Leverage a dollar position?

[jco]

I've been using margin for the PP for years with great success... All 3 other components are easy to margin, but not cash. It doesn't really make sense to use margin to buy SHY and pay more interest than it will earn.

What about deep in the money calls for SHY?... What about a 2x dollar bull ETF?... Perhaps holding a USD index future contract?

Can anyone think of a way I could leverage the dollar?

[stone]

Hi, in a previous post, blackomen said that he used the dollar index ETF UUP for that:
http://gyroscopicinvesting.com/forum/ht ... 727#p21727

[clacy]

Forex can provide massive leverage. You could open several micro, mini or regular lots against several of the major currencies (Yen, Swiss Franc, Euro, Australian Dollar, British Pound, etc).

[Storm]

I've been using margin for the PP for years with great success... All 3 other components are easy to margin, but not cash. It doesn't really make sense to use margin to buy SHY and pay more interest than it will earn.

What about deep in the money calls for SHY?... What about a 2x dollar bull ETF?... Perhaps holding a USD index future contract?

Can anyone think of a way I could leverage the dollar?

What do you use for leverage?  Buying ETFs on margin?  I'm curious as to how you might handle a margin call.  It seems highly likely that you could get one on any of the 3 assets that take a big dive.

[moda0306]

Margin wouldn't be so bad if it wasn't high-interest, tax-inefficient, and bit you in the @ss as soon at the absolute worst time with a margin call.

[jco]

I have an excellent margin rate of 0.9% and I deducted this from my taxes... Over the years of observation I have become very comfortable with the use of margin in the PP and have been slowly increasing it, but still never plan to ever be near the possibility of a margin call. I suppose if 2008 x 2-4 happened I could get a margin call.

Excellent, clancy, don't know why forex didn't come first into my mind. I think small forex positions against at least several, hopefully a basket (mimic USD index) of foreign currencies might be just what I ordered.

---
I like the idea of idea of using UUP, rather than cash, during the phases where all assets are going down against the dollar (2008) it would be more profitable... But betting on the USD longterm isn't a good idea, IMO... Still when another market correction/crash seems like a strong possibility something like UUP might be a good call... UUP was up 21% in the last half of 2008, but has since gone down 20%.

Still all these options have potential for real losses, rather than just loss of purchasing power... I'm not sure there is a proper way to do this, outside of simply buying SHY on margin, which is very inefficient tax/fee wise.

Deep in the money calls for SHY is another way, but the premiums might kill any benefits.

[stone]

jco, Odysseusa on here says he too holds a PP on margin including SHY. Melvyr pointed out that it didn't seem to make sense to do that since SHY has no volatility and so you are simply paying interest to hold something that does nothing but pay back less interest.
http://gyroscopicinvesting.com/forum/ht ... ic.php?t=4

Why would you borrow money at high rates, and have investments in lower yielding bonds? It's basically the worst arbitrage ever, a guaranteed money loser.

[jco]

lol, "worst arbitrage ever" it is... Seems like the only way margin could be used effectively as a dollar position is if there was some kind of leverage, but then you have volatility.

[stone]

I think that UUP that blackomen uses does have a lot of volatility. I suppose it is the difference between the USD and other currencies that you want to leverage. I think blackomen said that UUP does tend to rise a lot on days when the PP as a whole falls. He thought that would save him from risking a bad loss which I suppose is what a leverage portfolio always needs to hedge against.

For myself, I just want to keep savings safe so I'm not tempted.

[moda0306]

I have an excellent margin rate of 0.9% and I deducted this from my taxes... Over the years of observation I have become very comfortable with the use of margin in the PP and have been slowly increasing it, but still never plan to ever be near the possibility of a margin call. I suppose if 2008 x 2-4 happened I could get a margin call.

WTF... are margin rates usually this low?  I thought they were usually betwee 4% and 7%.

[escafandro]

I am really thinking about replacing SHY by UUP.
The PP seems to generally down when Gold was also down.
UUP has an inverse correlation to gold, so it can be a good ETF if the Gold begins to lose ground later. But still fails to balance the losses like they do the couple VTI-TLT, because UUP is less volatile than the Gold

[blackomen]

Right now, I play the leveraged portion of my PP as a short to medium term trade..  (about 20-50% of my equity, can consider this as my Variable Portfolio.)  I track the PP performance in Excel and if it's down from the all-time highs by a certain amount, then I'll add in a leveraged portion.  Btw, my PP is 25/25/25/25 SPY/GLD/TLT/UUP.

I'll wait 5 weeks before deciding to take off the leveraged portion (5 weeks to ensure enough time has passed so I won't get a wash sale.)  If that portion has made money after accounting for margin interest, then I'll take it off.  If not then I'll just periodically pay back the margin loan using a portion of my monthly paychecks.)

Every time I lever and delever, I reset my weights to 4x 25%.

My IRA, which can't be levered, uses SHY instead of UUP.

