Is betting on "isolated margin" just crazy fun or financial folly

Question

First off, no, I am not trolling, I have actually pondered this question.

Some entities offer in advertising a 10,000x pseudo-leverage on so-called "isolated margin" gaming. Now, I've considered a theoretical scenario:

• I buy some cryptocurrency for, say, 10€, with a 10,000x leverage betting on the price going up.
• Should the price now rise to 10.10, thus by 1%, I would make a profit of 1000€, which is a 100x return.
• Should the price fall by a minimum of 0.01%, to 9.999€, I would lose the 10€ under the "isolated margin" scheme.

Now, one could theoretically execute such a trade with 10 big DAX companies, and if just one of them luckily goes up by 1%, you make a 100x. Of course, you'd also be quickly liquidated with a tiny price movement, but it's enough to be lucky with just one trade and you've made a very high profit.

Am I overlooking anything? It's obviously VERY risky but could be fun to try with a few euros, couldn't it?

Edit: In my case, if the trade is set to be liquidated at a 0.01% loss, it means the position will be closed automatically to prevent further losses. Therefore, I wouldn’t owe the entity offering the arrangement additional funds beyond this predetermined loss threshold. (Isolated Margin)

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Important Disclaimer: The scenarios discussed here are purely theoretical and serve only for educational or entertainment purposes. Engaging in high-leverage trading involves significant risk, including the potential loss of your investment. This discussion is not a recommendation or encouragement to participate in such financial activities. Always conduct thorough research or consult a financial advisor before making investment decisions.

Answer 1

What you are overlooking is that your losses are quite certainly not capped at your initial investment. So if the price falls by 1%, you now owe your broker 990€.

Simply putting in a sell order at 9.999€ does not solve the issue, as the price might fall below 9.999€ faster than your sell order can execute. No serious broker is going to allow you to invest at 10,000x leverage while simultaneously limited your potential losses to the initial investment - they'd lose massive amounts of money on that.

If you think that you have found such a deal, you've either overlooked the fine print telling you that it isn't such a deal after all, and you might end up significant in debt. Or it is a scam, in which case they'll steal your money and then ask for more.

Answer 2

Stop Loss is Not Magic

If your broker could force someone to buy your rapidly declining shares at a particular price, they would not be a broker, they would be the richest person on the planet. In a market, the best your broker can do is sell your shares at whatever the best offer exists on the market. That is, some idiot has to want to buy your rapidly declining shares! And they don't have to accept whatever number you put in your stop-loss order. They can easily offer less, or much less. And if no other buyer is out-bidding them, then the price can fall right past your stop-loss threshold by huge amounts.

When a price is going down, it might be routine variation. But it also might be panic selling. And if it's a panic, there is no reason for buyers to line up like sheep and ask for prices in a smoothly continuous line down to the next point of support, for arbitrary numbers of shares. If you believe this, then switch to Dungeons & Dragons, because you obviously prefer fantasy.

If you look at any stock price history with any kind of volatility, you will notice something funny: they do not look like sine waves. Nor do they look like triangle waves. Quite often, they look like sawtooth waves. That's because very few stocks can generate so much mania that the price is driven up in a short time. The typical progression is for the price to creep up over many weeks and months. But when the price moves down, it can do so precipitously. It can make gut-wrenching downward swings in one day, often times in less than an hour. And when this happens, you can bet your bottom euro that the price will not look like a smooth, continuous function over those drops.

So when you request a stop-loss at 9.999 EUR, your trade might execute at 9.999 EUR. Or maybe 9.9 EUR. Or maybe 5 EUR. These are all possible, depending on the volume of shares and volatility. If your broker offers you a 10,000x leveraged trade with a 10 EUR investment, they are asking you to pay out 99,990 EUR if the security drops to 0. Make sure you can afford to lose that before you get your feet wet.

Answer 3

In the NYSE, the smallest unit of share price is one eighth of a cent, so I would assume that for European exchanges, it's either the same, or 0.01 EUR, or 0.001 EUR. So a price of 9.999 EUR would either be impossible, or literally the smallest possible change. As other answers have said, a stop loss isn't guaranteed to get you a buyer in general, and a stop loss that's literally the smallest possible price change is even less guaranteed. You'd have to have not only someone wanting to buy at that price to trigger the stop loss in the first place, but also enough additional people to leave you enough shares to buy.

To guarantee that you could sell at the price, you'd have to buy a put option. And the premium for a put option at the money (or at 99.99% of the money) is going to be roughly equal to (to an order of magnitude, at least) the expected volatility of the stock, which is going to be a lot more than one basis point. So I don't think there's any way to get 10k leverage on a 10 EUR stock. Maybe if you go for Berkshire Hathaway (currently $597k/share) you could get 10k leverage, but I doubt it, and I think you'd have to spend a lot more than 10 EUR to get it.

Any deal where you can capture gains while leaving someone else with the losses is going to be functionally equivalent in at least some sense to an option, and you'll be charged for the service, whether that charge is called a "premium", "interest", "finance fee", etc. As long as you're doing derivatives, you could just buy a call option instead. Then you wouldn't have to deal with getting a long position to balance out the put.

As for whether it's a good idea, if you're deriving sufficient enjoyment, and you're risking money that you can easily handle losing, then go for it. It makes more sense than putting money on a roulette wheel. If you're doing it expecting it to earn you money, then that would be foolish.

