11-03-2021, 08:07 AM
Can someone explain to me how margin actually is useful?
<!-- SC_OFF --><div class="md"><p>I'm struggling to justify the use of margin, particularly in naked puts. I learn best by doing, but before doing I need to learn, so I'm in a bit of a catch-22 with margin.</p> <p>The problem I'm having is visualizing the risk-reward to using it. I can take on substantially more risk with cash than I can take on with margin. And I can substantially concentrate my trades more with cash than with margin. (That is to say, the more concentrated in higher volatility, the more my margin buying power just begins to look like cash-only).</p> <p>So inevitably it looks like I can outperform with cash more than I can with margin.</p> <p>Thus the question, how is margin actually useful?</p> <p>For simplicity, if I want to 2x my buying power, but I have to reduce my return by 1/2x, then I have effectively accomplished nothing. Correct? So for margin to be useful I have to be able to both maintain a certain rate of return AND increase the buying power. Yes?</p> <p>I have some other advanced questions about house surplus, equity and journaling times, but I think first I just need to see someone justify the use of margin in the first place.</p> <p>Another problem with a margin call that I have is that it removes my ability to choose when I lose. Now the brokerage gets to choose when I lose, and they don't care if 2 weeks later the trade reverses and I would be a complete winner.</p> <p>That alone is a very big hindrance when working a long-game high risk trade.</p> <p>Maybe someone can comment a little on that as well.</p> <p>Thanks</p> </div><!-- SC_ON --> submitted by <a href="https://www.reddit.com/user/DarthTrader357"> /u/DarthTrader357 </a> <br/> <span><a href="https://www.reddit.com/r/investing/comments/qlivf6/can_someone_explain_to_me_how_margin_actually_is/">[link]</a></span> <span><a href="https://www.reddit.com/r/investing/comments/qlivf6/can_someone_explain_to_me_how_margin_actually_is/">[comments]</a></span>Kind Regards R
<!-- SC_OFF --><div class="md"><p>I'm struggling to justify the use of margin, particularly in naked puts. I learn best by doing, but before doing I need to learn, so I'm in a bit of a catch-22 with margin.</p> <p>The problem I'm having is visualizing the risk-reward to using it. I can take on substantially more risk with cash than I can take on with margin. And I can substantially concentrate my trades more with cash than with margin. (That is to say, the more concentrated in higher volatility, the more my margin buying power just begins to look like cash-only).</p> <p>So inevitably it looks like I can outperform with cash more than I can with margin.</p> <p>Thus the question, how is margin actually useful?</p> <p>For simplicity, if I want to 2x my buying power, but I have to reduce my return by 1/2x, then I have effectively accomplished nothing. Correct? So for margin to be useful I have to be able to both maintain a certain rate of return AND increase the buying power. Yes?</p> <p>I have some other advanced questions about house surplus, equity and journaling times, but I think first I just need to see someone justify the use of margin in the first place.</p> <p>Another problem with a margin call that I have is that it removes my ability to choose when I lose. Now the brokerage gets to choose when I lose, and they don't care if 2 weeks later the trade reverses and I would be a complete winner.</p> <p>That alone is a very big hindrance when working a long-game high risk trade.</p> <p>Maybe someone can comment a little on that as well.</p> <p>Thanks</p> </div><!-- SC_ON --> submitted by <a href="https://www.reddit.com/user/DarthTrader357"> /u/DarthTrader357 </a> <br/> <span><a href="https://www.reddit.com/r/investing/comments/qlivf6/can_someone_explain_to_me_how_margin_actually_is/">[link]</a></span> <span><a href="https://www.reddit.com/r/investing/comments/qlivf6/can_someone_explain_to_me_how_margin_actually_is/">[comments]</a></span>Kind Regards R