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Strategies & Market Trends : Margin Calls - Share The Pain

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To: TimF who wrote (136)	12/12/2000 5:40:17 PM
From: Robert O	of 158

I think, in general, what may be happening is a concept where the 'risk' portion of say a spread is fairly small so in order to magnify the return overall leverage is needed. For example if I incorporated a strategy that was able to sell an option at one price while buying underlying stock at another and combined them in such a way that I gained a small % spread for the 'inefficiency' b/t the option price and underlying security I could have an almost (if not totally) perfectly hedged play that 'guaranteed' me small return on this 'play.' Let's say this play needed 1 million in capital only to 'knick off' say 5k in profit. That's only a 1/2% take. But now if I introduce leverage and do same play only with 9 million more I borrowed then I can pay back the borrowings plus interest which is easily overshadowed by my additional gains say 1/2% x 9 or 4.5%. In this way, the 'play' is not a big risk but adding leverage can be if the near guaranteed spread is not so guaranteed. Although compared to your hypothetical option play my scenario looks a whole lot safer. Gulp! RO

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