May 6, 20193m
#591 - Everything Is Leveraged
May 6 '193m
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Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be talking about why everything is leveraged. This actually comes up from a discussion I was having with somebody the other day and they basically said, “Look, Kirk. I don’t want to invest in anything that has to do with margin.” And I was talking about how when you trade with options, sometimes depending on the account that you have, you have to put up margin. Not that you have to borrow a margin, but you have to put up margin to cover potential losses on positions and that’s how brokers allow you to then trade a leveraged product like options, is you have to put up margin. And they basically said, “Look. I don’t want to ever, ever, ever trade anything with leverage. I don’t believe in it. I don’t want to do it. I just want to invest in regular stocks and the stock market industries.” And I told them and I said, “Look. Everything is leveraged.” Even your regular traditional investment in any stock mostly or any index for sure has leveraged components into it because even stocks have leverage. Companies borrow with their capital and then invest potentially or hopefully in plant, people, equipment, other product lines, etcetera or they borrow money and pay back and repurchase their stock. And so, if you think that you’re investing in just equity or just an index because it’s a stock or it says equity, that it doesn’t have leverage, then you are grossly underestimating how many things have leverage.

And so, this is really again, I would say like a public service announcement almost. Everything that you see out there in the investing world probably has some sort of leverage tied into it. The end result here is that leverage is never bad if it’s used in moderation. It’s the same thing that goes in personal finance. It’s not bad to borrow money to get into an investment, but you shouldn’t borrow all of the money needed to get into an investment, right? You should have a little skin in the game. You should use leverage in moderation. And so, when it comes to options trading, because options trading is a leveraged product, you are trading a leveraged trading instrument that’s a derivative of the underlying security, you should be using it in moderation. And it doesn’t mean that it’s bad, it doesn’t mean that you’re a bad person and it doesn’t mean that it breaks into your belief system, but regardless, everything has leverage, so the choice is now – What do you want to trade that gives you the highest possible probability of success with the least amount of risk and the most control? And ultimately, I think that’s options trading. Hopefully this helps out. As always, if you have any questions, let me know and until next time, happy trading.

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