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Leverage & Portfolio Heat

In my options course, I explain how we can use options in our trading in order to be able to take more positions than what our regular margin enables us to take.

This is because the premium that we pay for the options can be a lot less than buying the underlying directly (with 50% margin over night).

For example, I can build a portfolio of 12 options that cost me about 40K and that portfolio will act as if I'm holding a similar portfolio with the underlying assets, that is worth over 550K.

The advantages are that I use my capital in much more efficient way, and also I know that I risk only the premium that I paid for the options (my total sum of Rs).

Here is an example of such portfolio:

I also say in my course, that you have to consider the Portfolio Heat.

If your account is worth only 40K and you buy the portfolio from the example above, you are at risk of losing all your money, because most of the positions are correlated (long equities), and if the market will go down sharply you can have losses in all of them.

This is true even if you use proper position sizing, for example 100 different option positions where you risk only 1% of the account in each of them.

However, if your account is bigger, for example over 200k then you are risking less than 20% in the worse case scenario. (10% or less is preferred).

So, by using options we gain many advantages, but never forget about the portfolio heat risk management.


We are not an investment advisory services, nor are we registered investment advisors or broker-dealers and do not purport to tell or suggest which securities customers should buy or sell for themselves. Customers should always check with their licensed financial advisor and their tax advisor to determine the suitability of any investment.

It should not be assumed that the methods, techniques, or indicators presented in this example will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. We, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

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