Author Topic: Indexing with leverage  (Read 44317 times)

zb3

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Re: Indexing with leverage
« Reply #100 on: March 25, 2015, 12:23:35 AM »
I hold a synthetic long position in BIB.   It is not intended to be a "hold forever" investment because of the daily balancing friction.  Take the return of the underlying index, multiply by two: this is not the return of BIB.  It is quite a lot lower than double due to fees and 'tracking error' caused by compounding the daily ups and downs.  These instruments are great when you have a rising tide but make no mistake, you have taken on twice the risk for less than twice the return.  This is the type of thing you only want to do with high conviction trade ideas.  Same applies to the other daily balancing issues.

I understand lots of the bad press that leveraged-ETF's have had relates to the observation that a 2x daily leverage likely will not deliver 2x results on periods longer than daily. No doubt there were investors who did not understand that and suffered losses with lots of kicking and screaming. That said, look at the chart I posted for BIB. Over a five year period it did better than 2x. Much better! .

Financial.Velociraptor, I get your point that "you have taken on twice the risk for less than twice the return", and it is well worth keeping in mind if you invest in any leveraged-ETF. I personally am willing to accept higher risk in a portion of my portfolio.

The only reason leveraged etfs have performed so well is because we've just had a massive bull market.  Over the long term letfs will always outperform unless you rebalance.  Look at the returns of UPRO for 2011 only.  From memory it was down 11 percent despite the index rising marginally.   Look at the returns of SSO from inception until now - barely outperforming the index but with double the risk

PEIslander

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Re: Indexing with leverage
« Reply #101 on: March 25, 2015, 03:42:36 AM »
The only reason leveraged etfs have performed so well is because we've just had a massive bull market.  Over the long term letfs will always outperform unless you rebalance.  Look at the returns of UPRO for 2011 only.  From memory it was down 11 percent despite the index rising marginally.

According to Yahoo Finance, in 2011 UPRO returned -14.43% while the S&P500 (^GSPC) returned -1.12%. You are right that would not have been a great period to be invested in UPRO. Of course if a holder in 2011 stayed invested it worked out well - as it did (albeit to lesser performance) for those who stuck with an unleveraged S&P500 Index investment in the same period. If you held UPRO for the last five years it would now have to fall one hell of a way down to not have been a 'better' investment than an unleveraged S&P500 Index investment.

If the average index investor believes the S&P500 index is going to be significantly higher in, say, five years that it is now, they will hold an unleveraged S&P500 Index investment and not worry too much about short-term performance. They've placed their bets and are willing to stick it out to see what happens. They are accepting some risk. To invest in the 3x leveraged UPRO they would certainly need to understand & accept increased risk -- but with that risk comes the potential of higher rewards. Personally, although I do think that the S&P500 index will be significantly higher in five years, I'm not prepared to go 'all in' on UPRO. I will accept the higher risk on a small proportion of my portfolio. To mitigate some of the risk I also watch it daily.   

rmendpara

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Re: Indexing with leverage
« Reply #102 on: March 25, 2015, 08:14:11 AM »
It seems to me the reason real estate can be such a good investment is because of the cheap leverage available.  Without that, real estate's "1% rule" gives you a 6% annual return after assumed expenses of 50% of your gross rent, and 6% is less than one expects from the stock market on average. (Though I am aware some markets have a 2% rule, which is clearly much better.)

I don't particularly want to be a landlord.  I'd rather index with my own leverage if possible.  Leveraged ETFs are no good because they don't seem suited for long-term holdings given they aim to amplify daily returns (and can thus take your investment to zero even if the benchmark is going sideways).  My minimal research has turned up the availability of secured loans for stocks, but those appear to carry rates of 6% or higher, which would eat up most of the expected returns in any long-term indexing strategy.  Brokers' margin interest seems to be similarly high. 

I don't understand options very well, but would they be an option (pun intended)?  Is there another solution I'm not aware of?

I think it's been mentioned in some fashion already...

The best way for an individual investor to leverage returns is probably through secured debt, because most of us can't leverage investments directly at reasonable rates. Most brokers will charge +/- 6% (today) for margin, which eats away most of your return. Of course, if you are a very, very large investor, that 1% spread between 6% fees and 7% expected return is sufficient, but most retail investors won't get much from that. Plus, those rates also change.

