What Happened to My Leverage?
On 11/15/2011 I bought BAC calls for 2.00 per share with a strike price of 7.00 for JAN 2014, while BAC was trading at approximately 6.00 per share. During that time frame I am up 7.5% of the calls, while BAC itself is up 22.6%. I was under the impression that options created leverage. To make matters worse, if I went in on margin I would be up 45.3% right now instead of 7.5%. I realize I bought at a time of excessive market volatility, but Jesus Christ, I at least expected to outperform the underlying security if the price went up significantly.
If I'm extremely bullish on BAC over the next 2 years, am I better going in on margin, or sticking with my calls?
NOTE: I'm not looking for everyone to tear apart BAC, I realize I'm taking a tremendous risk here, I'm simply looking for the most efficient way to create leverage over the next two years.
I think margin is a better way to create leverage if you are only looking to go long delta. Your options are killing you because of vega. Someone correct me if I am wrong.
this. max vega when your call is atm. max gamma too. right now you have low delta and are getting smacked by declining volatility since you are otm. it might get worse before it gets better if the equity stabilizes and slowly rises to the strike way before expiration. theta will be fighting you the whole way.
why would you not just buy underlying on margin (IB is the shit) or if you must deep itm calls?
If you're extremely bullish, why not just buy the stock outright instead of the options? Unless you really want to buy options that are so far out of the money they'll never see the light of day...
you need to understand implied vol, vega and theta.
I agree, get to know your Greeks.
You can buy stocks outright with margin money, this would save him from paying the premium and allow more of the margin to work on the stock price. If he is really as sure of the increase as he says he is.
You are so far away from expiry that the stock price doesn't play a large enough role right now as things can still go in either direction. You should better understand the security before you buy it. If you would have bought march 12 calls, things would be different.
To simplify, think of it like this: What are the chances that the price of any security fluctuates $1 from now until tomorrow? Now what is the likelihood of that same security fluctuating $1 from now until next year?
You bought Jan 2014 calls
That's 2 years away so you aren't going to see any massive moves
If you want leverage:
you could use futures for indices, commodities, interest rates/treasuries, but the notional of each contract is really high (for s&p 500, $50 x index value)
you could buy on margin, but online brokers charge insanely high interest rates (~6-8%)
you could buy deep in the money call options, which have smaller volatility premiums, but are less liquid
Thanks for the help guys. I'll be looking into an IB account but I still can't complain much after today. Things can be worse than a 20% gain in 2.5 months.
37.5%. BOOYAH!!!!!
Sell out and switch to margin, or wait for more volatility?
Bulls and bears make money while hogs get slaughtered. Being greedy doesn't pay...
I've been torn apart by everyone out there for my bullish call on BAC . I stand by my original assumption 3 months ago, BAC is going to 15.00, what's the best way to leverage my assets?
There\'s really not a whole lot you can do. If you expect things to happen short term you can buy on margin, but if it\'s down the road a bit and a slow climb instead of a big pop, you will get eaten alive by the interest cost.
If you\'re really that bullish on it, buy some way OTM calls at the price you expect it to get to as they are likely to be pretty cheap.
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