I agree that a product can have an asymmetric risk profile without being leveraged I donāt think I said otherwise or that this was the point I was trying to make.
In any other situation I might agree with you in regards to horse racing and yet:
"investment noun [ C or U ] UK /ÉŖnĖvest.mÉnt/ US /ÉŖnĖvest.mÉnt/ B2 the act of putting money, effort, time, etc. into something to make a profit or get an advantage, or the money, effort, time, etc. used to do this:"
You are quite correct I have not invested in BP, nobody was suggesting trading Brent would achieve this. I have invested in derivatives you have invested in equities. Why arenāt you gambling, because you have shareholder rights? This is purely semantics.
If you buy GBP 50k of shares and the company goes bust you lose 50k, if you put a 50k deposit down on a house with a mortgage and the value of that house goes to zero you have lost more than 50k. Good luck telling explaining to the bank it was low risk. Where employing leverage in this example expected losses can exceed initial outlay.
The point I am trying to make is that leveraged products expose retail investors to risk they might not be fully aware of. Incorrectly policing the term leverage and trying to enforce your own definition of investment is counter productive to this issue and ignore the sad reasons behind the article originally posted.
You actually did claim that a product must be leveraged to offer asymmetric risk. You stated that if something has the ability to return/lose multiple times the outlay then it is leveraged which is simply untrue. Otherwise asymmetric risk could not exist without leverage.
The difference between owning shares and options is not semantics. Speculation is when you buy something in the hope of being able to sell it to someone else at a higher price. In the example of the Brent options you need the price to rise above the strike price or you do not make a return, in fact if it does not you are certain of a loss. There is no alternative. However, owning a share in a company grants you claims to the profits of that company. The share never needs to be sold as gains can be realised through dividends etc. and so there is no need to sell the share to generate a return.
I agree with the stocks and house example but you missed the point of my comment. My point was leverage does not necessarily equal more risk than something which is not leveraged. The probability of default and the loss given default, in the housing example, could be used to weight the risk and, therefore, the likelihood of loss. There could be shares which you could buy without leverage that have a higher probability of default (letās assume we infer this from CDS pricing). In that example, leverage does not equal more risk. In fact you could be a greater risk of losing the Ā£50k of shares than than Ā£50k of housing equity. Also in the house example the house retains value and so you would be unlikely to be on the hook for the entire value of the house.
I have not incorrectly policed the term āleverageā. I have tried to stick to my original comment about the importance of education and try to critique the people who assured me that options trading is leveraged. As you cannot have leverage without borrowing this cannot be true in the case of options.
Leveraged products do expose retail investors to risk but so do traditional products the key is in the risk profile of each individual investment.
@hrochfor1 maybe a good exercise would be to explain to everyone the logistics of money flow for both the seller of the call and the buyer of the put option (in the one transaction) if the option is executed before expiry.
First off, I just want you to acknowledge that by the definition I posted, options are not leveraged? Leverage involves borrowing money.
An option is a contract with contractual obligations which, I agree, can result in the seller of an option being obliged to sell shares to the holder of the opposite side at a widely discounted price to the actual share and this incurring a large loss. This loss could be any infinite of multiples the value of the original contract.
You are correct I did claim that. I am happy to concede that. My point should have been that where employing leverage by using instruments like options or CFDs maximum potential lost can far exceed initial stake.
In regards to my point on semantics I donāt agree with your rebuttal. Not all shares pay dividends not all companies have profits to pay out. If my long call position expires OTM the maximum possible loss is exactly the same as your maximum possible loss on owning an equity on a non dividend paying, zero profit company that goes bust. Both equate to the initial stake invested. You may well have been motivated to buy shares in order to receive dividends but ultimately this is still speculation.
In regards to risk my point was simple, the maximum possible loss on the house buying example is clearly greater than the initial investment.
āAs you cannot have leverage without borrowing this cannot be true in the case of options.ā I donāt understand this point.
Just try and explain to everyone how the execution of a option works, you seems to know quite a bit about options. Tell us how the call option contract is able to receive the profit from shares that he doesnāt own.
Iām not trying to be rude or evasive but I have asked you two questions to which you havenāt responded. I donāt see why I should do you the courtesy when you do not afford it to me.
Once you respond to my questions I will happily explain the cash flow mechanics behind options settlements but I do not see how that is relevant to whether this product is leveraged or not.
Oh I see. This comes back to where we do not agree. Options are leveraged because they involve gearing. I am aware you donāt agree with me. I maintain options are levered products because they offer outsized returns and importantly losses. Investopedia is with me here and Iām willing to bet that regulators around the globe are as well.
By definition, not my definition that I made up but that of the Oxford English Dictionary, leverage as a verb involves borrowing to invest. No borrowing equals no leverage. There are ways to earn outsized returns without leverage such as betting on a horse with 10/1 odds.
You canāt just maintain something to be true if it does not meet a definition. I canāt maintain I am 6ā if I am actually 4ā2ā.
Again throwing around terms. Gearing is again a very specific word in finance which refers to the relative proportions of debt and equity that a company uses to support its operations.
I donāt see how, I partially explained it in my above comment and acknowledged how it can leave the seller on the hook for essentially unlimited losses but I fail to see how that means it is leveraged?
I havenāt. Not all debt is leverage. If I have credit card debt I am not āleveragedā but just in debt. Leverage only refers to borrowing to invest.
Banks take on leverage and have leverage ratios as they are trying to offer returns. We do not refer to countries as being leveraged but just in debt.
To answer your question about gambling at the races, I donāt see how this relates to financial products. But yes I would argue that gambling offers outsized returns versus the initial stake.
If i buy options on the CME and post 75% initial margin, have I borrowed money from anyone?