The Ultimate Leverage Investment Thread

[DcifrThs]

[ QUOTE ]
As a quick follow up:

You put up $1,800 in margin per BP Future (which is $1,800 for every 62,500 Pounds according to the contract specs).

You put up $350 in margin for every US Libor contract (which is a $3,000,000 deposit with 1 month to maturity).

I don't know about the UK Libor Swaps.

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Here is the trade i just wrote up:

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There seems to be a mispricing in the Libor USD/GBP markets. Specifically, the 3mo USD Libor 3mo forward and the 3mo GBP Libor 3mo forward quotes are not consistent with the rates implied by the USD/GBP currency futures. In turn, you can achieve positive returns with an extremely small risk (close to, but not quite, arbitrage) via the following methodology:



1) Short the USD Libor futures for December, January, and February at a 3mo compound rate of 1.127% (equivalent to an average 3mo futures price of 95.4158)

2) Lock in USD/GBP December 3mo Futures at $2.0458/GBP to buy pounds at that rate

a. Lock in return USD/GBP March Futures at $2.0395/GBP to sell pounds at that rate

3) Long the GBP Libor futures for December, January, and February at a 3mo compound rate of 1.512% (equivalent to an average 3mo futures price of 93.8132)

4) (here is the risky part) Use delivered interest payments in GBP to pay the deliverable interest payments in USD for the December, January, and February commitments from 1) above (or, simply reinvest the GBP interest payments you receive and pay the USD deliverable interest payments out of your own pocket).



Assuming exchange rates stay exactly constant (big assumption, and therein lies the risk though it is partially hedged), you would earn $759.7876 per $1million invested. That seems like a tiny 7.5979 quarterly basis point return (30.43 compounded annual basis point return), however, you don’t have to put up the $1million. Instead, you only have to post the margin on the contracts listed above ($350 margin for each USD Libor contract, $1800 margin per GBP futures contract and I can’t find the GBP Libor contract’s margin). So in terms of return on capital invested, it is attractive.



Now, obviously, I could be missing something (i.e. the liquidity might not be there or some other considerations), however, I think the trade is definitely worth considering.

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Barron

[CrushinFelt]

I'm confused as to why #4 is risky. Payments are guaranteed and yuo've locked in the rates.

[DcifrThs]

[ QUOTE ]
I'm confused as to why #4 is risky. Payments are guaranteed and yuo've locked in the rates.

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because you've agree to 1) buy pounds on December 1st and 2) sell pounds on march 1st

but you receive interest payments from the libor contract at the end (or beginning) or each month december, january, and february.

so you have to either 1) move your receipts from GBP to USD during the time to pay the USD libor payments (risky b/c the rates can jump all over the place between december and march) OR 2) pay the USD interest payments out of your own pocket and reinvest the GBP interest payments to move back via the futures contract on march 2008.

so either way you incur some small risk because you can't 100% lock in every single step at this moment.

at least that is how i've understood this transaction. let me know if i've missed something ehre.

thanks,
Barron

[john kane]

thoughts on this much appreciated. i feel this could be the final structure of it. what ive done so far is also noted at the end.

here it is:

Savings: 42%

Leveraged Investments: 31% comprising of

Commodities 17.5%: comprising of:
Gold: 10%. 13% stop loss
Gold fund: 2.5%. 20% stop loss
Silver: 2.5%. 15% stop loss
Oil: 2.5%. 20% stop loss

Currency 7.5%:
CNY/USD: 4.5%. stop loss at 8%
JPY/GBD: 3%. stop loss at 8%

Indices: 6%
Hong Kong: 3%. stop loss 30%
India: 3%. stop loss 30%

Other Investments: 27%

Emerging Markets fund (tax free): 5%
Poker Bankroll: 10%
Staking Players: 6%
Money people owe me: 6%


so, is this crazy?

i need to decide what to do with (hopefully) future poker winnings and salary. I guess I'll divide them between savings and leveraged investments, probably about 2:1 in favour of savings.

any thoughts hugely appreciated.

[CrushinFelt]

I like this portfolio a lot actually (assuming that your JPY/GBD(P?) play means you are long the Yen versus the pound).

Curious as to what your 42% savings is sitting in.

