Invest using leverage
I was reading another thread and the following comment by AnalystMonkey2769 is like a lightning strike:
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.
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)
short the inverse lol?
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.
FAS = -FAZ FAS + short FAZ = FAS - (-FAZ) = FAS + FAS = 2 x FAS (Discalimer: I am a professional ..not)
Obviously, since you said risk free.
I often borrow money from my brother to "invest" at Belmont. Is that what you're talking about?
Go punt some FX or whatever on margin...
Buy 3x ETFS using credit/margin.
TBT or DLBS for interest rate risk. TBT actually just got murked this morning and is hovering around 52 week lows, really attractive to me here.
Wow, the gullibility in this thread is appalling.
Yep, realized that a more relevant question should be: where do pro traders hang out?
What do elite traders wear tho
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).
Thanks for the words of caution bro. Will probably start with a small amount of leverage and see how it goes.
I'm not sure of books just about that. Maybe someone else can chime in though.
Just buy US treasuries - return free risk
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