest because you just use the margin purchasing power as collateral for the put. 2. If the put doesn't hit then I get to keep ~$500-$800/month in premiums. 3. If the put does hit then I got a stock I wanted to own at a 10-20% discount to where it was trading when I wrote the put.

If this happened on more than a few I'd just roll down and out for a few months until I could come up with the cash via income to take ownership of the shares. I started this with about 52k in January across 3 puts and it's generated $1,865 in cash so far. It's a bit lower than I was projecting, but that's because the market moved deeply south in February and early March forcing me to roll down and out and collect severely suppressed premiums.

uneven_cyclist

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Re: How Much Margin?
« Reply #6 on: March 29, 2022, 11:09:58 AM »
Thanks all for the ideas...the responses are making me realize that really what I need to be thinking about is not so much 'how can I use margin and how much?' but rather, 'what would be the best way to start using leverage in my investing?'

I did just circle back to MMMs post on margin and found lots of useful comments on the post there as well.  I found a book recommendation there, Lifecycle Investing, that deals with some of my questions.  The book is not really targeted to the FIRE community, but ideas are still useful/relevant. 

The authors argue that leverage, when used in the right way, can help to lower overall risk over the course of a lifetime of investing. 

They seem to favor using options over margin because there is a greater ability to hedge downside risks.  They do also have a chapter about leveraged mutual funds/ETFs although I have not yet made it that far...leveraged funds seem like an appealing approach because they're more hands-off than options which require at least some active maintenance...although maybe that wouldn't be so bad after learning a few processes.

Thanks all for your ideas, I'll continue to learn more about all of this, and I really appreciate your ideas and suggestions!

Malossi792

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Re: How Much Margin?
« Reply #7 on: March 30, 2022, 01:37:47 AM »
,,The authors argue that leverage, when used in the right way, can help to lower overall risk over the course of a lifetime of investing. "
To learn more about that, please read the all-too-famous thread on Bogleheads from user Markettimer, which documented their woes in real time when this strategy had shown its downside during 2008/2009.
See if you're ok with that level of risk.

djadziadax

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Re: How Much Margin?
« Reply #8 on: March 30, 2022, 08:46:16 AM »
It is wise to use leverage in a highly volatile market? If so,how?

If margin magnifies your losses, is now, in this market, the right time to get into any leveraged ETF?

Will IBKRs increase their margin rates with the rate hikes (I am sure yes).

ChpBstrd

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Re: How Much Margin?
« Reply #9 on: March 30, 2022, 09:28:35 AM »
I use a bit of margin to write puts (~$30-$50k). The reason I like this is that 1. You don't actually have to pay interest because you just use the margin purchasing power as collateral for the put.

What broker is not charging interest for margin used as collateral?

mizzourah2006

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Re: How Much Margin?
« Reply #10 on: March 30, 2022, 09:33:57 AM »
I use a bit of margin to write puts (~$30-$50k). The reason I like this is that 1. You don't actually have to pay interest because you just use the margin purchasing power as collateral for the put.

What broker is not charging interest for margin used as collateral?

Etrade doesn't charge. At least they haven't charged me anything.

ChpBstrd

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Re: How Much Margin?
« Reply #11 on: March 30, 2022, 10:12:08 AM »
I use a bit of margin to write puts (~$30-$50k). The reason I like this is that 1. You don't actually have to pay interest because you just use the margin purchasing power as collateral for the put.

What broker is not charging interest for margin used as collateral?

Etrade doesn't charge. At least they haven't charged me anything.

Most brokerages actually hit you with the interest charge monthly. Have you been doing this long enough to get that first bill?

My second thought is that maybe you're not borrowing on margin at all. Tastyworks, for example, only requires margin up to a certain calculation for short puts, not the entire liability if assigned. I would think Etrade has to follow the same formula:

The margin requirement for an uncovered put is the greatest of the following calculations times the number of contracts times the multiplier (usually 100):
    20% of the underlying price minus the out of money amount plus the option premium
    10% of the strike price plus the option premium
    $2.50

mizzourah2006

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Re: How Much Margin?
« Reply #12 on: March 30, 2022, 10:46:33 AM »
I use a bit of margin to write puts (~$30-$50k). The reason I like this is that 1. You don't actually have to pay interest because you just use the margin purchasing power as collateral for the put.