I think borrowing against a house or a car is likely the cheapest way to go. Either you can do it after the fact (once a house/car is paid off and you refinance) or by simply delaying payments as much as possible (pay the absolute minimum). You should consider any type of leverage in your whole life as portfolio leverage. Although the assets aren't directly related, it's a similar concept. It's like a company that issues bonds to build a new factory. Whether it's secured by the home office or by a satellite office, the payment terms and rate are the same at the consolidated level.

Similarly, taking cash out of a hard asset like home/car at 3-5% for a longer term loan (cars go up to 5 yrs and mortgages up to 30) can definitely help to add leverage to your overall net worth.

Today, if you really want to add leverage, I think a 4% 30 yr mortgage is the best way to go. You can tack on a 2-3% car loan for 5 years as well, but the term won't be nearly as long there.

There is obviously a risk component to all this as well, so you do need to consider that. This all assumes you have very low liquidity risk and can support the higher cash outflows comfortably and in perpetuity, as hitting even 1 liquidity event and having to sell assets at unfavorable prices would  negate much of the gains.

Interesting thread, thanks for posting!

Financial.Velociraptor

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Re: Indexing with leverage
« Reply #103 on: March 25, 2015, 09:57:45 AM »
Most brokers will charge +/- 6% (today) for margin, which eats away most of your return.

For the record, Interactive Brokers was charging 1.64% last time I checked.  I levered up 50% on stocks that yielded more than the borrowing rate during the 2009-2012 run up and did very well.  I stay "fully invested" in FIRE with no emergency fund and rely on the low borrowing rate for emergencies like when the air conditioner went out last summer.  Put it on 1.5% cash back capital one card, pay 1.64%, net borrowing cost 0.14% to stay fully invested.  That's less than inflation so technically, FREE MONEIZS!!!

I just have say leverage works both ways.  It feels good to earn "extra" when things are going up but it will make you sick to your stomach during a bear market.  So mind your trailing stop losses...

zb3

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Re: Indexing with leverage
« Reply #104 on: March 25, 2015, 01:17:06 PM »
The only reason leveraged etfs have performed so well is because we've just had a massive bull market.  Over the long term letfs will always outperform unless you rebalance.  Look at the returns of UPRO for 2011 only.  From memory it was down 11 percent despite the index rising marginally.

According to Yahoo Finance, in 2011 UPRO returned -14.43% while the S&P500 (^GSPC) returned -1.12%. You are right that would not have been a great period to be invested in UPRO. Of course if a holder in 2011 stayed invested it worked out well - as it did (albeit to lesser performance) for those who stuck with an unleveraged S&P500 Index investment in the same period. If you held UPRO for the last five years it would now have to fall one hell of a way down to not have been a 'better' investment than an unleveraged S&P500 Index investment.

If the average index investor believes the S&P500 index is going to be significantly higher in, say, five years that it is now, they will hold an unleveraged S&P500 Index investment and not worry too much about short-term performance. They've placed their bets and are willing to stick it out to see what happens. They are accepting some risk. To invest in the 3x leveraged UPRO they would certainly need to understand & accept increased risk -- but with that risk comes the potential of higher rewards. Personally, although I do think that the S&P500 index will be significantly higher in five years, I'm not prepared to go 'all in' on UPRO. I will accept the higher risk on a small proportion of my portfolio. To mitigate some of the risk I also watch it daily.   

You are taking a significant risk by not rebalancing.  Even a relatively small drop in the s&p will wipe you out, depending if the market is volatile or trending.  Where the market is trending you'll do better relative to the multiple, ie if SPY drops 20% you will lose less than 60%, but where the market is volatile you'll lose more.  Look at SSO In 2008 for an example of trending and UPRO in 2011 for an example of volatile.  If you rebalance your holdings to the value of SPY you will fare much better.  Test it if you don't believe me.  The market is bound to drop at 30% at some point, at which time losing the majority of your holding is inevitable.  Regardless of how high UPRO goes in the interim, an 80 to 95 percent loss is significant and will put you far below the s&p.  Anyway good luck - you'll need it.

