Recently an investor posted a question wondering if I had any ideas on how to leverage his account to increase the amount of capital he can invest to meet his goal of a bigger monthly income. Here is his question:

Investor Leveraging Account Question

“I have been selling puts and calls, making on average 2% per month, but I would love to leverage my efforts and make this return in a bigger account…(I’m 35, and my account has a little more than $200,000 and I will be very happy with a monthly income of $20,000 from trading)

Can you give me some advise on ways that I can leverage my account?
(Borrow money, manage other people money, etc…)

I really appreciate your help and your experience is valuable.”

Arik


Ways To Leverage An Account

There are many ways to leverage an account. Right now Arik has $200,000 which if he can earn 24% annually which is what he seems to be doing, will mean an income of $48,000 for the year. To earn $20,000 a month will require a lot more capital. Right now my US Portfolio has earned about $314,000 which works out to $26,000 a month. To make this I have invested $850,000 of capital and I am using very little margin. Arik’s goal should be to reach a capital base of roughly $500,000.

Here is what I suggest:

The Power Of Margin

The most powerful way to get Arik’s account booming is borrowing against your account or the use of leverage. An account of $200,000 depending on what you are holding should be marginable to around $140,000. If you are doing primarily Put Selling and have most of your capital in cash to support your Put Selling your marginable amount will be somewhat higher as cash has a high loan value rate. Remember though that when you sell puts you use up your margin and it will fluctuate with the value of the stock. Speak with your broker to find out which stocks are going to provide you with the highest rate of margin. Penny stocks will definitely not provide margin.

No Interest Is Being Paid On Margin Use

For Put Selling, you never pay a dime on your margin use until you have to actually use it to cover assigned stock. That means you can do Put Selling without any interest charges. This is a fantastic way to invest. You earn income from your margin and never pay interest on that margin.

Boosting Margin Even More

To boost your margin even more, close put trades early when you have earned perhaps 75% to 80% of the value. This immediately puts cash back into your account and will boost your margin. By holding open puts for weeks that are basically going to earn you 10 cents or even less, you are tying up your margin which must still be used to secure the naked puts. Instead look at this fictitious trade:

With ABC Stock trading at $50.00 our investor does the following

Sell To Open 10 ABC Stock naked puts at $48 for Oct 19 2013 options expiry for $.70 cents. By Oct 4 with ABC Stock trading at $53.70 the $48 put strikes can be bought back and closed for .10 cents. Total return on the trade is .60 cents. There are two weeks to October 19 options expiry. Another put can be sold on DEF Stock which is trading at $35. Our investor could sell 14 naked puts on this stock at $33.00 for .45 cents for November 15 expiry but all the margin is now in use. Is it worth holding the Oct 4 trade on ABC stock right until Oct 19 for .10 cents or is it better to buy and close the trade and sell puts against DEF Stock instead?

Having made 86% of the return it is far better to close the trade, release the margin and do the next trade. By continuously closing when 75% to 80% of the profit has been made on a trade, our investor is immediately making his margin available again for more trades which means building the account quicker. Perhaps in the above example the Put Selling against DEF Stock ends up with the $33 naked puts trading for .10 cents by Oct 23 or 24. This means the profit is made and another trade can be entered, often within November again. This form of double dipping within the same month with Put Selling means that your margin is working hard and generating significant returns.

Think Capital Earned All The Time

Arik indicated that he has earned about 2% each month on $200,000. If Arik used margin of an additional $140,000 he would boost his income by $2800.00 more each month. Arik should think about his profits as capital earned, all the time. Instead of thinking profit, think capital. Each month that his $200,000 plus $140,000 are earning 2% he is adding an extra $4,000 from the $200,000 PLUS $2800 from the $140,000 of margin which each month compounds PLUS his margin will also increase. This means don’t think about the profit being earned but instead think about growing your capital with the profit. Each month Arik is earning more capital, not just profit and he is increasing his marginable amount, monthly.

Think About The Future

Once Arik understands the use of margin and thinking capital not profit, he realizes that each month he is ballooning his account. Within about 4 years he should be able to grow his $200,000 to about $500,000 of capital as long as he is constantly using margin and earns 2% monthly. By the time he has reached $500,000 Arik will be able to have about $350,000 in margin. At 2% on $850,000 this works out to $17,000 a month. By the end of that year Arik can be earning $20,000 a month.

Other Methods To Leverage His Account

A) Other methods can be applied but a lot depends on your circumstances and level of comfort. Borrowing against your home for investing makes sense in both the United States and Canada as your interest payments are tax-deductible. You should talk to an accountant, which I am not, to learn more about this type of borrowing.

B) A second mortgage is another way to leverage your account and as long as all the mortgage funds are used for investing purposes, my understanding is this too is tax-deductible.

C) Borrowing against other assets. Besides your home many people have other assets. Everything from stamps to art to collectibles to boats, cars, trailers, cottages, electronic equipment, jewellery and even pets can be borrowed against. Once again you need to speak with an accountant and none of this should be entered into lightly. Consider all the consequences of what you are doing and if married discuss everything with your spouse. Remember they may want an agreement of some kind to protect them in the event that you default, lose all your capital or separate or divorce. Borrowing can get messy so again an accountant should be consulted.

D) I use to set up a weekly investment that every Friday night I would transfer whatever I could into my investment portfolio. This also meant that every Friday even if all I could put in was $100.00 would boost my margin by about $60.00 by Monday. If all I could do was put aside $100 a week for a year it still meant another $5200 plus about $3600 in margin. Over a period of 5 years this means another $25,000 in capital and $18,000 in margin is available.

E) Borrowing from friends or family members I will leave alone. This is a personal choice. Warren Buffett started by borrowing from friends and family. Many investors do. You need to be comfortable doing this and confident you will not only repay them but someday they will earn more than what they loaned to you.

F) Last think about all the small things you spend money on. Everything from coffee to donuts to dining out. Every time you consider buying a coffee put that money in a jar instead. Then by the end of a month figure out how much you have saved. Dining out is a huge expense which people do three times or more a week. Consider cutting back on dining out. There are many ways to save your money for investing.

Leveraging Your Account Summation

Protecting your invested capital from loss is as important as earning your 2% a month. Every effort should be made to learn strategies to protect your capital. Few of us have an inheritance we can rely upon for our investing. Instead most of us work and save. Borrowing through the use of margin, especially for Put Selling is one of the best and biggest ways to grow your account quickly. Just remember that I am not a financial planner, nor a tax expert or an accountant. I am just an investor who saved pennies and turned them into dollars. These ideas are just that, my ideas only so consult with tax experts, accountants, lawyers or whomever you think is best for your situation. In the end it comes down to comfort level and I don’t believe anyone should go beyond their comfort zones. While having money is wonderful your health and those of loved ones around you is by far more important.

Thanks for your question and I hope this helps you out. You are on the right track Arik, by having set a goal. Now it is figuring out how to reach the goal. It will not happen overnight, unless you come into a large sum of money.  At 35 years of age you have plenty of time to reach your goal. Good luck!

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