This is my sin I commit in trading and investing all the time – over trading. I trade and invest using margin. You may argue, that it may be dangerous and you should trade and invest Cash. I disagree.
This is how I see it:
If I want to buy 100 shares of a stock, let’s say Archer Daniels (ADM) which currently trades at $35.00 a share, in a cash account I would have to come up with $3,500 to be able to do it. In a margin account, I only need an initial buying power of $1,500.00.
I like to be buying using this leverage. You may not, but I do.
I also trade options. I sell puts to buy stocks and once I buy a stock (100 shares) or in other words I get assigned, I start Selling Covered Calls and do that as long as I get assigned again and sell the stock.
And here is my problem I have. Or had. When you sell a put in a margin account, only about a quarter of the needed buying power is needed compared to the cash secured puts. In the ADM example, to sell a 32 strike put, I would need only $405.15 of buying power.
But I need to keep remaining $1,100 +/- somewhere to have cash available in case of assignment. If I open an additional trade later on and do not keep a proper track of my available buying power (BP), and get assigned, I am in trouble. I do not have enough cash to Buy Shares.
And I also do not want to keep to much unused cash sitting in my account and doing nothing. So I want to use as much cash as possible and still stay safe.
And I was thinking on ways how to do it as spreadsheets and bookkeeping hasn’t protected me or prevented me from using more cash (BP) than I had available. And sometimes, I must admit, I get excited and open more trades than I can afford. In a bullish market is not easy, it is just a small trade, it will expire soon and I can afford this one breach or rules, and there is still plenty of BP to sustain this trade which I can eventually roll… yeah, sure.
So, I was thinking what to do and how to make sure I still have enough BP for assignment how to force myself to the rules.
And I came with an idea.
If I sell a put, I will need $400 of BP, if I get assigned, I will need additional $1,100 BP.
I then want to block $1,500.00 for assignment (a slightly more for a buffer). how can I do it so my trading app will show me less BP so I cannot use it as long as the open put trade if live?
I decided to place a buy order for enough ADM shares at some ridiculously low price, like $1 limit buy price, GTC order, which will most likely never executes but will block my buying power:
This trade will then be safe for its life and if I get assigned, I just cancel the shares purchase order to release my BP for the assignment. And, If I cannot do this trade and place the “blocking trade” then I cannot sell the put in the first place.
so, again, why all this and not just using cash account? Because, I still can buy 100 shares at 50% of needed cash, collect dividends, and sell covered calls and use only 50% of the cash.
And what about margin interest?
First, the margin interest is relatively low compared to the income I can generate monetizing my position by selling puts and collecting premiums, collecting dividends, and then selling covered calls and collecting additional premiums. It is still lower than losses you have to take when you are forced to close a position for which I didn’t have enough cash in the first place. And that is a price I am willing to pay.