PEIslander

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Re: Indexing with leverage
« Reply #105 on: March 25, 2015, 02:37:12 PM »
Anyway good luck - you'll need it.

Luck certainly was not on my side today! UPRO down 4.49%. BIB down 8.22%. SOXL down 13.7%. CURE down 5.44%. My account has given back about a months worth of gains in the last couple of days.

Perhaps I jinxed myself by promoting leveraged ETFs here. LOL

phillyvalue

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Re: Indexing with leverage
« Reply #106 on: March 25, 2015, 04:09:26 PM »
If there's a good time to use leverage - and I'm not sure there is - it certainly isn't in today's market environment with high valuations and low expected returns. I could see defending being, let's say, 110% invested in the depths of a crisis, returning to being 100% or below invested when markets improve. Some subtle market timing that won't hurt you too much as long as you are at a place like Interactive Brokers where margin is cheap.

691175002

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Re: Indexing with leverage
« Reply #107 on: March 25, 2015, 05:13:51 PM »
If there's a good time to use leverage - and I'm not sure there is - it certainly isn't in today's market environment with high valuations and low expected returns.
I also get the feeling that you don't want to commence this strategy at a time when people are talking about it.
If the market off 30% from the highs then things look a lot better, although everyone will probably be too scared to try.

hodedofome

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Re: Indexing with leverage
« Reply #108 on: March 25, 2015, 05:36:30 PM »
If there's a good time to use leverage - and I'm not sure there is - it certainly isn't in today's market environment with high valuations and low expected returns.
I also get the feeling that you don't want to commence this strategy at a time when people are talking about it.
If the market off 30% from the highs then things look a lot better, although everyone will probably be too scared to try.
+1

The best time to dip into a strategy is during a drawdown. Much less risk that way. Most people do the opposite however.

The Beacon

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Re: Indexing with leverage
« Reply #109 on: March 25, 2015, 09:57:47 PM »
The best time to dip into a strategy is during a drawdown. Much less risk that way. Most people do the opposite however.

That timing is just pure luck. One of my strategies (active day trading) had a winning streak of 8 months in a row in 2014.  If had waited for that draw down to come, I'would have lost out on the all the profits.  The draw down did come after 8 months though.  So if one has a winning strategy, it does not really matter in the long run when you enter

dragoncar

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Re: Indexing with leverage
« Reply #110 on: March 26, 2015, 12:08:56 AM »
If there's a good time to use leverage - and I'm not sure there is - it certainly isn't in today's market environment with high valuations and low expected returns.
I also get the feeling that you don't want to commence this strategy at a time when people are talking about it.
If the market off 30% from the highs then things look a lot better, although everyone will probably be too scared to try.
+1

The best time to dip into a strategy is during a drawdown. Much less risk that way. Most people do the opposite however.

+2 just because we're talking about it doesn't mean it's a good idea right now.  But if we talk about it now, everyone will be prepared to pull the trigger after the pull-back.  Right?*

*I'm not saying it's a bad idea if you are properly hedged.  But hopefully nobody has interpreted this thread as a license to go 400% long S&P500.

DrF

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Re: Indexing with leverage
« Reply #111 on: March 26, 2015, 07:50:13 AM »
The fact is, no one can predict if the S&P500 will go up or down 10% this year or the next 100 years. But, if you leverage a small portion of your portfolio, 25% according to my backtesting, and rebalance yearly or so, then you have an excellent chance of beating the index on a consistent basis. Over time you should realize significant gains by using leverage. Pairing that with an uncorrelated asset (treasuries or a diversified portfolio) enables you to capture gains due to volatility or market downturns. I would argue that there is no better time than the present to implement a strategy that you feel you can stick with through all points of a market cycle. If you think you can implement adding leverage during a 30-50% downturn, be my guest. I doubt most people would have the stomach to do that if they are uneasy about the strategy to begin with.

What I am proposing is 3x leverage on 10-20% of your portfolio using UPRO (equates to 30-60% equity exposure), with 80-90% treasuries or similar. This is effectively a 1.2-1.4x leverage (historically researches have found that ~1.5-2x leverage would have been optimal in the past. http://ddnum.com/articles/leveragedETFs.php

The key is, consistent rebalancing (bands, %, or calander based).

hodedofome

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Re: Indexing with leverage
« Reply #112 on: March 26, 2015, 08:34:44 AM »
The best time to dip into a strategy is during a drawdown. Much less risk that way. Most people do the opposite however.

