Pyramiding is a method of increasing margin by using unrealized returns from successful trades. Pyramiding works by surrendering a minimal amount of previously-owned shares in order to pay a part of the exercise price. The surrendered funds are used to purchase a larger amount of option shares. These shares are then surrendered back to the company so that the process repeats itself - with more funds added each time the action is completed - until the full option price is paid. Thus, the "optionee" is left only with an amount of shares equal to the option spread. The process of surrendering shares to pay some of the exercise price and then buying an increasingly larger number of option shares - with more funds added at each round - explains the trading method known as "pyramiding".

Pyramiding uses leverage to gain a larger position size and, along with other speculative practices, can be risky and potentially can lead to magnified gains or losses. While some hedge funds and private investors employ this method, many do not have the ability to set up such trades. In addition, most hedge funds avoid taking this type of large risk within a single position.

For more on this topic, read Triple Screen Trading System.

This question was answered by Richard C. Wilson.

  1. What is a risk pyramid and why is it important?

    Learn about the risk pyramid and what it is used for; discover why it is important for investors to use the risk pyramid ... Read Answer >>
  2. What is the difference between a Ponzi and a pyramid scheme?

    Pyramid schemes and Ponzi schemes share many similar characteristics in which unsuspecting individuals are fooled by unscrupulous ... Read Answer >>
Related Articles
  1. Trading

    Pyramid Your Way To Profits

    This strategy involves scaling into profitable investments as they continue to rise.
  2. Personal Finance

    What Is A Pyramid Scheme?

    The FTC announced it had opened an official investigation of Herbalife, which has been accused of running a pyramid scheme. But what exactly does that mean?
  3. Investing

    Determining Risk And The Risk Pyramid

    Many investors do not understand how to determine the risk level their individual portfolios should bear.
  4. Small Business

    Multi-Level Marketing

    Learn how to differentiate between a legitimate marketing strategy and a pyramid scheme.
  5. Insurance

    Understanding Cash Surrender Value

    The amount of money an insurance company pays the owner of an insurance policy if the policy is voluntarily surrendered prior to the event that is insured
  6. Managing Wealth

    9 Signs That Business ‘Opportunity’ May Be a Scam

    There can be a fine line between a legitimate multi-level marketing opportunity and a pyramid scheme. Here are 9 warning signs.
  7. Trading

    4 Reasons To Hold Onto An Option

    There are times when an investor shouldn't exercise an option. Find out when to hold and when to fold.
  8. Investing

    How Much Investment Risk Can You Handle?

    When determining the amount of investment risk you can handle, consider your time horizon and bankroll.
  9. Taxes

    Explaining Unrealized Gain

    An unrealized gain occurs when the current price of a security exceeds the price an investor paid for the security.
  10. Trading

    Dividends, Interest Rates And Their Effect On Stock Options

    Learn how analyzing these variables are crucial to knowing when to exercise early.
  1. Pyramiding

    A method of increasing a position size by using unrealized profits ...
  2. Investment Pyramid

    A portfolio strategy that allocates assets according to the relative ...
  3. Pyramid Scheme

    An illegal investment scam based on a hierarchical setup. New ...
  4. Surrender Period

    The amount of time an investor must wait until he or she can ...
  5. Surrender Rights

    A right to cancel an annuity or life insurance contract in exchange ...
  6. Cash Surrender Value

    The sum of money an insurance company will pay to the policyholder ...
Hot Definitions
  1. Nest Egg

    A substantial sum of money that has been saved or invested for a specific purpose. A nest egg is generally earmarked for ...
  2. Denial Of Service Attack (DoS)

    An intentional cyberattack carried out on networks, websites and online resources in order to restrict access to its legitimate ...
  3. Perkins Loan

    A loan program that provides low-interest student loans to undergraduate and graduate students who demonstrate exceptional ...
  4. Wealth Management

    A high-level professional service that combines financial/investment advice, accounting/tax services, retirement planning ...
  5. Assets Under Management - AUM

    The market value of assets that an investment company manages on behalf of investors. Assets under management (AUM) is looked ...
  6. Subprime Auto Loan

    A type of auto loan approved for people with substandard credit scores or limited credit histories. There is no official ...
Trading Center