Insane Emergency RE strategy

[dixonge]

Quote:

Originally Posted by ERD50 Compared to B&H the index, your chances of losing everything on that transaction, or even losing half of it are much higher. So how is that "alleviating some of the risk"?

Keep in mind that most of my comparisons are to straight options. Buying a put has a certain amount of risk - selling a put against it lessens that risk, and vice versa. Both would be more risk than buying straight shares of an index ETF.

Quote:

Originally Posted by ERD50 I actually do think you can make *slightly* above B&H rates with some options added in, but I don't believe it can be a big number. Any big number will get noticed and absorbed by the market.

So in other words no one has any chance of beating the historical rates of index B&H? All those money managers and fund managers and mutual funds are just useless?

Quote:

Originally Posted by ERD50 If you really think you can find a niche that the rest of the market is blind to, and that they are willing to turn their money over to you month after month for years on end - then the "insane" part of the thread title (that you reminded me of) fits, IMO. Good luck to you, and keep your eyes wide open in case your luck runs out. -ERD50

As I stated earlier, I'm not married to any strategy. I've used several, and if flaws appear, you move on. But I don't need the entire market to be 'blind' to what I'm doing, just one or two people at a time willing to buy what I'm selling. I don't care why they are doing it, and they don't have to be some gullible fool either. There are perfectly legitimate reasons for buying debit put spreads while I'm selling credit put spreads. Each month a different person can do so for different reasons. And they have been so far. And if that's crazy I hope none of us are ever cured!

[ERD50]

Quote:

Originally Posted by dixonge Both would be more risk than buying straight shares of an index ETF.

OK, I agree with that (although I think you reversed buy/sell on the put, or meant call). And part of my point is, when discussing returns, they really need to be risk adjusted to put them in perspective.

Quote:

All those money managers and fund managers and mutual funds are just useless?

Now THAT is an easy one. They are less than useless. Odds are, especially after adjusting for costs and taxes, you will do better with the B&H index. There are exceptions, but picking the future exceptions is like picking an individual stock today that will outperform in the future. Again, they MUST be risk-adjusted to be meaningful.

There is probably a FAQ on this, or search if you want to go through thousands of posts

Quote:

But I don't need the entire market to be 'blind' to what I'm doing, just one or two people at a time willing to buy what I'm selling. I don't care why they are doing it, and they don't have to be some gullible fool either. There are perfectly legitimate reasons for buying debit put spreads while I'm selling credit put spreads. Each month a different person can do so for different reasons. And they have been so far. And if that's crazy I hope none of us are ever cured!

But the "market" for these is not made up of one or two people. Even when there are few transactions, computers are monitoring that bid/ask in near real time and will jump in to buy/sell any imbalance before your fingers can hit "ENTER". Liquidity and supply/demand for options is fundamentally different from that of stocks. Because options do have an underlying component, the bid/ask (not the latest trade) will remain in lock-step with that, at least on liquid underlying components, like indexes.

It makes no difference what reason people buy/sell things - the market determines the price. Potatoes are $X/# at the grocery store - they don't care if I buy them to feed my family, or cut them up until I find one that looks like some celebrity and sell it on ebay for $1M bucks. And I don't offer the grocery store more than market price, just because I hope to make more. I pay what the market bears/demands, regardless.

-ERD50

[dixonge]

You seem to be discussing mainly price. I'm not trying to beat the average bid/ask spread price. I'll leave it to the market makers to arbitrage those things, I just put in a limit order for a price that meets my minimal demands and let the order fill as the prices move toward my position. I've gone 2-3 days working on that price before, but most often I adjust till I get a hit. Either way, it most often is the difference between taking in a credit for a 4.5% gain or a 5% gain.

Let me propose a theoretical trade scenario. For me to sell a July 780/790 bull put credit spread someone somewhere else has to be willing to *buy* a 780/790 put debit spread. (I think I have that right).