That timing is just pure luck. One of my strategies (active day trading) had a winning streak of 8 months in a row in 2014.  If had waited for that draw down to come, I'would have lost out on the all the profits.  The draw down did come after 8 months though.  So if one has a winning strategy, it does not really matter in the long run when you enter

It may have turned out that not waiting for a drawdown was good for you last year, but I would argue that on the average, waiting for a drawdown before beginning a new strategy is the least risky way of doing it.

If a strategy has a long-term upward bias, then waiting for a pullback logically means less risk, because it has less to fall for you before it resumes it's uptrend. It's value investing for trading strategies. I say this as someone who buys breakouts to new all time highs on individual stocks all the time.

The Beacon

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Re: Indexing with leverage
« Reply #113 on: March 26, 2015, 03:52:07 PM »
The best time to dip into a strategy is during a drawdown. Much less risk that way. Most people do the opposite however.

That timing is just pure luck. One of my strategies (active day trading) had a winning streak of 8 months in a row in 2014.  If had waited for that draw down to come, I'would have lost out on the all the profits.  The draw down did come after 8 months though.  So if one has a winning strategy, it does not really matter in the long run when you enter

It may have turned out that not waiting for a drawdown was good for you last year, but I would argue that on the average, waiting for a drawdown before beginning a new strategy is the least risky way of doing it.

If a strategy has a long-term upward bias, then waiting for a pullback logically means less risk, because it has less to fall for you before it resumes it's uptrend. It's value investing for trading strategies. I say this as someone who buys breakouts to new all time highs on individual stocks all the time.
It is true theoretically.  When I look at my back testing, I can clearly see that on paper. But again, no one can do it in real trading. You might hit it once or twice. But that is nothing but luck. If we could call out a draw-down with a degree of certainty, then we could just reverse the trades and be profitable.

That is why it is so important to have a system that focuses on minimizing draw-downs instead of profitability.  My deepest draw-down so far is 7.5%.  It happened only once. My average is only 5.5%. Hopefully I can keep it there.  I toss out any strategies that have draw downs over 15% regardless its profitability.   But  I know if the profitability is high enough, it might be Ok to have a 15%-20% draw down.







bigchrisb

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Re: Indexing with leverage
« Reply #114 on: March 26, 2015, 06:23:58 PM »
I've been quietly watching this thread and sitting on the sideline. 

I've been invested heavily on margin since 2008 - as in between 55% and 80% loan to value ratio through most of that time.  Its been a harrowing time - I had a series of events where I had to stump up significant liquidity to avoid margin calls in 2008, battled through liquidity issues in 2009 and had real margin calls towards the end of 2009.  I limped through and kept levering up through the trough, and had further margin calls in 2011.  I've now emerged from this in a pretty rosy financial position, but there were some pretty dark days along the path.   If you want more detail, have a read through page 5 on my journal on this forum.  There is more of a blow by blow account on an old journal on the ERE forum, and on networthshare.

I still struggle with just how quickly and savagely the fall in value was.  I was able to muddle through, because my portfolio was small compared to my income - under 1 years salary.  These days, where my portfolio is more like 10x annual income, I wouldn't be able to prop it up.  I also see myself as pretty mentally analytical and un-emotive.  Margin calls confirmed that I'm a lot more emotive that I thought I was.

I still use margin, but only on a portion of my accounts that I'm prepared to loose.  I keep the majority of my investments quarantined with no leverage - to reduce the risk of total wipeout.    I also use margin much more sparingly now, and am in the process of refinancing my margin debt against real estate secured debt - to take out the callable nature of the loan.

Leverage and margin are very powerful, but treat with significant caution.  The biggest message that I could give my younger self is that you are not as cold and rational as you think you are.  My younger self would promptly ignore this, and need to earn the lesson the hard way!

