How to use your margin with low risk?

J

john7722

Hello,

I have access to margin with IB with a pretty good rate.
I would like to know if there is a relatively safe way to use margin without exposing yourself to huge market swings.

I was thinking about selling puts and once assigned , selling covered calls on relatively stable stocks maybe a group of 5 stocks like WMT,INTC,MCD,KO,VZ while also getting some dividends.

My other strategy is selling covered calls on more volatile stocks or ETF's but also buying a protective put with 2y exp date.

I would be happy with 5% annual return on my margin


Thank you for your ideas and comments.
 
Although your answer is correct I don't like it because you assume that the poster knows the term tail protection. This is not the first time you have used jargon which is unfamiliar to most traders inc. options traders. If you are inclined to use jargon explain it. This is not an easy concept to practice.
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Find high sharpe trades and lever up. For example, if you think Ford will outperform GM, go long F / short GM using a beta ratio to set $ exposure (if Ford beta is 2 and GM beta is 1, you need 2x GM shorts to manage your Ford beta).
 
Tradex said:
Why do you want to make half the average yearly return of the S&P 500?
More...

I would be ok with consistent 5% return on borrowed money , with much lower volatility then sp500.
I don't have a stomach for a huge drop with borrowed money.

I am not smart enough to day trade and I have had mixed results with trend following and swing trading.
My best returns were always from buy and hold but that strategy comes also with a huge volatility.
I know that 5% annual return looks like nothing but I would take it with a strategy that eliminates huge swings in the market.

If there is a market correction in my portfolio even 50% I will be able to sleep at night but if it happens with margin funds and interest rates would go up as well I would not be able to handle it and just wait for recovery.

I was planning to use margin equal to the 1/2 of my portfolio.
If interest rates go up to then I could just close my margin positions.
 
traider said:
If you lever up 6x, 5% on margin is 30% on capital
Buy tail protection and reduce your returns so that you can sleep at night
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Thanks, I started to read about tail hedging. I have always assumed you had to buy ATM put to create a hedge against a market crash . It looks like buying even 30% OTM put works .

This is an interesting explanation but still pretty complex for a beginner if anybody is interested.
https://blog.thinknewfound.com/2020/06/tail-hedging/
 
john7722 said:
I would be ok with consistent 5% return on borrowed money , with much lower volatility then sp500.
More...

Yep, that's what I thought, you are basically looking for steady profits with minimal downside volatility.

This may sound strange but making 5% a year with 5% maximum drawdown is much, MUCH better than making 15% a year with 50% maximum drawdown!

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Why?

Because the trader can now use more leverage and compound his profits at a much faster rate, because his drawdown is 10 times smaller (in this example).

Best of luck.
 
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