The market maker makes money on the bid/ask spread, the brokers make it on commissions, and both sides of the trade have supposedly good reasons for the purchase. I'm betting on the SPX to stay above the 780-something breakeven, the other side is betting on going below.

However, long before expiration day the other side could sell for a profit. Say they bought when the S&P was at 920 and it falls to 850. They sell, take their profit. In the meantime the S&P levels out and my spread expires worthless with the S&P at 840. I keep my credit, the other side keeps their profit. The market makers and brokers keep their money. I don't see where this requires a winner vs. a loser or a pro trader vs. a sucker.

This reminds me of when I first started exploring options. Most of the textbook explanations seem to assume that one will always hold an option to expiration and base all their greeks and risk calculations on that assumption. The day I figured out that I could use money management and stop/loss techniques to simply sell my winners at a profit (before expiration, before assignment) was an epiphany. I could sell losers too, capping my losses. It makes the theory and fancy curve charts rather irrelevant, IMHO.

FYI, I'm quite enjoying this discussion btw. If I can't somewhat defend my strategy in the public forum I'd have no business doing it, right?

Quote:

Originally Posted by ERD50 But the "market" for these is not made up of one or two people. Even when there are few transactions, computers are monitoring that bid/ask in near real time and will jump in to buy/sell any imbalance before your fingers can hit "ENTER". Liquidity and supply/demand for options is fundamentally different from that of stocks. Because options do have an underlying component, the bid/ask (not the latest trade) will remain in lock-step with that, at least on liquid underlying components, like indexes. It makes no difference what reason people buy/sell things - the market determines the price. Potatoes are $X/# at the grocery store - they don't care if I buy them to feed my family, or cut them up until I find one that looks like some celebrity and sell it on ebay for $1M bucks. And I don't offer the grocery store more than market price, just because I hope to make more. I pay what the market bears/demands, regardless. -ERD50

[dixonge]

Quote:

Originally Posted by ERD50 OK, I agree with that (although I think you reversed buy/sell on the put, or meant call). And part of my point is, when discussing returns, they really need to be risk adjusted to put them in perspective.-ERD50

To clarify, if I buy a put there is risk, specifically that the stock might rise. If I then *sell* a put at a different strike price I help offset any losses the bought put might incur. One rises as the other falls. It is in that sense that risk is somewhat offset.

[ERD50]

Quote:

Originally Posted by dixonge I'll leave it to the market makers to arbitrage those things, I just put in a limit order for a price that meets my minimal demands and let the order fill as the prices move toward my position. I've gone 2-3 days working on that price before,...

I also do that often - but it is separate from what determines that price, which is the market's measure of the risk/reward of the position.

Quote:

Let me propose a theoretical trade scenario. For me to sell a July 780/790 bull put credit spread someone somewhere else has to be willing to *buy* a 780/790 put debit spread. (I think I have that right).

I'm not exactly certain of the mechanics of how it gets filled on the floor, but I always assumed they just fill your sale of the 790 put and your buy of the 780 put. So they just need to match each leg up with a buyer and a seller - not specifically another person looking for that complimentary spread (which I think would be a Bear Put Debit Spread, but I'd have to check).

Quote:

However, long before expiration day the other side could sell for a profit. Say they bought when the S&P was at 920 and it falls to 850. They sell, take their profit. In the meantime the S&P levels out and my spread expires worthless with the S&P at 840. I keep my credit, the other side keeps their profit. The market makers and brokers keep their money. I don't see where this requires a winner vs. a loser or a pro trader vs. a sucker.

You are mixing things up here. If the other side closed their complimentary spread position at a profit before expiration, then you need to compare them to a credit spread position that was opened/closed at the same time, and that would be closed at a loss - netting zero (disregarding spread/comm/fees). The position you hold to expiration can only be compared to it's complimentary spread held to expiration. If you had a gain, they had a loss.

Quote:

This reminds me of when I first started exploring options. Most of the textbook explanations seem to assume that one will always hold an option to expiration....