[jco]

There are 3x ETFs for USD now: UUPT (bull) UDNT (bear). But to go long you will have value eroded by time decay. You could short the bear, but that could get ugly.

[Gosso]

Right now, I play the leveraged portion of my PP as a short to medium term trade..  (about 20-50% of my equity, can consider this as my Variable Portfolio.)  I track the PP performance in Excel and if it's down from the all-time highs by a certain amount, then I'll add in a leveraged portion.  Btw, my PP is 25/25/25/25 SPY/GLD/TLT/UUP.

I'll wait 5 weeks before deciding to take off the leveraged portion (5 weeks to ensure enough time has passed so I won't get a wash sale.)  If that portion has made money after accounting for margin interest, then I'll take it off.  If not then I'll just periodically pay back the margin loan using a portion of my monthly paychecks.)

Every time I lever and delever, I reset my weights to 4x 25%.

My IRA, which can't be levered, uses SHY instead of UUP.

Oh no, you got me thinking (never a good thing ).  I have thought about doing this in the past, but forgot about actually putting it into practise.  What is the maximum that you'll leverage your margin account?  I'm thinking no more than 20%? 

I figure I have a good feel for how the PP bounces around, and might be able to pull some more gains out of it.  Actually I'm thinking that right now might be a good time to place my bets -- here's what the pseudo Canadian PP looks like at the moment:



It looks like a coiled spring at the moment.

[blackomen]

Right now, I play the leveraged portion of my PP as a short to medium term trade..  (about 20-50% of my equity, can consider this as my Variable Portfolio.)  I track the PP performance in Excel and if it's down from the all-time highs by a certain amount, then I'll add in a leveraged portion.  Btw, my PP is 25/25/25/25 SPY/GLD/TLT/UUP.

I'll wait 5 weeks before deciding to take off the leveraged portion (5 weeks to ensure enough time has passed so I won't get a wash sale.)  If that portion has made money after accounting for margin interest, then I'll take it off.  If not then I'll just periodically pay back the margin loan using a portion of my monthly paychecks.)

Every time I lever and delever, I reset my weights to 4x 25%.

My IRA, which can't be levered, uses SHY instead of UUP.

Oh no, you got me thinking (never a good thing ).  I have thought about doing this in the past, but forgot about actually putting it into practise.  What is the maximum that you'll leverage your margin account?  I'm thinking no more than 20%?  

I figure I have a good feel for how the PP bounces around, and might be able to pull some more gains out of it.  Actually I'm thinking that right now might be a good time to place my bets -- here's what the pseudo Canadian PP looks like at the moment:



It looks like a coiled spring at the moment.

Indeed it looked like a coiled spring.  I added a 20% leveraged position around mid March..  it wasn't easy pulling the trigger when gold and treasuries were in freefall AND stocks were so overbought but I'm kinda glad I did back then (still too early to tell..  gotta wait till mid to late April to take it off.)

The triggers and corresponding leverage ratios I use are:

2.5% drawdown from all time highs: 1.2 Leverage (leverage 20% of your equity.)
5% drawdown from highs: 1.6 Leverage
10% drawdown from highs: 2.1 Leverage

The maximum drawdown for the SPY/GLD/TLT/UUP implementation was about -11% in 2008 so it'll be rare when you get to use 2.1 leverage.  Note: although stocks require 50% margin, 2.1 leverage is possible since SPY has lower margin requirements.

[jco]

very interesting, blackomen... Looks like a good idea. Have you done any backtesting to see how your system would have performed historically?

[Gosso]

Blackomen, you have me scared with the 2.1 leverage with a 10% drawdown...what if it falls another 5-10%?...then you will be dealing with margin calls and be forced to liquidate a portion of the assets right at the bottom.  IMO that is too hardcore, which could result in significant damage.

What is the maximum that the PermPort has declined from peak to trough in the past?  I don't think it is out of the realm of possibility that we could see a short-term drop of 20% in the PermPort.

[blackomen]

Blackomen, you have me scared with the 2.1 leverage with a 10% drawdown...what if it falls another 5-10%?...then you will be dealing with margin calls and be forced to liquidate a portion of the assets right at the bottom.  IMO that is too hardcore, which could result in significant damage.

What is the maximum that the PermPort has declined from peak to trough in the past?  I don't think it is out of the realm of possibility that we could see a short-term drop of 20% in the PermPort.

I think the margin requirements for SPY are high enough for you to use 2.5 leverage..  if using GLD (instead of IAU), you might get as high as 3.0 leverage.

Keep in mind the 2.1 leverage is calculated after your equity has been decimated over 10% on the way down (since you were leveraging at -2.5% and -5.0%), not calculated based on your cost base.

Or you can use the 2-3x leveraged ETFs if you don't want to deal with a margin call and can accept a little tracking error.

[Gosso]

Blackomen, you have me scared with the 2.1 leverage with a 10% drawdown...what if it falls another 5-10%?...then you will be dealing with margin calls and be forced to liquidate a portion of the assets right at the bottom.  IMO that is too hardcore, which could result in significant damage.

