order of leverage?

Discussion in 'Trading' started by z32000, Aug 17, 2007.

  1. z32000


    I'm trying to figure out in what order has the highest to lowest leverage?

    can anyone please put this in order? thanks

    ES futures
    ES options
    SPX options
    SPY options

  2. Not really clear-cut IMO because leverage in options involves the strike price and its distance to the underlying.

    The underlying instruments themselves though, should go in this order

  3. Out-of-the-money call options can produce the most leverage. Futures are more valuable for their liquidity.
  4. z32000


    I'm a little confused...

    so if ES futures is worth $50 for 1 point...

    are you are saying with options, it's possible to get not only $50 for 1 point, but even more?
  5. (1) With futures, your leverage is the reciprocal of the margin percentage, i.e. a 5% margin, (1/20), means you have "twenty times", (20/1), leverage. (2) With call-options, I compare the strike price to the option premium. With out-of-the-money call-options, the strike price (numerator) gets larger while the option premium (denominator) gets smaller. You have a progressively smaller amount of money, the premium, controlling a larger amount of contract value, the strike price.
  6. What you are comparing is really apples to oranges.

    Margin in the sense of the word, is different in futures than it is in equities.

    Futures are like good-faith deposits, the margin rate is dependent on the contract. For example let's say I go long a contract that has a $500 margin, and every point in the contract is worth $100. On my $500 deposit, every point higher gives me $100 but I can only stay in for a 5-pt move against me before I am cleaned out and forced to put up more margin. Margin in this instance is calculated to be the ratio of the cost of the overall contract to your deposit on that contract. The amount of maximum leverage available all depends on the particular contract you are trading. You could be getting 20:1 or much, much higher.

    In equities the margin rate represents how much money you need to purchase the underlying equities. For example, the standard 50% (2:1) overnight margin rate means that I can buy twice the amount of equity my account is actually worth.

    Options usually increase the leverage of any the underlying, so options on futures are extremely leveraged. However the amount of leverage you obtain is not really clear cut because there is no straight-forward margin rate as there is in futures. Out--the-money options always provide more leverage than in-the-money options at the expense of the risk of expiring worthless. A very deep ITM option could mirror the underlying one to one, since the delta would be about 1. An OTM option has a delta much less and so doesn't mirror the underlying, but has more potential to increase at exponential rates, capable of producing 300%+ returns at the risk of a 100% loss.
  7. z32000


    yes but specifically for the S&P and it's derivatives...

    without considering margin calls...

    with ES, it's always going to be $50 per point...

    when speaking of options sometimes trading at 1 to 1.... does this mean that at times there is a small chance that option can come as close to trading the equal amount of leverage as futures which is $50 per point though only when you choose the right target price


    is it even possible and likely that the leverage in S&P options can normally beat $50 a point (if you select the correct target price of course)

    for example, the market price is currently $100.... if i truely believe that price will eventually go to $120... without considering margin calls or spreads.... would I make more if I purchased a $120 call or if the futures price was $100 right now, should I buy it and then sell at $120?