Sure, the books usually deal with expiration to make it clear how these things work. You can close earlier to lock in a profit or limit a loss, but.... at that point you are guessing on the future moves of the market. Locking in a gain means giving up some of the total gain you might have if held to expiry (but relieving you of further risk of loss). Limiting a loss means you give up on the chance that the position returns to profitability at expiration, which it might do.

It becomes market timing - good luck!

Quote:

FYI, I'm quite enjoying this discussion btw. If I can't somewhat defend my strategy in the public forum I'd have no business doing it, right?

That's the same reason I'm engaging in it from my end. It's been a while since I talked myself through these - good to challenge my thinking and make sure I don't get stale!


-ERD50

[dixonge]

Quote:

Originally Posted by ERD50 I'm not exactly certain of the mechanics of how it gets filled on the floor, but I always assumed they just fill your sale of the 790 put and your buy of the 780 put. So they just need to match each leg up with a buyer and a seller - not specifically another person looking for that complimentary spread (which I think would be a Bear Put Debit Spread, but I'd have to check).

I guess having the market makers in the middle does muddle the picture a bit...

Quote:

Originally Posted by ERD50 You are mixing things up here. If the other side closed their complimentary spread position at a profit before expiration, then you need to compare them to a credit spread position that was opened/closed at the same time, and that would be closed at a loss - netting zero (disregarding spread/comm/fees). The position you hold to expiration can only be compared to it's complimentary spread held to expiration. If you had a gain, they had a loss.

True. But don't underestimate the number of people trading with weak money management discipline. They will hold that OTM position until it is almost worthless because - well, it MIGHT suddenly shift and go ITM. Ask me how I know...

Quote:

Originally Posted by ERD50 Sure, the books usually deal with expiration to make it clear how these things work. You can close earlier to lock in a profit or limit a loss, but.... at that point you are guessing on the future moves of the market. Locking in a gain means giving up some of the total gain you might have if held to expiry (but relieving you of further risk of loss). Limiting a loss means you give up on the chance that the position returns to profitability at expiration, which it might do. It becomes market timing - good luck!

But a strict stop-loss strategy (pre-defined and you stick to it) takes the guess-work out of it. Getting that set at appropriate levels (%? x$?) takes some experimentation or backtesting. Emotions have to be minimized.

It's still market timing in a sense, but the guess-work (so to speak) is built in up front in an effort to survive losses and maximize wins.

[ERD50]

Quote:

Originally Posted by dixonge But a strict stop-loss strategy (pre-defined and you stick to it) takes the guess-work out of it. Getting that set at appropriate levels (%? x$?) takes some experimentation or backtesting. Emotions have to be minimized. It's still market timing in a sense, but the guess-work (so to speak) is built in up front in an effort to survive losses and maximize wins.

OK, a strict, pre-defined stop loss takes some emotion out of it. But I question if it is a good financial move. I have yet to see any evidence presented on this by anyone.

Stop losses don't help you financially if an investment dips, and then returns to previous levels - you just "bought high, sold low". I would need some evidence that the money saved by bailing out early on a real dog is greater than that lost by selling on a temporary dip.

Stop losses can also fail when a stock drops when markets are closed. If your $100 stock with a $90 stop-loss closes at $100 and opens Monday AM at $50 - all you will get is $50. It does not happen often, but it happens.

-ERD50

[citrine]

Or if it does not work.....you can move to India and teach them how to lose their accents!
That is my fall back strategy....move back to the homeland if my massage career does not last long

[dixonge]

Quote:

Originally Posted by BunsGettingFirm I still don't get the motivation for quitting your job now.

Just to clarify, we are targeting Dec. 2010 for retirement.

[dixonge]

Trades for your analyzing pleasure.

June 30 - sold 4 contracts RUT August 570/580 bear call spread. $0.92 credit

4 contracts - net credit of $346.05 after commissions.

Margin set-aside should have been $4000-$346.05=$3653.95 or somewhere in that range.