What is the maximum that the PermPort has declined from peak to trough in the past?  I don't think it is out of the realm of possibility that we could see a short-term drop of 20% in the PermPort.

I think the margin requirements for SPY are high enough for you to use 2.5 leverage..  if using GLD (instead of IAU), you might get as high as 3.0 leverage.

Keep in mind the 2.1 leverage is calculated after your equity has been decimated over 10% on the way down (since you were leveraging at -2.5% and -5.0%), not calculated based on your cost base.

Or you can use the 2-3x leveraged ETFs if you don't want to deal with a margin call and can accept a little tracking error.

Well it seems you have bigger plums than I do.   I wish you luck.

I have managed to talk myself out of using leverage after looking at a pseudo 10 year chart of the Canadian PermPort.  There appear to be several times when the portfolio will drop 2.5-5% and then won't recovery until after six months.  I'd hate to be sitting on leverage during that period.  I figure in the end the good bets would be countered by the bad bets, and I'll end up with a wash. 

[jco]

Or you can use the 2-3x leveraged ETFs if you don't want to deal with a margin call and can accept a little tracking error.

Holding long 3x ETFs (maybe even 2x) is not a good idea... Value will decay based on the reset to 0 calculations performed daily... Shorting the 2,3,4x can be a good idea but your risk is unlimited and if they move in one direction without break, you are likely in for a healthy amount of unpleasantness.

[blackomen]

Blackomen, you have me scared with the 2.1 leverage with a 10% drawdown...what if it falls another 5-10%?...then you will be dealing with margin calls and be forced to liquidate a portion of the assets right at the bottom.  IMO that is too hardcore, which could result in significant damage.

What is the maximum that the PermPort has declined from peak to trough in the past?  I don't think it is out of the realm of possibility that we could see a short-term drop of 20% in the PermPort.

I think the margin requirements for SPY are high enough for you to use 2.5 leverage..  if using GLD (instead of IAU), you might get as high as 3.0 leverage.

Keep in mind the 2.1 leverage is calculated after your equity has been decimated over 10% on the way down (since you were leveraging at -2.5% and -5.0%), not calculated based on your cost base.

Or you can use the 2-3x leveraged ETFs if you don't want to deal with a margin call and can accept a little tracking error.

Well it seems you have bigger plums than I do.   I wish you luck.

I have managed to talk myself out of using leverage after looking at a pseudo 10 year chart of the Canadian PermPort.  There appear to be several times when the portfolio will drop 2.5-5% and then won't recovery until after six months.  I'd hate to be sitting on leverage during that period.  I figure in the end the good bets would be countered by the bad bets, and I'll end up with a wash. 

I'm in the process of backtesting a more efficient system than simply buying on an X% pullback of the PP..  one using the RSI overbought/oversold indicator.  I'm thinking along the lines of finding the avg RSI of the PP's 4 components (UUP in lieu of SHY)..  maybe if this value is, say, more than 2 sigmas below the long-term average, it's time to leverage.  Haven't tested it out so use at your own risk.

The 20-60% leverage is used whenever I see a buying opportunity.  It's basically borrowing money from my broker which I'll pay back by funding my account with my next few paychecks.

Or you can use the 2-3x leveraged ETFs if you don't want to deal with a margin call and can accept a little tracking error.

Holding long 3x ETFs (maybe even 2x) is not a good idea... Value will decay based on the reset to 0 calculations performed daily... Shorting the 2,3,4x can be a good idea but your risk is unlimited and if they move in one direction without break, you are likely in for a healthy amount of unpleasantness.

I've not tried the 3x ETFs but the 2x don't seem to have too much tracking error over the timespan of about 1 year..  and the tracking error can be negated by rebalancing a little more frequently (say every quarter)..  at least that's what it seems from my backtesting.

[Gosso]

I'm in the process of backtesting a more efficient system than simply buying on an X% pullback of the PP..  one using the RSI overbought/oversold indicator.  I'm thinking along the lines of finding the avg RSI of the PP's 4 components (UUP in lieu of SHY)..  maybe if this value is, say, more than 2 sigmas below the long-term average, it's time to leverage.  Haven't tested it out so use at your own risk.

The 20-60% leverage is used whenever I see a buying opportunity.  It's basically borrowing money from my broker which I'll pay back by funding my account with my next few paychecks.

I doubt I can talk you out of it...but a picture is worth a thousand words:

[Odysseusa]

jco, Odysseusa on here says he too holds a PP on margin including SHY. Melvyr pointed out that it didn't seem to make sense to do that since SHY has no volatility and so you are simply paying interest to hold something that does nothing but pay back less interest.
http://gyroscopicinvesting.com/forum/ht ... ic.php?t=4

Why would you borrow money at high rates, and have investments in lower yielding bonds? It's basically the worst arbitrage ever, a guaranteed money loser.

Yes, I hold SHY using margin and please see the snapshot below for more information.