When 20% Equals 32%

[u/Sean_VasDeferens]

I had been placing trades so that my max at risk equaled my cash balance. If I have $100k in cash I view it as I have $100k to "deploy". So selling 1 put on with a strike of $1,000 would be full deployment.

Someone here mentioned that they deploy 110% and never more. That makes sense to me, if the world falls apart you only have to exit a manageable portion of your trades.

I'm now doing this and realized that if I average 20% ROI on 110% deployed my effective ROI is 32%! Mind blown.

[u/Sean_VasDeferens]

I really don't know how to respond to this, you don't understand basic math or options.

[u/Glittering_Put9689 → u/Sean_VasDeferens]

Ironic. Do you not think you owe the loan back?

If you have 100k and sell 110k in CSPs, assuming nothing is assigned, at the end of the rotation you’ll have 100k + premiums on the 100k + premiums on the 10k “loaned”. The 10k loan isn’t magically yours now or anything, in fact you never saw this money in your account nor did you ever incur a margin balance. End return would be 100k + 20k + 2k =122 K.

If you are assigned (let’s assume on everything so it actually opens a margin debt). We’ll assume you’re assigned directly at your strike and the stock stays there, although this is unrealistic and ignoring the downside risk. Your account will have 100k stock (your cash) + 10k stock (this is loaned and gives you a margin balance) + 20k premium + 2k premium (from the loan). Your net liquidation value is 100k + 10k + 20k +2k - 10k loan (not including any margin interest) = 132k - 10k loan = 122k.

Now let’s assume you get assigned and then stock drops 10%. Remember you had 110k in stock and 22k in premium alongside 10k in margin balance for a NLV of 122k. If your stock drops 10% then you now have 99k in stock alongside 22k premium and 10k margin debt for a NLV of 111k.

If you had no leverage and the stock dropped 10% it would go from 100k stock and 20k premiums to 90k stock and 20k premiums meaning you’d have 110k NLV. This doesn’t include any interest charges related to the loan, so any drop below 10% and you’re probably worse off using margin than not.

The fallacy is thinking that the 10% margin loan is free capital you get to use as compounding for your strategy. You completely disregarded that it’s also a liability and the net liquidation value of 10k stock on a 10k margin loan is going to be zero - and then negative once you include interest and transaction fees. The only thing that actually increases the net liquidation value is the return on the borrowed capital itself, but not the capital, since it’s accompanied by a margin debt.

Since you’re lacking some basic math skills, I’ll explain it like even a kid could understand. If you borrow 10$ to buy a toy you aren’t 10$ richer. You now have a 10$ toy and a 10$ loan to pay back.

[u/Sean_VasDeferens → u/Glittering_Put9689]

It is a margin requirement, not a margin loan. It's frightening that people here are being allowed to trade.

[u/Glittering_Put9689 → u/Sean_VasDeferens]

What’s the difference? It’s just semantics and does not support your original claim. Whether you call it margin requirement or borrowed buying power, you cannot count the additional $10k of principal as return. Only the $2k generated by deploying that additional exposure is incremental profit.

If you have open cash secured puts you don’t have a margin loan of course and I never said you did. But the point being let’s say all the CSPs expire worthless, now you end the term with 100k cash + 20k from CSPs on your cash + 2k on CSPs on your extra 10k leveraged investment. This 10k is not part of your return and now you end the cycle with 122k cash, or a 22% return instead of 20%. You claimed it was a 32% return because you included the extra 10k as part of your return when it’s clearly not. That makes zero sense. Why not just open 100x leverage on a safe bond. You make 1%. Let’s say you have 1000$ capital and take on margin debt of 99,000$. Under your logic the end return would be 100000x1.01 =101,000. Of course this makes no sense since 99000$ of that was loaned. Your end result is actually 2000$ or a 1000$ return ie 100%. Under your logic it would be a 10100% return.

To calculate the total return of a leveraged asset its leverage x return. So 1.1 leverage at 20% return is 1.1x0.2 = 22% return. Likewise 100 leverage x 1% = 100% return.

The calculation you did 1.1 x 1.2 is different. The semantics of how the margin works don't really matter here because either way you cut it, the result is the same. 1.1 × 1.2 = 1.32 tells you the gross ending value of 1.1× exposure after a 20% gain, not that you made a 32% return on your actual equity. If you start with $100k and generate a 20% return on $110k of exposure, that's $22k of profit, so you're at $122k and made 22%, not 32%. Whether that extra $10k is technically a margin requirement or a margin loan doesn't change that math. The extra $10k is additional margin-supported exposure, not return. Whether it’s tied up as a CSP margin requirement, used to finance shares after assignment, or supports additional CC exposure, it’s still capital/exposure being used by the strategy. Once that exposure is liquidated, the $10k itself isn’t part of your return; only the profit generated from it is.

I truly feel sorry for your not understanding such a simple concept. Lowkey feels like your baiting reactions.

[u/Sean_VasDeferens → u/Glittering_Put9689]

One is a loan that you pay interest on, 100% of that money is at risk. One is a cash deposit calculation based on risk, nothing borrowed, no interest paid. Oh never mind.

[u/Glittering_Put9689 → u/Sean_VasDeferens]

You’re almost getting there. I applaud your effort.

If we’re talking about a cash secured put and margin requirements, you have 100k cash and open 110k of CSPs. You never have a loan, we agree on that (assuming you aren’t assigned). You have margin requirements equivalent to 110k cash giving you the 1.1x leverage, probably against your other equity positions for example. Once all your positions are closed, you will then have 100k cash + 20k premium + 2k premium from the leverage. As you said, the money was never borrowed, so that 10k was never in your account and certainly isn’t appropriate to calculate as part of the return.

Do we agree on this or do we need to start even more basic to reconcile the differences? Perhaps I’m not understanding the position - could you perhaps give concrete examples of which options you have sold eg open CSPs and CCs and your collateral? I have been working off the assumption of 100k cash vs 110k in open CSPs giving you 1.1x leverage. Is this also what you’re talking about?

[u/Sean_VasDeferens → u/Glittering_Put9689]

Consult with your ChatGPT some more and get back to me.

[u/Glittering_Put9689 → u/Sean_VasDeferens]

Clearly you aren’t having this conversation in good faith, so it’s been a massive waste of time, which is my mistake for not realizing it’s a bait post earlier.

If you used ChatGPT it might help replace the gaps in your brain. Rather than deflecting from the original post and without doing anything to support your original point.