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In this text 4x leverage is mentioned:

"ITM call options have a strike (X) below spot price (S). ITM call option position is determined by aiming for ~4x leverage. The position size is set at 33%." Page 6, https://planbtc.com/20220807QuantInvesting101.pdf

But when I go to execute the trade, I see no leverage selection. I can only select position size and strike price, and position size is set, in the example, at a fixed 33% of portfolio.

How do I achieve 4x leverage by manipulating the strike price? How do I calculate the relationships between strike price and leverage? Otherwise, what am I misunderstanding?

1 Answer 1

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I didn't read the entire article so here's my guess at what the author is suggesting.

Determine the cost of the underlying.
Divide by three (33% risk).
Then divide by four and find a strike price that satisfies that.

Random example:
SPY is $427. Divide by 3 and again by 4 and you have $35.6

Find an ITM strike price that sells for $35.6

Strikes that satisfy this are Oct $398, Nov $405, Dec $406, Jan $410, etc.

Buy any combination of 4 of them or 4 of one of them. Now you control 400 shares via options.

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  • From the context I don't think it's possible they mean dividing by three like that because it later says "In this example, I use call options with 4x leverage and a position size of only 33%. This means 67% of the portfolio is in cash, with little risk. Even if there is a month with a very negative BTC return and the call option expires worthless, our maximum loss would still be only -33% per month."
    – Norbert
    Aug 14 at 3:58
  • If you buy options that risk 1/3 of the cash, you divide by 3 to determine the position's size. If your account size is $75k, you'd risk $25k, aka 33%. Aug 14 at 18:23

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