How does pyramiding work?

By Richard Wilson AAA
A:

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.

RELATED FAQS

  1. What are the best indicators for evaluating technology stocks?

    Technology stocks are often some of the most discussed stocks on the news. How can investors spot the company that will roll ...
  2. What technical indicators can I use to find undervalued stock?

    Investors seeking new ideas may want to look to technical analysis to see whether the market has undervalued a particular ...
  3. What's the difference between binary options and day trading?

    Binary options and day trading are both ways to make (or lose) money in the financial markets, but they are different animals. ...
  4. If a LEAP option is purchased and held for more than 12 months, is the tax treatment ...

    A LEAP (long-term equity anticipation security) is a call or put option that allows the buyer a long-term expiration on the ...
RELATED TERMS
  1. Forex Spread Betting

    A category of spread betting that involves taking a bet on the ...
  2. Multibank Holding Company

    A company that owns or controls two or more banks. Mutlibank ...
  3. Short Put

    A type of strategy regarding a put option, which is a contract ...
  4. Money Flow Index - MFI

    A momentum indicator that uses a stock’s price and volume to ...
  5. Mass Index

    A form of technical analysis that looks at the range between ...
  6. On-Balance Volume (OBV)

    A momentum indicator that uses volume flow to predict changes ...
comments powered by Disqus
Related Articles
  1. Gauging The Strength Of A Market Move
    Active Trading

    Gauging The Strength Of A Market Move

  2. Momentum Trading With Discipline
    Trading Strategies

    Momentum Trading With Discipline

  3. Confirming Price Movements With Volume ...
    Active Trading Fundamentals

    Confirming Price Movements With Volume ...

  4. Measure Momentum Change With ROC
    Active Trading

    Measure Momentum Change With ROC

  5. How To Profit From The
    Technical Indicators

    How To Profit From The "Night and Day" ...

Trading Center