Hi everyone, if you want to use leverage in the stock market, which would you choose? Long calls? or margin? I'm talking about leverage in the context of position trading where your trades typically last 3+ months. Thanks
Depends on how you fund. Long calls is not the same as long stock. Long calls regardless of your leverage intent is a view on volatility (if the stock will move a lot you will do better than being long stock and if it doesn't you won't). The right comparison is long stock or long a conversion (long call and short put).
If you're on margin and the market makes a big move against your position, you can get hurt REALLY badly! If you're long options instead, worst case is loss of your premium.
Probably trivial, but borrowing would be cheaper with deep in the money options and you get an extraordinarily cheap put option with it (although useless in almost all scenarios).
There is no loss of premium with the options. You are buying deep ITM calls instead of buying stock and using margin. The risk is almost the same.
If you use options you can buy the synthetic (forward). If you have portfolio margin, you get more leverage (mostly for shorts/beta). There's leveraged ETFs. Also, take positions long/short in leveraged ETFs. There you get exposure to a hugely levered differential. Alternatively, you can trade futures and futures spreads. Long short ES/YM (1:1), and ES/NQ in a 2:1 ratio are both synthetic indexes. The leverage is insane. Consider the gross exposure.
Personally, I use vertical spreads for any position I choose to use options on if I'm expecting to hold more than a day. I still use tight stops and if stopped out, I will either wait for reentry or roll. If bearish on the general market, I'll buy a 45/30 or so delta bear debit spread in NQ with expiration on the second Friday from current date. If I'm bullish overall, I'll buy 50ish/25ish bull credit spread in active, higher priced single names with expiration on the forth Friday from current date. If, or when I hedge my bull spreads, I will do so either with ES bear spreads (Rather than NQ) as listed in the first paragraph to manage overnight exposure. To manage my intraday long exposure, I will buy puts that expire on the nearest Friday or sooner. Naturally, exceptions exist based on volatility term structure and other factors. The are a lot of "Whys" to the above, but the best I can tell you is for you to figure out your own "Whys" and answer them when developing a cohesive trading plan. Compare probability of profit and return on capital of various structures under a variety price, volatility, and remaining time scenarios. As a start. Some of your fellow traders do... One can get great leverage at favorable "terms" using vertical spreads. What keeps me interested is the potential improved reward to risk based upon the way I trade.