Good luck with it!


arebelspy

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Re: Indexing with leverage
« Reply #115 on: March 26, 2015, 07:47:42 PM »
Good insight chris, thanks for sharing.  Do you have a link to the ERE thread handy?
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dragoncar

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Re: Indexing with leverage
« Reply #116 on: March 26, 2015, 07:56:09 PM »

I still use margin, but only on a portion of my accounts that I'm prepared to loose.  I keep the majority of my investments quarantined with no leverage - to reduce the risk of total wipeout.   

But wouldn't merging your assets realistically prevent a margin call?  I mean lets say you have 1.3x leverage in a $100k account and $900k somewhere else.  If it was all in the same account, that would be 1.03x, which would be very safe from a margin call.

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Re: Indexing with leverage
« Reply #117 on: March 26, 2015, 08:16:06 PM »

I still use margin, but only on a portion of my accounts that I'm prepared to loose.  I keep the majority of my investments quarantined with no leverage - to reduce the risk of total wipeout.   

But wouldn't merging your assets realistically prevent a margin call?  I mean lets say you have 1.3x leverage in a $100k account and $900k somewhere else.  If it was all in the same account, that would be 1.03x, which would be very safe from a margin call.

Nah. One should never have any margin call.  If one does. trading has gone haywire. One needs to separate a trade from an investment.  If you trade with or without leverage, you must have very solid risk control such as stop loss and position sizing.  If you have these 2 in place, you will never have a margin call aka blowing your account.  even If you can escape a margin call once or twice by any luck, you will not next time.  Of course, only these 2 things will not make you a profitable trader.

As for an investment, it is much simpler. As long as your long term direction is right, you can safely ignore the short term market noises. I am 100% against any investment with leverage such as this index leverage.   Never mistake a trade for an investment and Vice Versa.
« Last Edit: March 26, 2015, 08:18:11 PM by Sharpy »

hodedofome

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Re: Indexing with leverage
« Reply #118 on: March 26, 2015, 08:21:59 PM »
I asked my active investor grandpa if he ever used margin. He said he's been on margin for 50 years. I asked him what he did in 2008, he said he was selling stocks all the way down. Lol.

bigchrisb

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Re: Indexing with leverage
« Reply #119 on: March 26, 2015, 08:33:30 PM »
Re the ERE thread, having checked, it started in 2012, after things were on the fairly steady up and up.  The best history is probably in the monthly entries on https://www.networthshare.com/portfolio/bigchrisb, but its not easy to read - need to click on each month, then on details. 

Merging assets certainly would reduce the likelihood of a margin call.  However, it also reduces the worst case scenario to zero, rather than greater than zero.  The actual numbers are $720k of stocks in my margin account, $530k in margin debt, and $850k of stocks in other accounts. 

I have another reason for wanting to split the margin loan and assets like this (and its to do with tax rules in Australia where I'm based).  I invest the un-leveraged stuff through a trust and company, so its tax sheltered.  I invest in my yielding stuff there.  The stuff in my margin account (my own name) is low yielding (us index funds, low yield AUS stocks, and AUS reits - noting that for us, REITS are pretty tax sheltered, unlike the US REITS.  That means I get all the deductions from the interest in my name, and all the income from the investments in a tax sheltered environment.  Splitting the assets that way is worth a few thousand a year in reduced tax spend.

market timer

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Re: Indexing with leverage
« Reply #120 on: March 28, 2015, 03:41:14 AM »
While Ayres and Nalebuff confine their analysis to stocks, I believe one could improve on their recommendation by including other asset classes, particularly long term bonds. There is a recent Bogleheads thread on leveraging a balanced fund, which is closer to how I'd recommend using leverage today: https://bogleheads.org/forum/viewtopic.php?f=10&t=143037

Do you mean owning unleveraged long term bonds as well as leveraged equities or owning leveraged long term bonds? Since bonds tend to have mild price swings, but provide a lot of dividends, and many leveraged instruments (like options) don't payout dividends, it seems like the upside to leveraging bonds is limited and the expense is considerable.
Whether bonds or equities are levered doesn't make much difference, provided the financing costs are roughly the same. You can get very cheap financing on both using futures. I disagree that long term bonds have mild price swings. In fact, 30-year Treasuries have volatility in the same ballpark as the S&P 500.

