Invest using leverage

I was reading another thread and the following comment by AnalystMonkey2769 is like a lightning strike:

AnalystMonkey2769:
To me, cash flow IS sexy. And having physical assets like property or equipment to use as collateral to get leverage up the ass is king. leverage used the right way = better than equity

http://www.wallstreetoasis.com/forums/gas-station-car-wash-fast-food-ow…

Anyone has any thoughts about investing, besides in property or equipment, using leverage? I can think of a few- derivatives, leveraged ETFs, etc. But since higher leverage = higher volatility, any suggestions on risk management/tactics?

Thanks.

 
BTbanker:
Long FAS, Short FAZ.

That way you're levered up, and risk free. FAS runs more volatile than FAZ, so if you're bullish, it should outperform the short on the financials in the short-run.

Let me know how this works.

(Discalimer: I am not a professional)

I've seen this before and don't really understand it. Can you explain it a little better? If you're bullish but want to minimize your risk, why not just take a small long position in FAS? I don't understand how you go long one position, but short the identical inverse equity and make money. Because either way, you will lose on one of those positions which will eat into your profits on the other, therefore producing probably the same gross as you would get if you just went long a small amount.

 
Best Response
Waymon3x6:
BTbanker:
Long FAS, Short FAZ.

That way you're levered up, and risk free. FAS runs more volatile than FAZ, so if you're bullish, it should outperform the short on the financials in the short-run.

Let me know how this works.

(Discalimer: I am not a professional)

I've seen this before and don't really understand it. Can you explain it a little better? If you're bullish but want to minimize your risk, why not just take a small long position in FAS? I don't understand how you go long one position, but short the identical inverse equity and make money. Because either way, you will lose on one of those positions which will eat into your profits on the other, therefore producing probably the same gross as you would get if you just went long a small amount.

This sort of idea has greater relevance when using options rather than trading these specific ETFs. While the FAS has outperformed the FAZ over the past year, if you used them together your total return would only be around 4% assuming equal weights. If you invested in one of them and not the other you would naturally have experienced excellent returns with FAS but horrible returns with FAZ. At least to my eyes, and I could certainly be wrong, this approach is not really a viable method of leveraged trading unless you are able to trade them more along the lines of options. This sort of approach could work, for example, if when trading options you took either of two basic spreads. These spreads are straddles and strangles. The idea is that you go long an equal number of both call and put options at a specific price, if using a straddle, or at two slightly different prices, if using a strangle. The point of these strategies is to take a relatively riskless profit if you believe there will be a dramatic swing in the price of the underlying asset sometime during the life of the options. It doesn't matter which way the price swing occurs because each of those strategies will make you money if the price swings either up or down. The way this works is that the option that enters the money will start to become more valuable to you while the other will remain out of the money. At some specific price your payoff will turn positive if the price in the underlying asset swings far enough either way. The loss you incur from paying the premium for the now out of the money option is offset by the gain in the value of the in the money option. Also, these strategies (and other more complicated strategies as well but these are good for making a simple example) can be structured to perform in the opposite direction with a bearish approach. In terms of leverage, options naturally have intrinsic leverage built in. If you really wanted to leverage the hell of your position, which can be dangerous and in my opinion you really need to know what you're doing and have a plan if things turn south other than running for the border, you could of course employ margin from your broker as well. I hope that helps.

"Successful investing is anticipating the anticipation of others". - John Maynard Keynes
 
Waymon3x6:
BTbanker:
Long FAS, Short FAZ.

That way you're levered up, and risk free. FAS runs more volatile than FAZ, so if you're bullish, it should outperform the short on the financials in the short-run.

Let me know how this works.

(Discalimer: I am not a professional)

I've seen this before and don't really understand it. Can you explain it a little better? If you're bullish but want to minimize your risk, why not just take a small long position in FAS? I don't understand how you go long one position, but short the identical inverse equity and make money. Because either way, you will lose on one of those positions which will eat into your profits on the other, therefore producing probably the same gross as you would get if you just went long a small amount.

