Portfolio Management: Notional Value | tastytrade

The notional value of a position is the real amount at risk, excluding margin relief. If we own 100 shares of stock at $50.00 per share, we have $5000 of ... AlertWhatdoesBarclaysVXX,oilsuspensionmean?READTHEBLOGContentsOverviewLeverageinOptionsLeverageinFuturesSupplementalContentPortfolioManagement:NotionalValueContentsOverviewLeverageinOptionsLeverageinFuturesSupplementalContentOverviewThenotionalvalueofapositionistherealamountatrisk,excludingmarginrelief.Ifweown100sharesofstockat$50.00pershare,wehave$5000ofnotionalvalueatrisk.Ifthestockpricedropsto$0.00,westandtolose$5000.Inamarginaccount,weareoffered2:1leverageonstockpurchases.Whatdoesthismean?Basically,thatsame100sharesofstockwouldonlyrequire$2500ofcapitaltopurchase.Whatwehavetorememberisthatwestillhavethatsame$5000ofnotionalvalue.Inotherwords,weonlyhavetoputup$2500atfirst,butifthestockpricegoesto$0.00westilllose$5000. Understandingthedifferencebetweenleverage&notionalvalueisoneofthemostimportantconceptstolearn:LeverageinOptionsWhenitcomestooptions,leverageworksalittledifferently.Unlikestock,availablebuyingpowerdoesn’tchange.Ifwedeposit$10,000intomyaccount,ouroptionbuyingpowerwillbe$10,000.Ifweareinamarginaccount,thestockbuyingpowerwillbe$20,000.Thatishowthestockleverageworks.Ifwe’reinamarginaccountandhavefullmarginforoptions,thedifferenceliesinthebuyingpowerreduction(BPR).Let’ssaywesellaputatthe$50strike,whenthestockpriceistradingat$55.00.InanIRAaccount,whichiscashsecuredandhasnoleverage,wewouldberequiredtoputup$5000,lessthecreditwereceiveforsellingtheput.Eachputcontracthasthetheoreticalequivalentof100sharesoflongstock,whichiswhythesharesarealreadyaccountedforwhensellingtheput.Inamarginaccount,however,wewouldonlyberequiredtoputupafractionofthetotalvalue.Inalotofcases,itmaybearound20%ofthestrike(around$1000inthiscase).Thereareafewdifferentcalculationsthebrokerageworksthrough,andtheychoosethehighestvalueofthosecalculationsforBPR.Thisiswhereleverageplaysarole.Weareonlyrequiredtoputup$1000initially,butwestillstandtolose$5000lessthecreditreceivedifthestockpricegoesto$0.00.Thisiswhywealwayskeepalotofcashavailableinourportfolio,asthesemarginrequirementscanchangebytheminute.LeverageinFuturesLeverageisgenerallyhighestinfuturesproducts.Take/CLforexample,whichisthelightsweetcrudeoilfuturescontract.Thisproducttradesfor$1000apoint.That’sright,$1000apoint!Ifweownafuturescontract,and/CLisup$1.00,wewouldseeagainof$1000.Thatmeansthatinordertofindthenotionalvalue,we’dhavetomultiplythecurrentpriceby1000.If/CListradingat$47,thenotionalvalueofonecontractis$47,000.Inamarginaccount,thecosttopurchaseonecontractisonlyabout$3,500atthatprice!Thatmeanstheinvestorisgettingover10:1leverageonthatcontract,whenyoulookatnotionalvaluevsbuyingpowerrequiredtopurchasethecontract.Allfuturesproductsaredifferent,soit’sextremelyimportanttounderstandthenotionalvalue&pointvalueforfuturescontractsthatyou’retrading.Leveragecomesinallshapesandsizes.Moreleveragecangiveusahigherreturnoncapital,aswe’renotrequiredtoputupasmuch,butitcanalsomagnifylossesquickly.Understandingleverageandhowwecanuseitisimperativeforfutures,options,andstocktradersalike.SupplementalContentEpisodesonNotionalValue©copyright2013-2022tastytrade.tastytradecontentisprovidedsolelybytastytrade,Inc.(“tastytrade”)andisforinformationalandeducationalpurposesonly.Itisnot,norisitintendedtobe,tradingorinvestmentadviceorarecommendationthatanysecurity,futurescontract,transactionorinvestmentstrategyissuitableforanyperson.Tradingsecuritiescaninvolvehighriskandthelossofanyfundsinvested.tastytrade,throughitscontent,financialprogrammingorotherwise,doesnotprovideinvestmentorfinancialadviceormakeinvestmentrecommendations.Investmentinformationprovidedmaynotbeappropriateforallinvestors,andisprovidedwithoutrespecttoindividualinvestorfinancialsophistication,financialsituation,investingtimehorizonorrisktolerance.tastytradeisnotinthebusinessoftransactingsecuritiestrades,nordoesitdirectclientcommodityaccountsorgivecommoditytradingadvicetailoredtoanyparticularclient’ssituationorinvestmentobjectives.Supportingdocumentationforanyclaims(includingclaimsmadeonbehalfofoptionsprograms),comparison,statistics,orothertechnicaldata,ifapplicable,willbesupplieduponrequest.tastytradeisnotalicensedfinancialadvisor,registeredinvestmentadvisor,oraregisteredbroker-dealer.Options,futuresandfuturesoptionsarenotsuitableforallinvestors.Priortotradingsecuritiesproducts,pleasereadtheCharacteristicsandRisksofStandardizedOptionsandtheRiskDisclosureforFuturesandOptionsfoundontastyworks.com.  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