Investors double their shares and push margin debt to record

Some investors are tempted to pursue larger profits – and have exposed themselves to potentially devastating losses – through more risky plays, such as concentrated positions, trading options and exchange-traded funds. Others borrow against their investment portfolios and push 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 close to retirement age, uses all of these strategies after turning a $ 23,000 gamble on Tesla into a nearly $ 2 million windfall last year. . Its growing stake in Tesla has enabled it to borrow against its position of converting Tesla options into shares that have risen sevenfold this year. He says he also helped his daughter buy a house and bought a Tesla sports vehicle for another family member.

“Before, I did not do very well financially. Now I am far outside the place where I wanted to be for retirement, ‘said Mr. Burnworth said, adding that he also sold his own home and used some of the proceeds to buy more Tesla options.

The stock market is about to close out one of its most frothy runs in years. Some of the biggest fortune makers include Tesla, which has risen 691% so far this year, and the fuel cell company Plug Power Inc.,

more than 1 000% higher. Zoom video communication Inc.

added 451%, while the number of biotech shares also skyrocketed, including Covid-19 vaccine maker Moderna Inc.,

with 532% higher.

“The stock market is currently euphoric,” said James Angel, a professor of finance at Georgetown University. ‘A lot of people are extrapolating from the recent past and going,’ Wow, the market has risen a lot and I think it’s going to rise more. ‘We’ve seen it play out before, and it does not end well. ”

In the last week of 2020, investors will be watching at the last minute for changes to a Covid-19 relief package after President Trump demanded higher payouts for Americans. The pandemic itself remains in focus as cases, hospitalizations and deaths rise in a large part of the country.

A strong indication of euphoria in the stock market flashed red last month. According to the Financial Industry Investors Regulatory Authority, until November it had borrowed a record $ 722.1 billion against its investment portfolios. This was above the previous high of $ 668.9 billion from May 2018. The milestone is an ominous one for the stock market – margin debt records tend to precede volatility, as seen in 2000 and 2008.

Investors using margin debt pledge their bonds in exchange for loans from brokerage firms to make further investments. They can get into trouble if their collateral falls below a certain threshold, causing a margin call. They then have the option to raise more money or to sell the securities underlying the loans.

Many investors also use their margin balances to trade options, contracts that give them the right to buy or sell shares at a specific price later. Options trading exploded this year as individual investors flocked to the stock market. A record number of option contracts were traded this year. An average of 29 million changes every day, a jump of 48% from 2019, according to data from Options Clearing Corp.

Traders can use options to hedge their portfolios against declines in equities or place bets that large indices and individual companies will rise or fall in value. By using some of the more risky strategies, traders can also lose more than they put in.

Mary Roberts made her first major investment last year with a little extra cash and a remaining retirement account from a previous job to buy up shares in Tesla. Just like mr. Burnworth, increased its investment portfolio in value this year as the share of the electric car maker gained, leading it to the first time to trade options using margin debt.

‘About [shares of] Tesla enabled me to do all these things. It was life-changing, “she said. Roberts, who is 53 years old and lives in Vancouver, Washington, said. She and her husband own a chemical distribution company that she said was struggling due to Trump’s trade war with China. Between her investments and her spouse, their combined portfolio is now worth seven figures, with two-thirds of it from Tesla shares, Ms. Roberts said.

She says she does not think she will soon see another year of profits like 2020. But she also has no plans to sell any of her Tesla shares, and is also open to the idea of ​​borrowing more on her portfolio.

“This is what wealthy people do,” she said. Roberts said.

Of course, individual investors who are left over have been burned out before. Many investors lost money this year due to the chance that it fell back, among other things when oil prices became negative and shares of Eastman Kodak Co.

went on a wild ride.

The collapse of Joe Phoenix took place in 2018. He bet strongly against the prospect of market volatility resurfacing, earning more than $ 1 million through exchange-traded products that delivered the reverse of the Cboe Volatility Meter, or VIX. The products strengthen daily movements three times. And he made a risky bet even riskier by using margin debt.

An increase in volatility in February 2018 wiped out a significant portion of its profits and hit its holdings in the hundreds of thousands of dollars. Mr. Phoenix said the devastating loss shook it off the market by the end of the year. He resumed trading by mid-2019 after promising himself that he would not take so much risk again.

However, he still trades leveraged ETFs. These products attracted $ 14.3 billion this year through November, the most since 2008, from investors who had the prospect of doubling or tripling the daily movements of the S&P 500, the top 100 Nasdaq stocks and other indices. The moves work both ways, and such funds have fallen to 15% on some of the worst days of the market this year.

Mr. Phoenix adds that the products offer all the benefits of margin debt, without having to worry about a margin call or paying interest.

“This year I have done quite well in terms of my emotional response to things and the fact that I was able to cut off the losers,” he said. Phoenix said. He said he has risen more than 12% since resuming trading. “If I can do more than 8%, I’m doing pretty well.”

Write to Michael Wursthorn by [email protected]