Buying power is the amount of money required to trade a strategy. It isn’t static. Not having enough for a possible expansion can lead to an early exit. How much extra is needed?
One thing many traders forget is that buying power is not a static number. Changes in the underlying can cause fluctuations in the amount of capital required to hold the position, this in turn affects our return on capital.
In August of 2008, when the market dropped, buying power for SPYmore than doubled. Not leaving enough capital on the side would force an early exit. Historically, the average buying power requirement in SPY increased slightly as duration increased. Although the increase was minimal, it reinforces the concept of not being under capitalized in trades.
When we implementof straddles, we see a decrease in the average buying power requirement. This makes the position less prone to spikes in buying power.
How much extra buying power should we set aside? Tune to see what Tom and Tony recommend!