High Leverage Options playing on interest rate sensitive securities

B

bcavender

I subscribe to a newsletter flogging a very expensive options sub-service that suggests:

" Right now, with some of the options we are eyeing, costing as little as $50 to $100, you can potentially control $1 million worth of interest-sensitive securities. That’s the equivalent of 10,000-to-1 leverage!"

I've primarily traded stocks...so help me out here...

What kind of option vehicle(s) can do this....or is he full of it?

Thanks!
 
They are probably are talking about some sort of swap options (swaptions) or eurodollar futures options - i would have to read more to explain more. There's an apparent little lie there:
"1M worth" - 1M is probably a notional amount rather then the real principal - that means that you will be getting interest of 1M, like you would on a eurodollar future.
 
Quote from bcavender:

I subscribe to a newsletter flogging a very expensive options sub-service that suggests:

" Right now, with some of the options we are eyeing, costing as little as $50 to $100, you can potentially control $1 million worth of interest-sensitive securities. That’s the equivalent of 10,000-to-1 leverage!"

I've primarily traded stocks...so help me out here...

What kind of option vehicle(s) can do this....or is he full of it?

Thanks!
More...


Options are available for Fixed income ETF's :

iSHARES Trust : TLT, IEF, SHY, AND LQD

TLT, eg., is a 20+ year Note Trust
LQD is for corporate bonds
etc.
 
for the money they charge, they better be providing proper trade management right up front on every single trade - that means proper entry and stop loss reco's

but... if you are already comfortable trading stocks, electronically traded funds (ETF'S) trade just like stocks...available everywhere - ameritrade, IB, etc.
 
On being careful....I couldn't agree more.

Some people equate big costs to high quality. I've just not seen the kind of quality in their stock recommendations with a cheap newsletter. It's hard to extrapolate that this would be any better.

My aim here is to determine if there is a vehicle that carries the megaleverage they claim and learn enough about it to see if it is a sensible addition to my investing plans.

I appreciate your information!
 
Just a quick comment. I know their are a few who will disagree, but for the retail trader, using "big" leverage is bad policy. Why?
1. Retail traders don't seem to understand that these instruments can change value without trading.
2. Retail traders don't seem to know how to put on an appropriate hedge (partly because they don't know how to determine the "hedge ratio"), and because they don't understand about "contra-party risk". Its possible for instance to get "nothing done", or "no bid" in response to an order to sell (to close) a position. After you re-gain your composure and re-submit the order, guess what kind of fill you get?
3. For those that think they have it solved and are using VAR, you are in for an unpleasant surprise, because of the non-linear relationship between the greeks, VAR does not accurately describe true value at risk.
Anyway I would advise anybody thinking of trying to max out volatility on a single position or portfolio to re-consider. Thanks steve46
 
Quote from bcavender:

I subscribe to a newsletter flogging a very expensive options sub-service that suggests:

" Right now, with some of the options we are eyeing, costing as little as $50 to $100, you can potentially control $1 million worth of interest-sensitive securities. That’s the equivalent of 10,000-to-1 leverage!"

I've primarily traded stocks...so help me out here...

What kind of option vehicle(s) can do this....or is he full of it?

Thanks!
More...

could it simply very low delta/cheap OTM calls? would need to know more to have a meaningful discussion. e.g. you can buy this lottery ticket for $1 and potentially win $100 million tomorrow - talk about some nice leverage:D
 
learn about those ETF's - they directly reflect changes in interest rates of various terms - ETF's have option chains

do the math - out of the money options control huge amounts of money for very little cost - that is where you get those huge leverage percentages - there is less leverage at the money - to profit with the higher levels of leverage, you need a big move in the market to profit with out of the money options - that is the hitch - are those people right in their market bias???? The bait with out of the money is the small cost, but if the option doesn't move, it is a loss of the premium paid
 
You guys make a lot of sense...(I especially like the lottery ticket analogue...we should all be so fortunate like the state to setup a system where the expected value of each ticket puts 50% of all transactions in the state's pocket.

Here is another quote from this flogger that might offer more insight:
...............................
Just recently, a bond option was trading for $578. Interest rates started to jump, and these bonds fell a modest 1.6%. But the option surged 113.5%! A $2,312 investment in these bond options would have surged in value to $3,436. Before commissions, that would be 113% in gains -- all in just 2 days!

A second interest-rate option jumped 157% -- this time, in under 2 weeks. That's enough to turn a modest $3,000 investment into $7,710.

A third, more aggressive option did even better. This option was trading for $172, and then, bonds dropped (interest rates rose) a modest 1.5% overnight. The next day, these same options fetched as much as $515 each. That's 200% -- in 1 day!
................................

I know anything that sounds too good to be true probably is....but I try to keep an open mind. Never can tell what will come up.

Regards.....
 
Quote from steve46:

Just a quick comment. I know their are a few who will disagree, but for the retail trader, using "big" leverage is bad policy. Why?
1. Retail traders don't seem to understand that these instruments can change value without trading.
2. Retail traders don't seem to know how to put on an appropriate hedge (partly because they don't know how to determine the "hedge ratio"), and because they don't understand about "contra-party risk". Its possible for instance to get "nothing done", or "no bid" in response to an order to sell (to close) a position. After you re-gain your composure and re-submit the order, guess what kind of fill you get?
3. For those that think they have it solved and are using VAR, you are in for an unpleasant surprise, because of the non-linear relationship between the greeks, VAR does not accurately describe true value at risk.
Anyway I would advise anybody thinking of trying to max out volatility on a single position or portfolio to re-consider. Thanks steve46
More...

Ditto in spades, especially with respect to VAR and greeks.
 
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