Currently, due to technical reasons involving optimal early exercise and low interest rates, I'd recommend avoiding LEAPS. Futures are my preferred investment vehicle, as they are extremely liquid and allow one to borrow essentially at the risk-free rate.

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Can you explain more of why you recommend against LEAPS? It seems like they are a great way to avoid the margin calls that did you in. Whereas futures like e-minis could give you an unmanageable margin call at any moment. Some people don't even recommend holding them overnight since they never stop trading.
Currently, the dividend yield on the S&P 500 is well above short term interest rates. Since owners of American-style options are not entitled to dividends, this means it is often best to exercise deep-in-the-money LEAPS ahead of dividend payments, well before options expiration. In effect, this turns a 3-year LEAPS call into a short term call. You can, of course, choose not to exercise, but this means you are effectively paying a higher financing cost than you can get elsewhere, such as futures or even margin. For these reasons, LEAPS are currently less attractive than they would be in an environment with higher short term rates.

forummm

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Re: Indexing with leverage
« Reply #121 on: March 29, 2015, 07:38:04 AM »
I've seen on Bogleheads that people were recommending to sell long-dated futures, options, and LEAPS well before expiration. Given that it would bring additional transaction costs and bid-ask spread loss, why would that be the case? Does it have to do with selling before dividends are posted? Or the time decay?

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Re: Indexing with leverage
« Reply #122 on: March 29, 2015, 08:20:20 AM »
I've seen on Bogleheads that people were recommending to sell long-dated futures, options, and LEAPS well before expiration. Given that it would bring additional transaction costs and bid-ask spread loss, why would that be the case? Does it have to do with selling before dividends are posted? Or the time decay?
In the case of LEAPS, it is typically preferable in a low interest rate environment to exercise (or sell) before expiration in order to retain rights to the dividend on the underlying. LEAPS are not very liquid, so bid-ask spread is significant. That's why I suggest using other forms of leverage today, such as futures, margin, or even leveraged ETFs.

forummm

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Re: Indexing with leverage
« Reply #123 on: March 31, 2015, 06:00:12 PM »
Since e-minis are available for a year duration, is there a reason to buy and roll quarterly contracts, if the intent is to buy and hold?

hodedofome

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Re: Indexing with leverage
« Reply #124 on: March 31, 2015, 07:10:36 PM »
Just check and see if the price 1 year from now is much different from the current contract. If it's a bit higher you may prefer to go with the current contract. Also, the contract needs to trade enough for you to get it. Probably not a big deal for anyone on this forum. But if you are a large investor it could be an issue, the long dated contracts are pretty thin.

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Re: Indexing with leverage
« Reply #125 on: April 01, 2015, 03:23:27 AM »
Since e-minis are available for a year duration, is there a reason to buy and roll quarterly contracts, if the intent is to buy and hold?
Yes, liquidity. The current quarter's futures are much more liquid than longer term futures. The bid/offer spread on current quarter S&P e-mini futures is $12.50 per $100K. Commissions are about $7 roundtrip. So, total transaction costs from rolling quarterly would sum to $12.50x4 + $7x4 = $78, or about 8 bps per year.

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Re: Indexing with leverage
« Reply #126 on: April 01, 2015, 07:17:46 AM »
. Commissions are about $7 roundtrip.

Options commissions at Interactive Brokers are 75 cents per contract and usually less than a dollar if you put in one or more change orders to the ticket before fulfillment.  Round trip should be less than 2 dollars per contract if you are at the right broker.

hodedofome

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Re: Indexing with leverage
« Reply #127 on: May 09, 2015, 12:39:47 PM »
Sorry to resurrect an old thread but I read this today and thought I'd throw it in here since it seems applicable.  http://seekingalpha.com/article/3140956-investing-in-leveraged-etfs-theory-and-practice

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Re: Indexing with leverage
« Reply #128 on: May 09, 2015, 12:59:57 PM »
How does it work if you buy a call option or a futures contract and the expiration date nears. If you want to exercise an ITM option, do you have to explicitly do something to cash in on the value? For a futures contract, do you have to close out your position, or does it just add/subtract the right amount of cash from your account and then expire?

