Yeah, that sucked. During this time, PM requirements on even large cap equities went from 6x to 1.5-2x. As such, I wouldn’t think anything more than 1.5x in a drawdown is something you could count on, not that you can count on anything for sure. If you have a long portfolio with high margin, maybe consider some index OOTM puts so you make enough you can afford to delever (or won’t need to) if the market crashes 20% or something and they jack requirements.
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Portfolio maintenance margin over the years
- Thread starter ZoomerInvestor
- Start date
So clearly I was wildly off with my initial passive leverage ratios. Does 1.5x initial leverage make sense or do you really need to get even lower such as 1.2x to mostly set it and forget it?
So clearly I was wildly off with my initial passive leverage ratios. Does 1.5x initial leverage make sense or do you really need to get even lower such as 1.2x to mostly set it and forget it?
Again, there is no set and forget with leverage. Your leverage ratio will change as your equity fluctuates. Even 1.5x leverage will put you over 2x on a 35% decline and over 3x if index DD ever approaches 50%+. At some point you will be way overleveraged in a chaotic market trying to decide how long you're going to hold out and hope for some mean reversion.
That's why you're getting answers really close to 1x for passive longs. This thought experiment is more of a bet on max decline over your holding period than anything; complicated further by unknown margin reqs during drawdown. If you get either parameter wrong when calculating how much leverage to use you will be penalized at the worst possible time for it.
Yes, taking the historical perspective into account is quite helpful. Your strategy does make sense, did you test it?
you can also short the spx index and buy the 500 stocks and lever it up 100x and to make a small spread with massive leverage.
In fixed income they do this all the time.
What matters with leverage is the basis of the instruments you are trading. The more correlated they are the more leverage you can take with less risk.