Have you ever wondered how Wall Street bankers make millions and millions of dollars every year? Do you wish that you too could earn millions and millions every year? Well you can. It’s even easier than you think. The key to making stacks is leverage.
In the last Time is Money article, Making You Pay Twice, I showed you how selling call and put options on stocks could earn you a large percentage of your money in a short amount of time. If you sell stock options at prices that are far from the current stock price, you may only have to put down 10% of the stock price to hold the position. You have to admit, that’s using a lot of leverage. But you can take it to an even higher level! Consider using futures instead of stocks.
Futures are different from stocks. They are standardized contracts that require you to buy or sell an underlying commodity at a certain time in the future, at a certain price. This may sound similar to options, however a future is a binding contract that gives you an obligation. Options are a right but not an obligation. By using certain futures contracts and selling options on these futures, you can gain even more leverage power than with stocks.
While foreign exchange margin requirements fluctuate based on volatility, one of the most leveraged instruments is the 10-year note futures contract. The initial margin requirement to establish the note position is just $2,970. The notional value of the futures contract is $100,000. This certainly isn’t your grandfather’s bond investment! By putting in less than $3,000, you can control a hundred thousand dollars!
Notes, like all interest rate futures, fluctuate based on the movement of interest rates. When interest rates go up, notes go down. When rates go down, ratings go up.
One of the best things I’ve noticed about the US Government Treasury market is that these securities are traded globally, almost 24/7! Treasury bonds are perhaps the largest trading market on the planet. Because they are widely traded, they are the most normal trading instruments I have come across and the easiest to make money on consistently using the Time Is Money principle. This is not to say that Treasuries don’t sometimes move to abnormally extreme levels, they do, but they are not easy to manipulate.
Several times in recent years, interest rates and Treasury bond prices have moved to extremes. When Hurricane Katrina devastated New Orleans and the economy seemed badly damaged, interest rates fell sharply, sending the prices of notes and bonds to extreme levels. When Lehman Brothers went bust and the Treasury Department and the Federal Reserve warned us that the economy was in imminent danger of collapsing, the world flocked to US Treasuries and prices moved abnormally high. But when the Federal Reserve announced that it would buy long-term Treasuries in an effort to manipulate long-term rates lower, rates actually fell. But these events were short lived and rates returned to normal expectations. The sheer size of the market prevented even the US Federal Reserve from manipulating prices!
Depending on current volatility levels, it’s not that hard to make 5%, 10%, even 50% of your money each month by selling deep-out-of-the-money call and put options on 10-year Treasury note futures. A current example shows that if one were to sell options today, with 37 days remaining in the life of the option contract, at +3 and -3 standard deviations from the current 20-day moving average, one could receive option profit of $1,343. The margin requirement to establish this position is only $2,960. My return, if both options expire worthless at option expiration in 37 days, would be a 45% return on my money! If the price of the note were to move to an extreme beyond expectations, you could close out the unprofitable option by buying it back or taking a futures position. If I believe that prices will eventually return to the mean, I am not concerned with taking the actual futures position.
If you are familiar with the markets, you may be familiar with the old saying, bulls make money, bears make money, but pigs get slaughtered! It goes without saying that a 45% return in just over a month is a lot. Although we are three standard deviations away from the moving average, we need to review what our current volatility level is, what average volatility levels might be, and to what high volatility levels some unforeseen event could push prices. Once we’ve done these tests, we may want to tone down our aggressiveness. After all, we want to be sitting on the beach, watching our account value increase each day as time goes by.
We would never want to get into one of these positions without being adequately capitalized. We only need a small amount to hold the position, but if we only have a small amount and don’t have additional funds that can be added if something unexpected happens, we could lose all our money and even more. Oftentimes, poor money management will drive you out of the market with big losses at the worst time. It never fails, after the market has taken it out you will see prices return to the moving average. You could have made stacks if you could have just posted a little more capital.
If you have been watching the events of the current banking crisis, you will see that this is exactly the same thing that is happening there. Banks do not want to part with their toxic assets at current prices because they consider them too low. They know that over time, these prices will return to a normal level and become profitable again. The problem is that they currently do not have adequate margin requirements to hold these positions. Fortunately for them, the government has stepped in to provide them with the liquidity they need. Unfortunately for you, if you find yourself in such a position, the government will never help you.
However, if you manage your resources and risks properly and study the techniques outlined in the Time Is Money article series, you should be able to accumulate wealth beyond your wildest dreams, letting time continue to pay you off until that fateful day when you die. run out of money. time.