Risk VS Reward
When you first get into stocks the first lesson I would tell you to learn about is Risk vs Reward (R/R).
I still don't completely grasp the finer points except that I keep making the same mistake and that is not measuring the Risk before I buy short dated options on SPX.
Granted when you hit a short dated Out of the Money (OTM) options (referred to sometimes as Lottos) the rewards are amazing, but the risk you take holding them is much higher.
You have a better chance going to a casino and betting it all on Black or White.
Then there are Short Leveraged ETFs like SPXU.
These are great equities/derivative to use Margin with on in a Carry Trade.
My broker labels it as a Married Put and what it essentially lets you do is apply the premium of the In the Money (ITM) PUT you buy as your risk of the underlying going down (which is natural for short leveraged etfs) so they will lend you shares.
You can then safely leverage up as much PUT premium as you can afford to risk.
In the case of a market correction like what happened in Mar20, your reward would pay x 15k to 20k times your maximum risk.
To put that in perspective, using 31k in put premium for the next 4 months (max risk 11k at SPXU $15) you would borrow 130k from your broker (10k shares of SPXU).
The payout at SPXU $210 (march 2020 correction) would pay you out ~2 million dollars.
Now is about the only time the margin interest will be low enough. When the Fed finally raises interest rates, the cost of borrowing 130k for 4 months would be significantly more.
You can also write weekly/monthly Calls on some of your SPXU shares to cover the margin/premium cost and maybe even generate income.
Just look at the volume average (white dots) increasing as we get closer to the inevitable rate hike the fed must do.
Definitely Not Financial Advice. I'm a Meat Popsicle.
As always, Hope for the Best. Plan for the Worst.
I still don't completely grasp the finer points except that I keep making the same mistake and that is not measuring the Risk before I buy short dated options on SPX.
Granted when you hit a short dated Out of the Money (OTM) options (referred to sometimes as Lottos) the rewards are amazing, but the risk you take holding them is much higher.
You have a better chance going to a casino and betting it all on Black or White.
Then there are Short Leveraged ETFs like SPXU.
These are great equities/derivative to use Margin with on in a Carry Trade.
My broker labels it as a Married Put and what it essentially lets you do is apply the premium of the In the Money (ITM) PUT you buy as your risk of the underlying going down (which is natural for short leveraged etfs) so they will lend you shares.
You can then safely leverage up as much PUT premium as you can afford to risk.
In the case of a market correction like what happened in Mar20, your reward would pay x 15k to 20k times your maximum risk.
To put that in perspective, using 31k in put premium for the next 4 months (max risk 11k at SPXU $15) you would borrow 130k from your broker (10k shares of SPXU).
The payout at SPXU $210 (march 2020 correction) would pay you out ~2 million dollars.
Now is about the only time the margin interest will be low enough. When the Fed finally raises interest rates, the cost of borrowing 130k for 4 months would be significantly more.
You can also write weekly/monthly Calls on some of your SPXU shares to cover the margin/premium cost and maybe even generate income.
Just look at the volume average (white dots) increasing as we get closer to the inevitable rate hike the fed must do.
Definitely Not Financial Advice. I'm a Meat Popsicle.
As always, Hope for the Best. Plan for the Worst.
Related publications
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.