Financial.Velociraptor

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Re: Indexing with leverage
« Reply #129 on: May 09, 2015, 03:44:11 PM »
How does it work if you buy a call option or a futures contract and the expiration date nears. If you want to exercise an ITM option, do you have to explicitly do something to cash in on the value? For a futures contract, do you have to close out your position, or does it just add/subtract the right amount of cash from your account and then expire?

I'm not sure on futures, never played that game, but I think you in some cases have to take delivery of the actual commodity.  John Meynard Keynes famously made a futures mistake when managing a university endowment and the university chapel ended up storing hundreds of bushels of grain for months as a result.

On (American) options, the option automatically exercises at expiry if it is in the money.  If you want to exercise a long option sooner, you have issue an affirmative command to your broker.  European options can only be exercised at expiry.  If you are short an (American) options contract you are the mercy of your counterparty regarding early assignment.  It rarely happens until just a few days before expiry though because it makes more financial sense to sell the long option and capture the remaining time value on the contract.

hodedofome

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Re: Indexing with leverage
« Reply #130 on: May 09, 2015, 09:46:23 PM »
In futures you will take physical delivery if your broker supports it. Some brokers don't. For financial instruments you would be expected to buy or sell the underlying on the delivery date. If taking physical delivery is not something your broker does, they may just automatically close your position on the expiration day.


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forummm

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Re: Indexing with leverage
« Reply #131 on: May 10, 2015, 09:50:37 AM »
In futures you will take physical delivery if your broker supports it. Some brokers don't. For financial instruments you would be expected to buy or sell the underlying on the delivery date. If taking physical delivery is not something your broker does, they may just automatically close your position on the expiration day.

For an e-Mini do you have to take delivery of anything?

Financial.Velociraptor

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Re: Indexing with leverage
« Reply #132 on: May 10, 2015, 10:08:43 AM »
In futures you will take physical delivery if your broker supports it. Some brokers don't. For financial instruments you would be expected to buy or sell the underlying on the delivery date. If taking physical delivery is not something your broker does, they may just automatically close your position on the expiration day.

For an e-Mini do you have to take delivery of anything?

The e-Minis are options rather than future.  There is no physical delivery but if you are short the contract and it is in the money at expiry you will be assigned shares.

Roland of Gilead

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Re: Indexing with leverage
« Reply #133 on: May 10, 2015, 12:08:53 PM »
I did the leverage thing the way a previous poster described, but did it on ALU (sold $2 puts and used the money to buy $2 calls) a few years ago.  ALU kept going down and ended up around $1.20, where I was assigned some huge number of shares (I had the cash so it was not a margin issue).

I was then holding so many of these ADRs, and they were charging ME several pennies per share (ADR, because it is a French company) which pissed me off so I sold all in disgust at like $1.25, booking a $0.75 loss per share (figured the French would never be able to turn things around because of labor laws)

Of course you fast forward 2 years and now ALU trades at $3.80 :-(


bacchi

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Re: Indexing with leverage
« Reply #134 on: May 10, 2015, 12:21:06 PM »
In futures you will take physical delivery if your broker supports it. Some brokers don't. For financial instruments you would be expected to buy or sell the underlying on the delivery date. If taking physical delivery is not something your broker does, they may just automatically close your position on the expiration day.

For an e-Mini do you have to take delivery of anything?

The e-Minis are options rather than future.  There is no physical delivery but if you are short the contract and it is in the money at expiry you will be assigned shares.

While there are some e-mini options, most of the e-minis themselves are futures and are cash settled. The most popular is probably the e-mini S&P, ES: http://www.cmegroup.com/trading/equity-index/us-index/e-mini-sandp500_product_calendar_futures.html

If an in-the-money e-mini FOP goes to expiry, you'll be assigned the e-mini future and not the underlying shares of the future (e.g., if you hold an ITM call on ES, you'll be long ES after expiry).

forummm

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Re: Indexing with leverage
« Reply #135 on: May 10, 2015, 01:05:46 PM »
In futures you will take physical delivery if your broker supports it. Some brokers don't. For financial instruments you would be expected to buy or sell the underlying on the delivery date. If taking physical delivery is not something your broker does, they may just automatically close your position on the expiration day.

For an e-Mini do you have to take delivery of anything?

The e-Minis are options rather than future.  There is no physical delivery but if you are short the contract and it is in the money at expiry you will be assigned shares.

