Margin lending hits all time high

by Wayne Ferbert on May 28th, 2013

The New York Stock Exchange announced last week that the total amount of margin lending in investor portfolios hit an all time high in April. The level was $384 billion - which exceeds the record set in June 2007.

Let's examine this statistic and what it means. A few observations:

The Buy and Hedge investor already knows that if he wants leverage, he can achieve it using options to a much more effective outcome. You can use ITM options with a lower cost and have a built in floor in your portfolio. And you know your broker won't be selling you out in the event of a market decline. 

Given the increased adoption of options and the manner in which options influence equity markets, you can expect that the real leverage in the market is even higher than the June 2007 levels. Retail investors are using them much more smartly to control a higher notional value of stocks.

The last time the margin lending was this high was June 2007 and the market peaked in the Fall of 2007. Just remember that timing. While this kind of margin lending is considered bullish, remember that the last time it reached this level, the market peaked within 6 months.

Lastly, lets remember the whiplash effect that margin lending can have. Wen margin lending is high and the market gaps down for any reason, the pressure to sell is magnified. Remember that the investors with margin lending need to sell out to avoid the wipe out scenario. This puts even more selling pressure on the market. 

Remember that as the market potentially corrects in the next couple of months, other investors will be looking to exit positions and save their portfolio. Heck, his broker might even sell him out of some positions to cover a margin call. Any market correction could get worse in that event. 

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joe - June 20th, 2013 at 11:25 AM
You can't use options to capture interest rate and dividends. For example, I might be using margin to purchase muni bonds and collecting the spread or buying high dividend stocks for the dividend yield spread and not for appreciation. Margin this time around was to collect interest/dividend yield spread. With margin rates under 1% at places like Interactive Brokers it has been easy money. Now it is unwinding. Please provide an update as margin decreases here in June.
The Author - June 24th, 2013 at 5:44 PM
You do not get an interest or dividend payment for owning an option - but ATM and ITM puts contain the discounted value of the future dividends in the price of the put. So, you can build strategies to effectively 'capture' the dividend payment of an ETF or stock.

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