The U.S. equities market in 2014 has been marked by an almost eerie calm amidst a prolonged period of near-record low volatility. For the Warren Buffets of the world, or those happy to watch the market slowly tick upward and reap the benefits of long-term investments, these market conditions are ideal. For active traders and investors, however, a stagnant market means little or no opportunities to find profit by taking advantage of price movements, or volatility. As some market experts have deemed this period the “new normal,” with no expectations of a return to sustained volatility, where can active traders and investors turn to find opportunities to profit?
1. Go long and leverage
Assume you want to buy a stock with a glimmer of hope that it might squeeze a couple dollars higher. If you have a large amount of disposable cash to invest, a 2 to 3 percent return over the course of a year may satisfy your investment goals. For those who want to get more bang for their buck, however, turning to leverage, or borrowed capital, may increase the potential returns of an investment as only a couple dollar move in the stock price will impact your account more positively.
Investors using cash accounts through a brokerage put up 100 percent of the value of a stock position, meaning that a one dollar increase in the stock price provides a 1:1 return ratio. Regulation T, or Reg T, allows investors to put up only 50 percent of the value of a stock position, and provides a 1:2 return ratio for overnight margining and 1:4 intraday margining return. Leverage is always good when you’re on the right side of the market, but if a stock decreases in value a leveraged investor may end up owing multiples of their initial investment!