Understanding Leverage

A common question we get is "what is my risk?"

One of the steps in our income generation process is temporary borrowing, also known as leverage. Leverage can be a powerful tool, but it's important to know your limits. Brokers require minimum equity levels such as 25%, sometimes more or less. If you drop below, they require you to sell something or post more capital until your ratio is restored. Otherwise known as a "margin call."

Example

Starting Values

• You contribute $1 million of stock
• We use $200K leverage to run our strategy + your $1 million equity = $1.2 million gross value
• The margin equity is 83% ($1 million / ($1 million + $200K debt))

Black Swan Scenario

• The market rapidly declines by 50%
• Account value drops by 50% from $1.2 million to $600K
• The margin equity is 66% ($600K - $200K debt) / ($600K value)

In this case there is still lots of buffer to wait out the market storm, if one chooses to. We do not lever to the max since our objective is extra income, not maximum return. Being overleveraged can get one in trouble when the market turns, as seen in the recent implosion of Archegos. It is also risky to not diversify, as evidenced by the collapse of many crypto concepts.

This is an example to illustrate the mechanics of leverage. Please consult the offering documents for full disclosures of risks and contact us if you would like to discuss further.