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On April 2nd, new SEC rules come into effect covering "portfolio margin calculations". This means that the margin requirements for good-faith deposits that control leverage in margin accounts will, in some cases, be dramatically relaxed. Here's one example from a list of examples.
PROTECTIVE PUT POSITION
Long 500 IBM @ $91.25
Long 5 puts IBM APR 90 @ $ 2.50
Current strategy margin is 50% of stock plus full payment for put or $24,062.50
New portfolio margin requirement is $1,878.00
So before April 2nd, you'd have to maintain $24,062.50 of fungible value in your account to cover possible market fluctuations against this position of 500 shares of IBM @ $91.25 ($45,625 worth) despite also holding 5 contracts of at-the-money puts. But since the puts provide insurance against a decline in value of your IBM shares, there's no need for 50% of the value of the stock, so the SEC will now allow your broker to ask you to maintain only $1,878 margin deposit. (I'm guessing that amount is still needed to guarantee payment of interest?)
Bottom line: $25,000 right now only allows you to control 500 shares, even if you guarantee them against loss with matching puts. After April 2nd your broker will be free to allow you to leverage that $25K to control 6600 shares ($600K worth) of IBM as long as you insure them against decline with matching puts. Of course, you'd still have to pay interest on that $600K from your broker, but since you hold collateral shares that are insured against loss, your broker should happily lend you that much. Then if IBM rises $3.75, you've doubled your $25,000. Sweet. But now, having an extra $25K of marginable value in your account, you can pyramid your investment, buying another 6600 shares and 66 long puts. Say IBM goes up another $3.75. So you double your investment again, ending up holding about 27000 shares worth around $2.5 million, guaranteed not to lose money over the life of the puts. All from $25K and a total rise of a little over 8% in IBM. Okay, these are sloppy numbers, and it's not clear that the entire rise in value of IBM shares will translate 100% into added margin value, but it should work out pretty close to this. (Though having to service interest on $2.5 million could make you want to 'focus' real hard on each tick of IBM).
Fun?
On April 2nd, new SEC rules come into effect covering "portfolio margin calculations". This means that the margin requirements for good-faith deposits that control leverage in margin accounts will, in some cases, be dramatically relaxed. Here's one example from a list of examples.
PROTECTIVE PUT POSITION
Long 500 IBM @ $91.25
Long 5 puts IBM APR 90 @ $ 2.50
Current strategy margin is 50% of stock plus full payment for put or $24,062.50
New portfolio margin requirement is $1,878.00
So before April 2nd, you'd have to maintain $24,062.50 of fungible value in your account to cover possible market fluctuations against this position of 500 shares of IBM @ $91.25 ($45,625 worth) despite also holding 5 contracts of at-the-money puts. But since the puts provide insurance against a decline in value of your IBM shares, there's no need for 50% of the value of the stock, so the SEC will now allow your broker to ask you to maintain only $1,878 margin deposit. (I'm guessing that amount is still needed to guarantee payment of interest?)
Bottom line: $25,000 right now only allows you to control 500 shares, even if you guarantee them against loss with matching puts. After April 2nd your broker will be free to allow you to leverage that $25K to control 6600 shares ($600K worth) of IBM as long as you insure them against decline with matching puts. Of course, you'd still have to pay interest on that $600K from your broker, but since you hold collateral shares that are insured against loss, your broker should happily lend you that much. Then if IBM rises $3.75, you've doubled your $25,000. Sweet. But now, having an extra $25K of marginable value in your account, you can pyramid your investment, buying another 6600 shares and 66 long puts. Say IBM goes up another $3.75. So you double your investment again, ending up holding about 27000 shares worth around $2.5 million, guaranteed not to lose money over the life of the puts. All from $25K and a total rise of a little over 8% in IBM. Okay, these are sloppy numbers, and it's not clear that the entire rise in value of IBM shares will translate 100% into added margin value, but it should work out pretty close to this. (Though having to service interest on $2.5 million could make you want to 'focus' real hard on each tick of IBM).
Fun?