While there are some e-mini options, most of the e-minis themselves are futures and are cash settled. The most popular is probably the e-mini S&P, ES: http://www.cmegroup.com/trading/equity-index/us-index/e-mini-sandp500_product_calendar_futures.html

If an in-the-money e-mini FOP goes to expiry, you'll be assigned the e-mini future and not the underlying shares of the future (e.g., if you hold an ITM call on ES, you'll be long ES after expiry).

So if I bought a June ES and just held it, money is added/subtracted to my account every day (as the market moves), but then one day it just expires and nothing happens? And I'd have to buy a September ES to retain market exposure?

If I had an ITM call on ES, when it expires I'm long on ES, but with an expired contract? Does the money keep being added/subtracted to my account as the market moves?

I know you can roll contracts by buying the new one and selling the old one. But that requires extra transaction fees.
« Last Edit: May 10, 2015, 01:11:17 PM by forummm »

Financial.Velociraptor

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Re: Indexing with leverage
« Reply #136 on: May 10, 2015, 01:15:07 PM »
In futures you will take physical delivery if your broker supports it. Some brokers don't. For financial instruments you would be expected to buy or sell the underlying on the delivery date. If taking physical delivery is not something your broker does, they may just automatically close your position on the expiration day.

For an e-Mini do you have to take delivery of anything?

The e-Minis are options rather than future.  There is no physical delivery but if you are short the contract and it is in the money at expiry you will be assigned shares.

While there are some e-mini options, most of the e-minis themselves are futures and are cash settled. The most popular is probably the e-mini S&P, ES: http://www.cmegroup.com/trading/equity-index/us-index/e-mini-sandp500_product_calendar_futures.html

If an in-the-money e-mini FOP goes to expiry, you'll be assigned the e-mini future and not the underlying shares of the future (e.g., if you hold an ITM call on ES, you'll be long ES after expiry).

So if I bought a June ES and just held it, money is added/subtracted to my account every day (as the market moves), but then one day it just expires and nothing happens? And I'd have to buy a September ES to retain market exposure?

If I had an ITM call on ES, when it expires I'm long on ES, but with an expired contract? Does the money keep being added/subtracted to my account as the market moves?

I know you can roll contracts by buying the new one and selling the old one. But that requires extra transaction fees.

I think you may be a little unclear on the concept.  There isn't a settling in cash each day.  Your net liquidation value (and any margin calculated thereof) move with the market but your cash balance is static except for on day of purchase/sale and expiry (or early assignment in some cases).  If the contract expires out of the money, all is done unless you buy/sell a new contract with a later expiry.

hodedofome

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Re: Indexing with leverage
« Reply #137 on: May 10, 2015, 01:18:19 PM »

forummm

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Re: Indexing with leverage
« Reply #138 on: May 10, 2015, 05:32:33 PM »
I don't know, it looks to me from sources like the CME that ES is not an option, and is cash-settled--both daily and at the end of the contract. Maybe I don't understand what that means.

http://www.cmegroup.com/rulebook/CME/IV/350/358/358.pdf
http://www.cmegroup.com/trading/equity-index/eminifaq.html

Quote
The E-mini and the larger contracts are cash-settled to the same index values on quarterly expirations (the Special Opening Quotation).
The E-mini S&P 500 and E-mini NASDAQ-100 settle daily to their larger contracts' counterpart settlement price, while the E-mini S&P MidCap 400 and E-mini S&P SmallCap 600 daily settlement prices will be used to settle their larger counterpart contracts. 

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Re: Indexing with leverage
« Reply #139 on: May 11, 2015, 12:12:43 PM »
Sorry to resurrect an old thread but I read this today and thought I'd throw it in here since it seems applicable.  http://seekingalpha.com/article/3140956-investing-in-leveraged-etfs-theory-and-practice

Here he's only saying that shorting inverse or long ETFs is not a good idea.

No where does he say that holding leveraged long ETFs is not a good idea.

Here they say that holding leveraged long ETFs IS a good idea. (I'm pretty sure I already posted this somewhere.)

http://seekingalpha.com/article/2966666-monthly-annual-upro-gains-map-almost-perfectly-to-the-s-and-p-500