Why Not Use Margin?

[Corso482]

Quote from harrytrader:

I doubt by probability law that all of a sudden one day you can't wake up to find your entire acct. down more than 50% .

By dividing your account into 10ths for each position, and assuming that you are holding a "full load," every one of your 10 positions would have to gap down 50% in order for your entire account to lose 50% in one day.

What event would cause 10 positions of liquid stocks to gap down 50% all at once? Even another 9/11 or dirty bomb on Wall Street wouldn't cause that to happen.

I think that odds of it happening are negligible.

 

[Pabst]

Quote from a_ooiioo_a hii:

Guess what. Single Stock Futures give you 5:1 margin, and there's no margin interest on it! Links are in my signature.

With 5:1 margin, you can comfortably trade 2:1 your account size, with no margin call problem. Even 3:1 will be ok just about all the time if you're doing ok trading.

There's imbedded margin interest. Ever here of a phrase "premium to the underlying".

 

[a_ooiioo_a hii]

Well that's factored into the price, isn't it.

But the point is, if you buy a SSF at $30, and sell it at $31.02 (if your commission is $1 per contract), your profit will be exactly $100, regardless how long you held it, your account won't be charged any other interest fees to calculate.

 

[Pabst]

I'm not dissing SSF's. I am a fan of leverage. BUT whether you buy stock on margin and see them debiting your account for the juice, or if you buy futures and pay a premium over the underlying (unless the underlying equity has a dividend greater than the broker loan rate) your still paying interest!

 

[OPTIONAL777]

Quote from harrytrader:

I doubt by probability law that all of a sudden one day you can't wake up to find your entire acct. down more than 50% .

What exactly was the probabilty of commercial air liners flying into the 2 trade towers, and the Pentagon?

I would think a paranoid fellow like you would be more risk averse.

 

[Pabst]

Quote from a_ooiioo_a hii:

If you use your $10,000 to buy $10,000 worth of stock, you would still be able to make another $10,000 worth of purchases. If you bought $10,000 worth of stock, and it dropped in value 50%, you would still be able to buy another $5,000 worth of stock. In fact, if your stock dropped in half, you could buy $5,000 more (double your position) and if it went back to where you first bought it you would have doubled your money to $20,000.

In the above scenario your return would be 50% not 100%.

i.e. Buy 1000 shares @ $10.00
Buy 1000 shares @ $5.00
Sell 2000 shares @ $10.00
Total profit $5000 on a $10,000 account.

 

[FishSauce]

Why dont you just use options?


You control the same amount of notional value with less capital PLUS less risk - assuming of course that you dont put it all in one basket.

You have to pay the premium obviously, but that's the price of leverage.

 

[swoop[TR]]

hmmmm, no offense but if you lose 50% on your positions you are COMPLETELY wiped out. If you lose 25%, you are down 50% on your capital.
When are you going to stop trading? When your account reaches zero?
Depending on your trading strategy, if your drawdown is expected to be 15%, that means you're willing to lose 30% on a drawdown. I mean obviously it works both ways but when you hit the black swan, you really take it hard. Using margin is the same as taking a loan out to trade, if you are sure you want to risk it, then go ahead.

 

[maxpi]

Quote from Corso482:



Not really trying to get people to dissaude me. I just want a better understanding of it.

Essentially, what margin does is amplifies your gain or loss by the same amount. If you use 100% margin your gain or loss will be doubled. The real scary problem is in the fact that it then also allows you to incur a maximum loss that is more than your original capital. You could lose your original investment and still owe the broker money. In that case you should have some money sidelined in order to pay off the debt and start over, which is silly, you could have just used that same money in the first place and never used margin. Then when you lost it all you could borrow the money to start over instead of using your own money. The moral is to never use margin until you are broke, but then you can't have a margin account.

Max

 

[a_ooiioo_a hii]

Never use full margin. A little margin as an overdraft protection is no problem.

Probably half of your available leverage is a good general maximum (and used infrequently). So with 2:1 stock margin, using 50% margin should be about your limit (instead of 100%).

With 5:1 SSF margin, half of the available extra 4:1 leverage would be 200%. So 3:1 margin would be a good maximum there.

The problem with options, as well as with using high leverage, is that your timing must be perfect. And also with 4:1 daytrader stock margin, since that's only available during market hours, your timing must be perfect.