I know that with Options Trading you can have from 10% margin to 50% margin control over money. Here’s my 2 questions:
1) If I had £1,000 how much money would be under my control if I used 10% margin?
2) If I had £1,000 how much money would be under my control if I used 50% margin?
Please give an easy to understand answer to earn 5 star best answer.
I think you are confusing "margin" and "leverage." Leverage multiplies your gains – and your losses. Trading stock on margin OR trading options both increase your leverage, but in different ways..
Here is a simple example (the ratios are the same for Pounds)
ABC cost $100
You have $1000
No margin
Buy 10 shares
Price up 10% -> 10% gain
Price down 10% -> 10% loss
50% margin (2:1 leverage)
Buy 20 shares (borrow ~$1000)
Price up 10% -> ($2200-$1000)/$1000 = 1.2 -> 20% gain
Price down 10% -> ($1800-$1000)/$1000 = 0.8 -> 20% loss
10% margin (10:1 leverage)
Buy 100 shares (borrow ~$9000)
Price up 10% -> ($11000-$9000)/$1000 = 2 -> 100% gain
Price down 10% -> ($9000-$9000)/$1000 = 0 -> 100% loss
As an example of option leverage, look at XOM (the future values are asssumed at option expiration):
$66.57
May $65 call: ask: $2.79
Price of XOM up 10% -> $73.23
Option value: $73.23-$65 = $8.23
Profit: $8.23/$2.79 = 2.95 -> 195% profit
Price of XOM up 10% -> 59.91
Option value: $59.91-$65 = -$5.09 -> $0 -> 100% loss
(if XOM dropped by > $1.57, the loss would be 100%).
One thing, you can’t buy options on margin; if you have $1000, you can only buy $1000 worth of options.
PS I never buy stocks on margin. If the stock goes against you, then you can face a "margin call" and be forced to either deposit more money or sell some of you stocks, so even if you are proven right in the long term, you could still lose money. Also, you should be experienced in Investing in stocks before trading options.
My friend 50% means 50% – And it means you are borrowing – But I would assume that you have not been trading otherwise you know about margins – Personally I would stay away from margin borrowing – It is dangerous if you do not know what you are doing -
References :
if you have 10% margin it’s like you have 10,000 to invest, whereas with 50% margin it’s on 2,000.
Learn about margined investing like spread betting and cfds before you start.
References :
http://www.independentinvestor.co.uk
I think you are confusing "margin" and "leverage." Leverage multiplies your gains – and your losses. Trading stock on margin OR trading options both increase your leverage, but in different ways..
Here is a simple example (the ratios are the same for Pounds)
ABC cost $100
You have $1000
No margin
Buy 10 shares
Price up 10% -> 10% gain
Price down 10% -> 10% loss
50% margin (2:1 leverage)
Buy 20 shares (borrow ~$1000)
Price up 10% -> ($2200-$1000)/$1000 = 1.2 -> 20% gain
Price down 10% -> ($1800-$1000)/$1000 = 0.8 -> 20% loss
10% margin (10:1 leverage)
Buy 100 shares (borrow ~$9000)
Price up 10% -> ($11000-$9000)/$1000 = 2 -> 100% gain
Price down 10% -> ($9000-$9000)/$1000 = 0 -> 100% loss
As an example of option leverage, look at XOM (the future values are asssumed at option expiration):
$66.57
May $65 call: ask: $2.79
Price of XOM up 10% -> $73.23
Option value: $73.23-$65 = $8.23
Profit: $8.23/$2.79 = 2.95 -> 195% profit
Price of XOM up 10% -> 59.91
Option value: $59.91-$65 = -$5.09 -> $0 -> 100% loss
(if XOM dropped by > $1.57, the loss would be 100%).
One thing, you can’t buy options on margin; if you have $1000, you can only buy $1000 worth of options.
PS I never buy stocks on margin. If the stock goes against you, then you can face a "margin call" and be forced to either deposit more money or sell some of you stocks, so even if you are proven right in the long term, you could still lose money. Also, you should be experienced in investing in stocks before trading options.
References :
http://finance.yahoo.com/q/op?s=XOM