When I trade, it is all about the amount of leverage that I want to use. If I have say $10,000 and I invest 100% in IWM, then I am invested 100%. If I want to go above 100% to say 200%, I can use margin. Problem is that cost money, so I could invest 100% of my funds in UWM, then I would be invested at 200% (or a leverage of 2). I would have used all my cash, but no margin. If I wanted to go a step higher, I could invest all my funds in TNA, then I would be invested at 300% for a leverage of 3.
And if that is not high enough then the next step would be to go to options. Now I can quickly get to a leverage of over 30. Last week I looked at an IWM (trading at $75) option for $1.20 with a delta of 50%. So 2 options worth $240 would control the equivalent of 100 shares of IWM or $7500. Now you have a leverage of just over 30. With $10,000 cash available, I could purchase about 80 options, so I would be controlling $300,000 worth of stock with a $10,000 investment. Now I would be right up there with MF Global.
I see traders doing this all the time. In the option example above, say IWM goes up a modest $1 from $75 to $76. Since the delta is 50%, the option value price would go up from $1.20 to $1.70. And what do they report, they made a 42% profit. Yes they did make a 42% profit on a $240 investment (assuming they bought 2 options), which means they made a total profit of $100. With a $10,000 account, they really just made a 1% profit on the account, which is still a good number actually. It is all about investment level of the account and how one wants to use leverage to trade it.
Now if 30:1 leverage is not high enough, I could go to futures and start to push I think about 100. I haven't gone through the math in a long time, so I am not sure.
So for my own trading, the first decision I have to make is how much of my cash do I want to put at risk. At the present, the max I have traded (as I did yesterday) is 150%. So for every 1% the market goes up, my account value grows by 1.5%. So I have 3 easy choices to do this again assuming a $10K account.
1. Trade $15,000 of IWM and be 50% on margin, ouch!
2. Trade $7,500 of UWM and still have $2500 in cash.
3. Trade $5,000 of TNA and still have $5000 in cash.
Up to now I have chosen to trade UWM because it gave me all the leverage that I wanted or needed to get the job done. And like I said I was invested at 150% yesterday.
Another thing to consider for me is that on a typically day, IWM yield is 1.5 times SPY. Yesterday SPY was up 1.69% vs 3.01% for IWM, so this is an additional leverage of almost 1.8 vs the "market". I was really trading at almost a leverage of 2.67:1. That is rick enough for me. This allows me to not have to catch the exact bottom or top of a reverse and still be able to easily beat the market.
So bottom line, I can use UWM and get all the leverage I want for now. I may end up trading TNA/TZA, but it will not be because I need the leverage as of yet.
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