What Is Pyramiding?

Pyramiding is a method of increasing a position size by using unrealized profits from successful trades to increase margin. Pyramiding involves the use of leverage to increase one's holdings by making use of an increased unrealized value of current holdings. Since the use of leverage is involved, this is a riskier strategy than one which only makes use of cash to purchase securities.

Understanding Pyramiding

An investor who is pyramiding uses additional margin from the increasing price of a security in his or her portfolio to purchase more of the same security. This is generally a slow method of increasing one's position size, as the margin increases will permit successively smaller purchases. Additionally, whether the pyramiding involves only a single security or a few securities, the risk of a portfolio concentration increases with each level of the pyramid. See margin maintenance and margin call for risk aspects of pyramiding.

Pyramiding Options

Pyramiding in options 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 a number of shares equal to the option spread. Since pyramiding relies on leverage to gain a larger exposure to a trade, gains and losses will be magnified.