What broker is not charging interest for margin used as collateral?

Etrade doesn't charge. At least they haven't charged me anything.

Most brokerages actually hit you with the interest charge monthly. Have you been doing this long enough to get that first bill?

My second thought is that maybe you're not borrowing on margin at all. Tastyworks, for example, only requires margin up to a certain calculation for short puts, not the entire liability if assigned. I would think Etrade has to follow the same formula:

The margin requirement for an uncovered put is the greatest of the following calculations times the number of contracts times the multiplier (usually 100):
    20% of the underlying price minus the out of money amount plus the option premium
    10% of the strike price plus the option premium
    $2.50


I've been doing it since early January. I haven't been charged anything. I do have cash to support ~45% of the strike price in the account right now though.

ChpBstrd

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Re: How Much Margin?
« Reply #13 on: March 30, 2022, 11:22:55 AM »
I use a bit of margin to write puts (~$30-$50k). The reason I like this is that 1. You don't actually have to pay interest because you just use the margin purchasing power as collateral for the put.

What broker is not charging interest for margin used as collateral?

Etrade doesn't charge. At least they haven't charged me anything.

Most brokerages actually hit you with the interest charge monthly. Have you been doing this long enough to get that first bill?

My second thought is that maybe you're not borrowing on margin at all. Tastyworks, for example, only requires margin up to a certain calculation for short puts, not the entire liability if assigned. I would think Etrade has to follow the same formula:

The margin requirement for an uncovered put is the greatest of the following calculations times the number of contracts times the multiplier (usually 100):
    20% of the underlying price minus the out of money amount plus the option premium
    10% of the strike price plus the option premium
    $2.50

I've been doing it since early January. I haven't been charged anything. I do have cash to support ~45% of the strike price in the account right now though.

OK that probably explains it. You're not required to borrow the entire value of the stock that could be assigned, until and unless it is assigned. You are only required to have something like 20% of the underlying's price minus the OTM part. So if you're selling a put for a $10 stock at the $8 strike you'd only need $2/share. You'd borrow margin when and if the shares were assigned.

I'm glad I looked into this and we had this conversation. It makes selling far-OTM puts seem a lot more attractive because 4-5X leverage is available for free (until assigned).

mizzourah2006

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Re: How Much Margin?
« Reply #14 on: March 30, 2022, 11:41:14 AM »
I use a bit of margin to write puts (~$30-$50k). The reason I like this is that 1. You don't actually have to pay interest because you just use the margin purchasing power as collateral for the put.

What broker is not charging interest for margin used as collateral?

Etrade doesn't charge. At least they haven't charged me anything.

Most brokerages actually hit you with the interest charge monthly. Have you been doing this long enough to get that first bill?

My second thought is that maybe you're not borrowing on margin at all. Tastyworks, for example, only requires margin up to a certain calculation for short puts, not the entire liability if assigned. I would think Etrade has to follow the same formula:

The margin requirement for an uncovered put is the greatest of the following calculations times the number of contracts times the multiplier (usually 100):
    20% of the underlying price minus the out of money amount plus the option premium
    10% of the strike price plus the option premium
    $2.50

I've been doing it since early January. I haven't been charged anything. I do have cash to support ~45% of the strike price in the account right now though.

OK that probably explains it. You're not required to borrow the entire value of the stock that could be assigned, until and unless it is assigned. You are only required to have something like 20% of the underlying's price minus the OTM part. So if you're selling a put for a $10 stock at the $8 strike you'd only need $2/share. You'd borrow margin when and if the shares were assigned.

I'm glad I looked into this and we had this conversation. It makes selling far-OTM puts seem a lot more attractive because 4-5X leverage is available for free (until assigned).

Exactly. That's why I started doing it. I usually write ~45 days out, but yeah, you could definitely say write a July 15th $160 strike for AAPL for ~$450 in cash today and I guess what you're saying is you only need to carry ~$1.8k in cash to write it.