Gain of 9.4% - 4.7% per month

Today sold 4 contracts of RUT August 430/420 bull put spread to create an iron condor. $1.10 credit - net credit of $418.05 - NO margin set-aside.

$346.05 + $418.05 / $3653.95 = 20.9% gain - 10.45% per month

So as long as the RUT stays between 430 and 570 by the third Friday in August I'm good. I apologize ahead of time for not rooting for a big rally...

[ERD50]

Quote:

Originally Posted by dixonge Trades for your analyzing pleasure. .... Gain of 9.4% - 4.7% per month

Well, you should say "potential maximum gain of x.x%". - you won't know the gain until you close it, or it expires. And then, it should be compared to B&H with the same amount at risk.

But still very interesting - I'll have to do some analysis later. I'm guessing that adding the bull put spread on top of the bear call spread doesn't require any added margin set-aside, but I'd have to pick it apart to check. Off hand, it would also seem to double your risk of a loss, right? With either one, only a big market swing in a single direction can cause a loss, but now a big market swing in either direction can cause a loss, is that right?. Stable market, you win on both.

If you are up to it, some good info to include with these trades is the price of the underlying when you transacted it, and the points of max profit, max loss, and break even of the underlying. 430 and 570 below are where your credits would start to be eroded, right?

Quote:

So as long as the RUT stays between 430 and 570 by the third Friday in August I'm good. I apologize ahead of time for not rooting for a big rally...

I hear ya! With my current strategy, seeing the market swing up wildly the 4th week of each month, then way down (to keep volatility going), and then ending the third Friday of each month up 1-2% would be ideal. Is that too much to ask? The B&H portion of my portfolio would see 12-18%/year, and the options would see another 8-12%. I'd take it.

-ERD50

[ziggy29]

Quote:

Originally Posted by dixonge So as long as the RUT stays between 430 and 570 by the third Friday in August I'm good. I apologize ahead of time for not rooting for a big rally...

In other words, the RUT needs to remain stuck in a rut...

[dixonge]

Quote:

Originally Posted by ERD50 Well, you should say "potential maximum gain of x.x%". - you won't know the gain until you close it, or it expires. And then, it should be compared to B&H with the same amount at risk.

But since I receive the credit up front and it always (so far) expires worthless and I keep the money.......*shrug* I know it's not realized gain until expiration, but still...

Quote:

Originally Posted by ERD50 But still very interesting - I'll have to do some analysis later. I'm guessing that adding the bull put spread on top of the bear call spread doesn't require any added margin set-aside, but I'd have to pick it apart to check.

My broker does not require extra set-aside. Some do.

Quote:

Originally Posted by ERD50 Off hand, it would also seem to double your risk of a loss, right? With either one, only a big market swing in a single direction can cause a loss, but now a big market swing in either direction can cause a loss, is that right?. Stable market, you win on both.

only a big *sustained* swing - must last through expiration date. But yes, depending on how you calculate risk, I now have extra opportunities to lose.

Quote:

Originally Posted by ERD50 If you are up to it, some good info to include with these trades is the price of the underlying when you transacted it, and the points of max profit, max loss, and break even of the underlying. 430 and 570 below are where your credits would start to be eroded, right?

Yes. Boy, you're sure making me work here!

[ERD50]

Quote:

Originally Posted by dixonge But since I receive the credit up front and it always (so far) expires worthless and I keep the money.......*shrug* I know it's not realized gain until expiration, but still...

And that is exactly the kind of thinking that I expect will *eventually* get you into trouble (or maybe just 'disillusioned', as haha put it earlier).

So I'll say it again - do you really think the person on the other side of the trade is saying - "here, take my money, I don't have any reasonable expectation of ever seeing this again"? I don't. I think that they expect that, over the long run, they *won't* expire worthless at about the same rate as the ratio of credit to set-aside. Otherwise it would be a lop-sided market, and I just don't believe those exist for long, at least lop-sided enough to make huge profits.

