Thread by @theBuoyantMan

On leverage:

Whatever systems I trade (I have a couple systems I trade manually now), I trade without using leverage on top of leverage.

I primarily trade 2xATM or synthetic futures directionally, predominantly to avoid futures related slippages and reduce costs.

Banknifty futures spread is around 4 points, and slippage is usually 3-5 points one way. That is like 17-20 points two way. Add to this the commissions and all, worst case you end up looking at 20-22 points as your cost.

Nifty Futures is slightly better with respect to spread and slippage, but neither banknifty futures nor nifty futures have enough depth to scale up with, at least on intraday timeframes.

So, I predominantly use options. Banknifty options are quite liquid (I use weekly options) and have much less slippage and cost as compared to banknifty futures. So far I have observed 2-2.5 points spread, and 1-1.5 points slippage worst case scenarios.

During march, the spread was bigger in options, but always significantly better than in futures. I found tight spreads in ATM options, and options with 500 multiples (like 24000, 24500, etc.,) also have decent liquidity and spreads.

So, being a directional trader, I have been testing both synthetic futures (if i am going long, buying 1xATM call, selling 1xatm put, and vice versa) and 2xATM call/put based on direction. Synthetic future mimics Futures movement very closely, like 98-99% and 2xATM around 95-96%.

The only caveat with Synthetic Futures is the margin amount. It usually is around the similar amount of margin as required for 1 lot futures.

But since you save in cost and slippage, it should be fine too.

The caveat with 2xATM is that it is subject to time decay, and other decay you face in options. So you have to get the direction and timing right. So, I usually use 2xATM only intraday, and never for positional.

I have heard people use Synthetic Futures for positional. Options traders like @SarangSood can pitch in. In fact, he's the one who gave me confidence to move towards Synthetic Futures.

I haven't yet used Synthetic for positional trading as both the systems I trade are intraday.

But I think few traders on Twitter do use Synthetic Futures for their positional swing trades. I suggest you read about it extensively and then take your call based on your leverage requirements, margin requirements, and other related parameters for your system.

As for leverage, I don't use intraday leverage, as options and futures themselves are leveraged instruments.

Let me illustrate this with an example.

One lot BNF requires 1.33L margin. For the sake of illustration, let's assume 1.35L as margin.

If you have 1.35L in your account, and you trade 1 lot of BNF, it means you have put 1.35L as your end of margin.

If bnf is at 24000,

24000*25 = 600,000 rupees.

600,000-135000 = 465000 rupees.

This 4.65L is the amount the exchange extends as a loan of sorts trading Futures.

So, you're putting in 22.5% as margin. Exchange is extending the remaining 77.5% as leverage.

If you have only 67500 in your account, and you use broker's 1x leverage to trade 1 lot, you're essentially taking leverage on top of leverage.

If you have 135,000 in your account, if you trade 1 lot bnf, it goes from 24000 to 23000.

You lose 25*1000 = 25000 rupees.
That's 18.5% drawdown on 1.35L.

But if you have only 67,500 in your account, and you trade 1 lot bnf when it goes from 24000 to 23000,

You lose 25000 rupees, but, it's 37% of your capital.

So, as you use leverage on top of a leveraged instrument, your drawdowns are multiplied too, determined by the leverage you take.

So, be very careful taking leverage on already leveraged instruments. Doesn't end well always.

Now, there are traders who take 10x leverage and all. Unless you know what money management and position sizing they use, and what their capital size is, don't think you can take 10x leverage too, without knowing the specifics of their trading style and capital size.