[john kane]

thanks crushinfelt.

yep sorry i always get confused with which way to put the currencies, i am long yen vs £ and long yuan vs $

my 42% savings is currently sitting in HSBC, however, ive already set up my ICICI savings account which has just increased to 6.41% and guarentees to be at least 0.3% above the BofE base rate.

as for what ive done so far:
Gold: $200 per $1. stop loss at 680p
JPY/USD: $200 per 1 yen swing in $1. stop loss about 120p (got to configure correctly
india 50: finally got round to doing this today, annoying ive missed huge gains, but long term i think it's a winner.

i'll hopefully get everything up and running monday/tuesday.

pleased i loaded up from $60 to $200 on gold when it dipped to 750p and in the last few days it's just jumped up to 780p so a very useful $6k profit. though i am determined not to trade any of these and to invest long term instead, only stopping the position when there is a better opportunity elsewhere (i know this'll be hard, but ill try).

[john kane]

oh yep, to confirm, when i say 'stop loss' that means if it hits i am busto for that position. do you think i should make any of my stop losses larger? smaller? basically the larger the stop loss, the lower the leverage, so a 20% stop loss = 5 times leverage for example.

[CrushinFelt]

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though i am determined not to trade any of these and to invest long term instead

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This doesn't really vibe with leveraged investments.

Long term positions are meant to be able to handle swings so that the long run can actually be reached. Leveraged investments are for finding an opportunity, going after it using leverage to bump up the returns, and eventually getting out and back into more stable positions.

Your leveraging looks reasonable.

[kimchi]

[ QUOTE ]
oh yep, to confirm, when i say 'stop loss' that means if it hits i am busto for that position. do you think i should make any of my stop losses larger? smaller? basically the larger the stop loss, the lower the leverage, so a 20% stop loss = 5 times leverage for example.

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I think you're looking at your stops the wrong way around. Your stop loss should be determined by the market and not how much you can afford to lose. Place your stops at a pre-determined level. That can be at a sensible point in price such as a technical level or as a factor of recent volatility.

Once you decide upon your stop, then you can decide upon your position size based upon how much risk your account will be exposed to should your stop be hit.

Also I'm wondering what your exit strategy is. As Crushinfelt said, leveraging isn't suitable for long term - especiallly with the overnight LIBOR rates applied to spreadbet positions. Spreadbetting is a trading vehicle and your exits should receive more attention than your entries since they are more important.

[mickeyg13]

I'm a nobody on this forum, but I nonetheless strongly disagree with your decision to buy puts on Crox. There's a strong short interest because everyone assumes that the "ugly plastic shoes" are a fad that will die off soon like Healys. That is simply not the case though IMO.

They've been consistently creating more products, and they now have a few dozen types of shoes as well as apparel and accessories like sunglasses. International sales have been growing at a tremendous rate, and they now account for more than 50% of total sales, even though domestic sales have also been growing at a great rate. The "Beach" and "Caymen" designs are the clog design that people know Crocs for, and even though their sales have been increasing, their proportion of total sales has been decreasing. People are buying their other products, and the reason is that Crocs sells comfort, something that is not likely to go out of style.

Some people cite cheap knock-offs as the eventual demise to Crocs, but Crocs has many things the knock-offs don't. First of all, they have their proprietary closed-cell resin used to make the shoes called Croslite. It is revolutionary and they are incorporating it into apparel as well as their shoes. Furthermore, Crocs has licensing deals with the NFL, MLB, NCAA, NASCAR, Marvel, Disney, etc. that knock-offs don't have. Some people view shoes with their teams logo in the same way people view baseball caps. They like to wear team colors. Also, Crocs is developing into a name-brand that people will pay for.

Furthermore, even IF this company is a fad (which I believe it is not), it would take a great deal of time for the products to fade across the world, meaning that they would seem to have several great quarters left in them even IF they start to fade away.

If you want a high-risk but very high-reward leveraged position, I suggest buying Crocs CALLS, not puts. The company should announce their Q3 earnings pretty soon. I look for perhaps a 5 point runup in anticipation of earnings, follwed up by the company blowing out street expectations and raising Q4 guidance. The management team has a history of raising guidance in a conservative manner, allowing them to get the publicity of raising guidance while still enabling themselves to crush expectations the following quarter. Just because this stock has gained a few hundred percent so far doesn't mean that it doesn't have a few hundred percent left in it. It closed below 68 on Friday, and I believe it should easily clear 100 with room to spare before we hit spring.

I haven't contributed much around here, and the size of my portfolio is probably trivial compared to most here, but those are my thoughts, do what you want with them.