The tricky thing here is, you are making something like 8:1 bets, you get a relatively small payoff, and a relatively small chance of losing on any one trade. It can lull one into a false sense of security because you can go a while w/o a loss. But at 8:1, the one loss can eliminate 8 wins.

Not to sound too negative - I think there are reasons why one *can* expect to "win" selling options. But I don't expect that to be a big win.

Quote:

Yes. Boy, you're sure making me work here!

You do it anyhow, don't you? I always do when I do an option trade. It's simple stuff, it's just that I haven't studied all the configurations in so long, I'd have to look each up to tie it all together and know which numbers to add and subtract.

But hey - you're the crazy one, right (see thread title)?

-ERD50

[dixonge]

Quote:

Originally Posted by ERD50 And that is exactly the kind of thinking that I expect will *eventually* get you into trouble (or maybe just 'disillusioned', as haha put it earlier).

To me it is a matter of perspective. When buying options I am on guard from the minute I submit the trade. My stop loss (whether built into the trade or set up as an alert) could be triggered in mere minutes. I have let go of many dollars and I may never see some of those again, gone forever. An additional subtle but insidious mindset comes into play as well. If I buy a LEAP for, say, 2011, why would I bother with a stop loss? If the market turns against my position today, is it not reasonable to assume that by 2011 it will surely recover? So you watch your portfolio value slowly shrink and soon you are thinking like a gambler, scheming how to double down and win back all you've lost. By the time you panic and attempt to sell, is there any value left to your options?

But when selling, the perspective is reversed. I am being *given* money up front, which I will then attempt to hold on to. I have a lot of cushion built in so that stop loss triggering is much less likely. And somehow, psychologically, letting go of losing positions is easier. Some of this is anecdotal, but that's my story...

Quote:

Originally Posted by ERD50 So I'll say it again - do you really think the person on the other side of the trade is saying - "here, take my money, I don't have any reasonable expectation of ever seeing this again"? I don't. I think that they expect that, over the long run, they *won't* expire worthless at about the same rate as the ratio of credit to set-aside. Otherwise it would be a lop-sided market, and I just don't believe those exist for long, at least lop-sided enough to make huge profits.

Regardless what the other side of the trade *expects,* the raw numbers show that the vast majority of options expire worthless, and this benefits the sellers.

Quote:

Conclusion Data presented in this study comes from a three-year report conducted by the CME of all options on futures traded on the exchange. While not the entire story, the data suggests overall that option sellers have an advantage in the form of a bias towards options expiring out of the money (worthless). We show that if the option seller is trading with the trend of the underlying, this advantage increases substantially. Yet if the seller is wrong about the trend, this does not dramatically change the probability of success. On the whole, the buyer, therefore, appears to face a decided disadvantage relative to the seller. Do Option Sellers Have a Trading Edge?

Quote:

Originally Posted by ERD50 You do it anyhow, don't you? I always do when I do an option trade. It's simple stuff, it's just that I haven't studied all the configurations in so long, I'd have to look each up to tie it all together and know which numbers to add and subtract. But hey - you're the crazy one, right (see thread title)? -ERD50

I pay attention to the numbers when I first put on the trade, but I'll admit I don't track them too carefully except for the breakeven. Max profit is the initial credit.

[ERD50]

Quote:

Originally Posted by dixonge Regardless what the other side of the trade *expects,* the raw numbers show that the vast majority of options expire worthless, and this benefits the sellers. Do Option Sellers Have a Trading Edge?

While I agree with the premise that option sellers have the edge, the data within is meaningless. And when I see meaningless data presented as if it is supposed to mean something, I ask - hmmm, whas'up wid'at?

Notice that they never mention the value of the options that expire worthless, minus the losses incurred when they didn't, divided by the entire amount of money at risk over a given time period, compared to the behavior of the underlying over that same time period? Now *that* would give you some indication of how *much* of an advantage the sellers have over B&H. The % that expire worthless means nothing, absolutely nothing.

