Stats suggestion: Portfolio Leverage

I’m not a fan of using very high portfolio leverage (or gearing) but I know some would argue for it.

I think it would be helpful to have two stats in the simple stats section:

* maximum portfolio leverage used to-date, and

* average used in the last 30 days (including % change on previous 30 days)

Also one of those gray pop-up boxes explaining the pros and cons of high leverage would help Joe Average (if they existed!)

May be hard to track in real-time, but even a once-a-day snapshot would be useful.

Anyone else with a view on this?

I agree.

how do you find out? the amount of money you enter into auto-trader may already have leveraged built in?

Defining leverage such that it’s comparable between systems in a meaningful way is not straightforward. E.g. what is the leverage for each of the following 3 positions (assuming a $5,000 account):

1) BTO 100 QQQQ @ 52.31

2) BTO 24 QLD @ 109.29

3) BTO 2 QQQLZ @ 1.16 (QQQQ Dec 2007 52.0000 call)

Note that delta for each of the positions is roughly the same (i.e. the change in the account equity if the QQQQ would move up or down a few percent).

by the way, I think the suggestion is good–in particular for forex and futures systems.

Hi Robert,

Unfortunately the terms “leverage” and “margin” are often used interchangeably - I think you may be referring to margin? In any case, what folk do with their own accounts can’t be monitored by C2.

Let’s call it “portfolio gearing”. It’s simply the total value of open positions (in USD) divided by some measure of account size, eg: cash + open profits - margin requirements (also in USD). All of these account size factors are shown on C2, although of course, they may be different from an actual trading platform used by the vendor or subscribers.

But it gives a consistent, apples-for-apples comparison point between systems, and over time.

I’m not totally sure I understood your response, so feel free to clarify, but hopefully the above makes some sense.

OOPS! I caught myself out by terminology! Looking at what C2 presents under “Cash and Margin” on the systems page, I think the appropriate account size measure would simply be the “Buy Power” figure.

Se we’d have Gearing = [USD value of open trades] : [Buy Power]

Eg: if an account with $100k Buy Power had $500k of open trades, the gearing is 5:1

Nice and easy.

Hi Science Trader,

Thanks for your support of the suggestion to include leverage stats.

It’s not calculated for individual positions, just across the entire portfolio (see note above).

The only issue for individual positions is converting them to USD value, for those held in other currencies. But that shouldn’t be too difficult.

It’s true that this is most relevant to Futures and Forex systems (or blends).

I suggest to compute leverage in exactly the same way as it is done in an IB account, in TWS > Account information > Available for trading > Leverage. According to the TWS user guide, this is defined as

Leverage = Gross Position Value/Net Liquidation

But, if I understand the TWS user’s guide, this does not inlcude margin requirements. That would be another measure of interest, something like

total margin requirement / account value.

My example applies to leverage across an entire portfolio as well. Consider 3 portfolios (or systems if you like), each holding one (and only one) of the 3 positions I gave as an example. What would the leverage be for each of those 3 portfolios?

Thanks Jules, that seems like a nice, simple approach. I assume “Net Liquidation” means if the account was liquidated at current market prices for open trades, & “net” meaning after any fees.

The terminology in the US is a bit different to what I’m familiar with (I’m based in NZ, but use UK and Denmark trading platforms), so I was struggling a bit.

Also, I have my own approach, which is to value open trades at their stop-loss rather than at market - but of course that only works for traders who use stops.

regards, Murray

OK, now I understand!

Your questions raise some interesting implementation issues:

Q1: BTO 100 QQQQ @ 52.31 >> only trade in $5000 account.

PL (Portfolio Leverage) = [1*(10052.31/5000)]:1 = 1.05:1 … where "1" at the start is the “contract size”.

Q2: BTO 24 QLD @ 109.29 >> only trade in $5000 account.

PL = [2*(24109.29/5000)]:1 = 1.05:1 … (the same as Q1) … where "2" at the start is the “contract size” (QLD has 2:1 leverage already built-in to the product: ie it’s analogous to a futures product with a contract size of 2)

I’m sure C2 feeds from brokers, or their product spec database, or whatever, includes contract size for futures, and assume it does for ETFs as well, but Matthew would know and could confirm.

So needing to know the underlying leverage (or implied contract size) for ETFs is the first issue, although it may be a trivial one.

Q3: BTO 2 QQQLZ @ 1.16 (QQQQ Dec 2007 52.0000 call)

After some experimentation about 18 months ago, I decided I either needed to specialize in options, or avoid them altogether. I’ve taken the route of avoiding them, so I’m not really the person to answer this one.

Following on from Jules’ comment, I would guess we need to look for the current liquidation value of the option trade (value if exercised with the current bid/ask spread?)

Exactly how options are treated is the second issue. Over to others for suggestions.

I should have mentioned: In Q1 and Q2 responses above, I’ve assumed $5000 is the total liquidation value of the account - just to keep things simple.