I'm a young DIY investor who is looking for ways to consistently implement the approach outlined in the Lifecycle Investing book by Barry Nalebuff and Ian Ayres.

In short, they suggest using moderate leverage in the initial ten or so years of investing to increase market exposure, while salary income can as a substitute for the bond component of the portfolio. They provide a very compelling argument why doing so makes sense.

However, this question is not whether it's a good idea or bad, but how it can be efficiently implemented through deep-in-the money index/ETF options, which can provide this leverage. Such options with the strike price equal approximately to half of the current index value give 2/1 leverage, which I'm aiming for.

Unfortunately, such options are costly, with the cheapest ones I found(like STOXX50 or S&P/ASX200) amounted to about 15000 USD. This makes it really inconvenient for relatively small contributions from my salary. I would need to wait 6-12 months of accumulating cash until I can afford a new option pack. If I would like to include a Japanese NIKKEI, it'll be even worse, with such an option costing around ~70000 USD.

The question is, how can I implement this strategy with smaller invested amounts each month(with 2500USD)? Or at least every other month(5000USD)? I have been looking into SPDR ETFs that track some indexes at 10% of this price, but I haven't found any cheaper yet.

2 Answers 2


... how it can be efficiently implemented through deep-in-the money index/ETF options, which can provide this leverage. Such options with the strike price equal approximately to half of the current index value give 2/1 leverage.

Buying an option with a strike price of 1/2 the underlying's price is merely an arbitrary number. Let's look at this in a different way.

A very deep ITM call LEAP with a delta in the 90's will almost duplicate the performance of the underlying. It also has the advantages of low time premium cost and low theta decay. But these are quite expensive. 90 delta call LEAPs can be had at a strike price above the 50% level (1/2 the price of the underlying).

If you're willing to pay a bit more time premium and buy an 80 delta call instead of a 90 delta call, you might pay 25% less for the call (actual pct discount will vary based on the implied volatility and the time remaining until expiration).

Another way to achieve 2:1 leverage is to buy three 66 delta calls. This will cost more time premium but the total cost should be less. You'll have to evaluate all of the possibilities (drop the quotes with deltas into a spreadsheet).

Your 'participation rate' is how much you will gain per dollar move in the underlying. So if you own 3 calls each with a delta of 67, you currently have 2:1 leverage. But technically, you have 3:1 leverage because an option itself is leverage (delta will increase as the underlying increases).

Here are some other suggestions:

Consider the possibility of rolling your calls up as they achieve decent profit. You'll give up some delta but you'll lower cost basis and risk.

Roll your LEAPs out to a later expiration when theta decay starts to become significant. To evaluate this, calculate premium per day. It will depict the possible cost savings.

LEAPs have very wide B/A spreads. Do not pay market prices. Work your orders and try to get fills at the midpoint or better.

To lower total cost (your capital issue), consider the possibility of vertical or diagonal spreads. Unfortunately, the trade off will be capping your potential gain. The premium received for the short leg could pay for much/most of the time premium of a high delta LEAP. However, this is a very different game than the open ended leverage you seek.

  • So, to recap, to try to achieve the same effect with a different combination of options. Thank you, this is a good answer. Sep 10, 2020 at 13:03

Have you considered leveraging that you may have available [and indeed may already be using] through having a mortgage on your house?

While a home may be better classified as a personal asset than a true 'investment', keep in mind that if you put a 20% down payment on a house, you have effectively leveraged yourself 4:1 on what is likely the biggest purchase you will ever make. Even if you assume that the value of your home goes up only with inflation in the long-term, since those gains are made on a leveraged basis, you end up with more net assets than just 'down payment * inflation ^ # of years'.

To the extent you want leverage this is maybe not a problem, but consider that if you have such a mortgage, taking out additional leverage on your investment portfolio may be extending your risk more than you realize.

[Even if you don't own own a home now / have a mortgage / personal debt now, this may apply for you down the road, so to the extent you take out a large loan in the future consider whether you would want to decrease your investment leveraging to compensate].

  • This is a very relevant observation for this strategy in general, but at this stage in life, I'm renting an apartment and don't have any debt. Sep 10, 2020 at 15:01
  • @NikolayRys Do you have a car loan? Student loans? Other personal debt? Any of these are effectively providing you with financial leveraging in terms of your ability to invest rather then pay them off. A 30k car loan, for example could represent 5:1 leveraging at the current level of investment assets you seem to be indicating. Doesn't mean more leveraging is necessarily bad, just make sure you consider your overall 'balance sheet', not just leverage directly on your investments. Sep 10, 2020 at 15:05
  • Sorry - I missed you saying you have no debt - I'll leave the comment up just for reference to others who may be in a different situation. Sep 10, 2020 at 15:09

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