Answer 4

You are almost certainly misunderstanding what will happen. There is not a single 'price' where you can buy and sell for the same amount. There are individual orders out there at various prices for both buying (bid) and selling (ask). The 'price' you see when you look at graphs of stock prices is the last sale price. Whenever there isn't a gap between the ask and bid prices, a trade occurs. So when you buy stock at 10 EUR a share, there is nobody else willing to buy at that price or higher, or the trade would already have been made.

If you want to leverage 10 EUR into a 100,000 EUR purchase, there must be someone willing to sell that much stock at that exact price, and nobody else willing to buy that high or the trade will have already occurred, so the current bid price will be lower than 10 EUR. Say the orders look like this:

• ask 5,000 shares @ 10.05
• ask 10,000 shares @ 10.00
• bid 2,000 shares @ 9.99
• bid 10,000 shares @ 9.98

You leverage your 10 EUR to buy those 10,000 shares and sell them if the price goes above 10.10 or below 10, your broker makes the deal and shells out 100,000 EUR. Your account now has a balance of 10,000 shares and -100,000 EUR. The brokers won't do this for free, so you'll be paying interest on that 100,000 EUR. If you have an order to immediately sell if the price goes below 10 and someone sells 2,000 shares at 9.99, your broker will sell the 10,000 shares at 9.98 because the price dropped, losing 2,000 EUR (actually since there is no longer a bid at or greater than 10 EUR, they may sell immediately 2,000 shares for 9.99 and 8000 for 9.98, not sure). Your account now has 0 shares and a balance of -1,990 EUR. The broker is not going to be the one on the hook for that.

If you find a broker saying they are willing to do that and take all the risk, it is almost certainly a scam. If not, the broker will not be in business for long.

Answer 5

While stock prices are often portrayed as going up and down in some smooth process, it's important to understand that they really represent a sequence of not-necessarily-contiguous snapshots.

Suppose, for example, that at some moment in time, a stock that has last traded at $100 has one posted offer to buy 10 shares for $98, one posted offer to buy ten shares for $75, and many posted offers to buy many of shares for $50, but no other posted offers between $50 and $100, and someone wants to sell 15 shares at market price, that seller will receive $98 for ten of the shares and $75 for five, leaving five orders pending at $75/share. If someone else had a stop loss order for 100 shares at $99, the stop loss would trigger as soon as the first sale occurred at $98, but the seller who triggered the sale would be able to sell all 15 shares ahead of any sales resulting from the stop loss order. That order would result in five shares being sold at $75 and 95 at $50, for a total of $5,125.

If many people have posted stop loss orders at $99, all but five of the shares that would be sold as a result would get sold for a price of $50. If it turned out that 1,000 shares were instantly sold as a result of stop loss orders, the total value of the sales (assuming the only pending purchase offers over $50 were the ones described above) would be at most $50,125, i.e. $50/share for 1,000 shares, plus an extra $25/share for five shares. No matter how quickly the sellers act, the total "prize pool" available for quick sellers would amount to only $125 beyond what slower sellers would get.

Answer 6

As the other answer explains, if you have a leverage of 10'000x, it can go up that much, gaining you almost 1000 EURs, but it can also down that much, and then you thus are in debt with the broker.

An idea could be to set an automatic selling price at 9.999, such that, if the price goes lower, and you would only have to pay 10 EUR, you immediately sell the stock, and thus would be protected against a loss. This strategy will indeed prevent you from massive losses, but will not gain you much, since it is a lot more likely that the stock value goes down 0.001 than going up to 10.10. On the very short term, the probability of going up n% is almost the same as going down n%, so that means that the scenario of the value going down to 9.999 is probably almost 100 times more likely than going up to 10.10, and thus the probabilities will even out: if you would repeat the scenario 100 times, approximately 99 times you will lose 10 EUR, and 1 time you will gain 990 EUR, so these will even out, and only move in the direction the stock itself goes: if the stock is in an upwards direction, the gaining scenario is more likely and you thus will win a few times more, and so there will be a bit more gain than there than what you lose. But if the stock itself goes downwards, the loss scenario is more likely so in the "average scenario", you lose money.

Answer 7

Let's simplify your financial product a bit. It's now a coin toss. If it comes head, you win 10.000€. If it comes up tails you lose 1€. Chance is 50/50.

To turn a profit, the issuer needs to price that product at least at 5000€.

And that's excatly what will happen with your product - as happens with all financial products. The price will immediately rise until the expected profit matches the market average.

Answer 8

It's also worth noting that a stop-loss order means you are sacrificing the possibility that the price might recover; you must sacrifice potential gains when you attempt to limit losses.

The market unavoidably balances potential gain with potential risk. There is no way to bypass that; if there was, the market would adjust prices until there wasn't.

If you are willing to look at the long term and settle for "market rate of return", investing can be reasonably safe and reasonably easy (modulo brief periods of weirdness like the covid bubble and it's correction). If you want to try for more than that, you must accept that you may also get less than that, and leverage works both ways. Doing enough research into the companies may compensate for that somewhat, which is part of how angel investors make money, but most folks aren't willing or able to get and evaluate that kind of information.

Don't waste your time looking for magic. It distracts you from the more reliable investments, and leaves you open to being played for a sucker when someone else does understand the odds