FAS = -FAZ FAS + short FAZ = FAS - (-FAZ) = FAS + FAS = 2 x FAS (Discalimer: I am a professional ..not)

 
BTbanker:
Long FAS, Short FAZ.

That way you're levered up, and risk free. FAS runs more volatile than FAZ, so if you're bullish, it should outperform the short on the financials in the short-run.

Let me know how this works.

(Discalimer: I am not a professional)

Obviously, since you said risk free.

Because when you're in a room full of smart people, smart suddenly doesn't matter—interesting is what matters.
 

Just make sure that you aren't risking more than 2-3% of your account per trade. Maybe 4-5% if you are willing to take on more risk. You can use whichever amount of leverage that you want, but I usually use the highest available leverage.

You should first determine the stop loss that makes the most sense in your particular situation. This could be placed below a recent support, for example. Now take your core account equity (not including money in other trades), multiply it by your desired risk level (probably should try 2-3%) which gives you the maximum amount you could lose per trade. Dividing the maximum amount that you are willing to lose by the difference between your entry price and your stop loss will give you the position size that you should use in order to risk only your specified % of core account equity. This holds constant no matter your leverage.

For example, if you had $10000 of core equity and you wanted to risk no more than 2% per trade, you would be able to risk at most $200. If you wanted to invest in something priced at $10 and you have determined that a stop loss should be placed at $9.50, you should use a position size of 400 ($10000*.02/($10-$9.50)).

 

Just making sure everyone knows this: investing in a 2X levered ETF will not give you the same results as levering up those same securities 2 to 1 over any period longer than 1 day. The 2X funds are 2X the daily returns, so there is a huge amount of path dependency. Probably not something you should be buying. Also, using leverage in a retail account is a recipe for disaster because you get hosed on interest costs (you pay a substantially higher rate than an institution).

 
SirTradesaLot:
Also, using leverage in a retail account is a recipe for disaster because you get hosed on interest costs (you pay a substantially higher rate than an institution).

Thanks for the words of caution bro. Will probably start with a small amount of leverage and see how it goes.

The Auto Show
 
MindOverMonkey:
You should first determine the stop loss that makes the most sense in your particular situation.
Can't agree more. I think setting stop loss is definitely the key of leverage investing. Do you know any good readings about risk management?
The Auto Show
 
huanleshalemei:
MindOverMonkey:
You should first determine the stop loss that makes the most sense in your particular situation.
Can't agree more. I think setting stop loss is definitely the key of leverage investing. Do you know any good readings about risk management?

I'm not sure of books just about that. Maybe someone else can chime in though.

 

Beatae qui ut beatae commodi. Possimus ea voluptatem necessitatibus officiis dolore alias. Praesentium veritatis occaecati officia deleniti iure.

Quis voluptate architecto incidunt et vel ipsum. Et sit voluptas quibusdam quia eos qui. Quisquam exercitationem facere quae autem error voluptatem.

Quibusdam beatae vel id incidunt praesentium. Et a ab suscipit et. Ad vero soluta molestias excepturi distinctio dignissimos vel. Cupiditate quo consequuntur et non quibusdam. Nisi quo aliquid voluptas doloribus ut. Quos aspernatur similique vel ut vel.

Dolor porro nihil autem amet veniam reiciendis. Nulla corrupti voluptatem eveniet rerum itaque ut molestiae. Ut consequatur quaerat aperiam et quia.

Career Advancement Opportunities

April 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. New 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

April 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

April 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

April 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (87) $260
  • 3rd+ Year Analyst (14) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (205) $159
  • Intern/Summer Analyst (146) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Secyh62's picture
Secyh62
99.0
3
Betsy Massar's picture
Betsy Massar
99.0
4
BankonBanking's picture
BankonBanking
99.0
5
kanon's picture
kanon
98.9
6
CompBanker's picture
CompBanker
98.9
7
dosk17's picture
dosk17
98.9
8
GameTheory's picture
GameTheory
98.9
9
numi's picture
numi
98.8
10
Kenny_Powers_CFA's picture
Kenny_Powers_CFA
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”