Investors double the shares, pushing the margin debt to record

Some investors have been tempted to pursue higher gains – and have been exposed to potentially devastating losses – through riskier games, such as concentrated positions, trading options and exchange traded funds. Others borrow on their investment portfolios, bringing margin balances to the first record in more than two years, to buy even more shares.

Mr. Burnworth, a civil engineer in Incline Village, Nev., Who is approaching retirement age, is using all of these strategies after turning a $ 23,000 options game on Tesla last year into a near-2 discount. millions of dollars. Its growing stake in Tesla has allowed it to borrow against its position to convert Tesla options into equities that have risen seven times this year. He says he helped his daughter buy a house and bought a Tesla sports utility vehicle for another family member.

“Before, I didn’t do very well financially. Now, I’m a long way from where I wanted to retire, ”said Mr. Burnworth, who added that he sold his own house and used some of the proceeds to buy more Tesla options.

The stock market is about to close one of the most frothy races in recent years. Some of the largest wealth producers include Tesla, up 691% so far this year, and fuel cell company Plug Power Inc.,

over 1,000% higher. Zoom video communications Inc.

added 451%, while biotech stocks also rose, including vaccine maker Covid-19 Moderna Inc.,

increasing by 532%.

“The stock market is euphoric right now,” said James Angel, a finance professor at Georgetown University. “A lot of people extrapolate from the recent past and say, ‘Wow, the market has grown a lot and I think it will grow more.’ I’ve seen this game before and it doesn’t end well. “

In the last week of 2020, investors will follow the last-minute changes to the Covid-19 aid package after President Trump demanded higher payments for Americans. The pandemic itself remains concentrated as cases, hospitalizations and deaths increase in much of the country.

A strong indicator of stock market euphoria turned red last month. Investors borrowed a record $ 722.1 billion against their investment portfolios through November, according to the Financial Industry Regulatory Authority, surpassing the previous high of $ 668.9 billion in May 2018. The benchmark is ominous for stock market – margin debt records tend to precede volatility attacks, as seen in 2000 and 2008.

Investors who use margin debt pledge their securities in exchange for loans from brokerage firms to make further investments. They may have problems if their guarantee falls below a certain threshold, triggering a margin call. Then they have the option to put more money or sell the underlying securities.

Many investors also use their margin balances to trade options, contracts that give them the right to buy or sell shares at a certain price, later. Options trading exploded this year as individual investors entered the market. A record number of option contracts have been traded this year. On average, 29 million changed hands every day this year, up 48% from 2019, according to Options Clearing Corp.

Traders can exploit options to hedge their portfolios against declining stocks or make bets on which major indices and individual companies will increase or decrease in value. Using some of the riskier strategies, traders can lose even more than they introduce.

Mary Roberts made her first big investment last year, using some reserve money and a pension account left over from a previous job to buy Tesla shares. Like Mr Burnworth, its investment portfolio has grown in value this year as the shares of the electric car maker have grown, prompting it to engage in options trading for the first time using margin debt.

“With [shares of] Tesla allowed me to do all these things. It changed her life, “said 53-year-old Roberts, who lives in Vancouver, Washington. Between her and her husband’s investments, their combined portfolio is now seven figures, two-thirds that of Tesla’s stock, said Roberts.

She says she doesn’t think she will soon see another year of earnings, like 2020. But she also has no plans to sell any of its Tesla shares and is open to borrowing more from her portfolio.

“That’s what rich people do,” said Mrs. Roberts.

Of course, over-expanding individual investors have been burned before. Dozens of investors lost money this year on gambling that gave back, including when oil prices turned negative and Eastman Kodak shares Co.

he went on a wild walk.

Joe Phoenix’s accident occurred in 2018. He bet heavily against the prospect of volatility in the market, accumulating over $ 1 million using products traded on the stock exchange that delivered the reverse of the Cboe Volatility or VIX size. The products amplified daily movements three times. And he made a riskier and riskier bet using margin debt.

An increase in volatility in February 2018 eliminated a significant part of its earnings, turning its stakes into hundreds of thousands of dollars. Phoenix said the devastating loss took it off the market by the end of the year. He started trading again until mid-2019, after promising not to risk so much.

However, it trades leveraged ETFs. These products attracted $ 14.3 billion this year through November, the most since 2008, from investors drawn to the prospect of doubling or tripling the daily movements of the S&P 500, the top 100 Nasdaq shares and other indices. The moves work in both directions, with such funds falling by up to 15% on some of the worst market days this year.

Mr Phoenix adds that the products give him all the benefits of margin debt without worrying about a margin call or interest payments.

“This year, I did pretty well in terms of my emotional reaction to things and the fact that I was able to lose the losers,” Mr. Phoenix said. He said it has grown by more than 12% since resuming trading. “If I can do more than 8%, I’m doing pretty well.”

Write to Michael Wursthorn at [email protected]