Jim, you allude to the use of leverage in your option strategies. I just addressed this question to Fidelity concerning the use of “leverage,” and the rep confirmed what I was thinking.
There are two kinds of leverage. One, where you put up less money to control more stock, such as DITM LEAPS.
Then, there is the leverage of buying on margin, borrowing money from Fidelity based on my holdings. When you say 1.5/1, which kind of leverage are you referring to?
What I was referring to was using call options.
If you own (say) $75 in stock and $25 worth of in-the-money call options that have 3:1 leverage built in,
you’re long 1.5 times as many dollars worth of stock as you have dollars invested and at risk,
compared to the number of dollars worth of stock you’d control just buying the stock for the same amount of money.
Don’t ever use broker margin.
As others noted, brokers can (and do) take it away from you at any time for any reason or no reason.
And when they do, that will NOT be a good day to be a forced seller.
They don’t necessarily sell only the amount needed to cover any margin liability, either: they can and sometimes do sell 5-10 times as much as needed.
Interactive Brokers, interestingly, has a caveat that they themselves may be the counterparty on those forced sales.
I suspect they have a small but aggressive “pounce” department waiting for such opportunities.
(not that there is anything specific wrong with Interactive Brokers–at least they’re up front about it)
The loan effectively built into a call option you buy is at a much higher implied interest rate than a broker margin loan.
But that option “loan” can not be called in any circumstance, even if the stock market is closed for a month and all security prices are zero.
Money well spent.
Jim
- 3:1 is a relatively risky/expensive call option pick, but it’s just a math example to show what I meant by 1.5:1 overall leverage.
A more prudent selection might be (say) Jan 2024 $170 calls, which offer 2:1 leverage at an implied interest cost of about 3.95%/year.
Or did as of Tuesday, last time I checked.
Note, the way I calculate it, that’s about 4% implied interest on the portion borrowed, not 4% on the whole block of shares controlled.
So, for an option like this with 2:1 built in leverage, the stock price would have to rise at about 2%/year to cover the fact that you’ve entered a position at a worse breakeven.
Note that that rate is lower than most inflation estimates for the next couple of years.
I expect this happy situation not to last.
At some point, either long dated call options will cease being available, or the implied interest rates will be prohibitively high, or some tax will remove the benefit.
There is no point paying 7%/year to buy stock that you think will rise in price at 7%/year.
But for so long as the cheap opportunity lasts, and during moments Berkshire’s valuation is attractive: I’m a leveragin’ fool.