That's true, but it's not even the main trouble with margin loans. The issuers have the right to suddenly change the terms. It kills me when people say "TSLA would have to drop 50% for me to get a margin call." That is false in all cases! The brokerage making the loan can instantly make whatever stock you are borrowing against almost worthless to use as collateral based upon nothing more than the perception your collateral has dropped in value or increased in risk. The actual price doesn't even need to change for them to do that and it's completely beyond your control and can happen without warning. Many people are unaware of this.
Hence my question to people asking if they should use margin loans: Do you aspire to becoming a puppet?
E*Trade has been oscillating between 25%, 40% and 60% maintenance margin requirement for me. My account with them is 100% TSLA shares and calls.
I have been getting margin called about 3x per week lately because of E*Trade flip-flopping on their lending risk tolerance and because of TSLA dropping.
I have a simple algorithm for dealing with this:
Wake up in morning around market open;
Check Tesla news and TMC;
If (new information compels me to adjust my net income per share forecast model) {
Model.adjust();
}
While ($TSLA << 50 * EPS forecast for ‘23)
{
If (I have more credit than yesterday) {
Buy TSLA shares; //to max out margin again
}
Else If (I need to cover a margin maintenance deficit) {
Sell TSLA;
If (this was caused in part by a TSLA drop and not just a maintenance percentage requirement) {
Sell even more TSLA;
Use proceeds to leverage up with irrationally discounted LEAPS;
}
}
}
As long as I can confidently expect that $TSLA in 2024 will be trading for much more than $TSLA now, this strategy will have high returns by 2024. The real risk is being mistaken in that assumption. Technically another risk is that TSLA could drop like 90% in an hour without me reacting fast enough and E*Trade sells automatically near the bottom while I’m underwater on the loan and now I’m suddenly bankrupt. However, that’s almost entirely mitigated by my massive sell order set to be triggered at $310. Basically the order would have to fail to execute for me to be bankrupt. Trading regulations also tend to reduce the risk of such rapid drops, or so is my understanding. Meanwhile I could always come out of retirement and get another engineering job if my wealth is near zero. Overall I’m comfortable with the risk because I’ve done so much research and analysis on this one topic.