I'll re-visit the Roulette Wheel. You are the house, and you are "selling options" in effect. You don't care if the bettor steps up and bets either:

Bettor A) On a SINGLE NUMBER - he will only win 1 of 38 times, over 97% of his bets "expire worthless".

or...

Bettor B) On RED - he wins almost half the time (18/38), 52.6% of his bets "expire worthless" - much better performance than bettor A.


Yet, the house will, on average, collect the exact same 5.263% of the money bet from each of them. No matter what bet is placed and what the odds of it "expiring worthless" are. Because simply, the payout matches the chance of the bet. I'm pretty sure "the market" has known this for as long as gamblers have.

Now the only thing that keeps people coming to the table and betting on a single number is that, every once in a while, there is a big payout (but the house still, on average keeps 5.236%). So those people giving you money month after month are going to expect a big payout once in awhile (you take the full loss), or they get bored and don't play (supply/demand says the price they are willing to pay drops). So yes, I think option sellers can skim a bit off because people on the other side are willing to pay to play (either "gamble" by buying a call, or "buy insurance" with a put), but I don't think they will pay anything near 5% a month, on average. If it did, there would be a thread titled - "The easy way to retire early with a nest-egg approaching the size of the GDP", with this approach explained


-ERD50

[dixonge]

Quote:

Originally Posted by ERD50 The % that expire worthless means nothing, absolutely nothing.

I find it interesting that a lot of people are scared off from options because of the oft-cited numbers - "80% of all options expire worthless." This could be because people who buy straight calls/puts lose all their money. Or maybe people buy a lot of puts as insurance for their stock holdings. My spreads expire worthless when my held puts are worthless, and the sold puts are worthless. But this is a GOOD thing from my perspective.

So yeah - we all know what they say about statistics.

Still - I much prefer being on the selling side.

Quote:

Originally Posted by ERD50 I'll re-visit the Roulette Wheel. You are the house, and you are "selling options" in effect. You don't care if the bettor steps up and bets either: Bettor A) On a SINGLE NUMBER - he will only win 1 of 38 times, over 97% of his bets "expire worthless". or... Bettor B) On RED - he wins almost half the time (18/38), 52.6% of his bets "expire worthless" - much better performance than bettor A.

I was using the roulette analogy just yesterday. I have played at the table for hours. The result? I could play for hours and break even. BORING.

In comparison, option spreads are like laying bets on the table in the section labeled "all numbers except for 1-5" That's an option you'll never see on a roulette table.

Quote:

Originally Posted by ERD50 So yes, I think option sellers can skim a bit off because people on the other side are willing to pay to play (either "gamble" by buying a call, or "buy insurance" with a put), but I don't think they will pay anything near 5% a month, on average. If it did, there would be a thread titled - "The easy way to retire early with a nest-egg approaching the size of the GDP", with this approach explained -ERD50

I haven't started that thread........yet....

[ERD50]

Quote:

Originally Posted by dixonge In comparison, option spreads are like laying bets on the table in the section labeled "all numbers except for 1-5" That's an option you'll never see on a roulette table.

Sure it is. Bet on both RED and BLACK. That is the same as NOT betting on GREEN (0 & 00).

One guess what the payback is .

-ERD50

[dixonge]

Quote:

Originally Posted by ERD50 Sure it is. Bet on both RED and BLACK. That is the same as NOT betting on GREEN (0 & 00). One guess what the payback is . -ERD50

not a good analogy - "not 1-5" leaves 33 possible wins (6-38) not 1 (0&00).

BUT - the roulette analogy fails any way since it is random chance on every spin, not a progression down through the numbers.

This *is* giving me some crazy ideas for new games of chance though. LOL

[ERD50]

Quote:

Originally Posted by dixonge not a good analogy - "not 1-5" leaves 33 possible wins (6-38) not 1 (0&00). BUT - the roulette analogy fails any way since it is random chance on every spin, not a progression down through the numbers. This *is* giving me some crazy ideas for new games of chance though. LOL

heh-heh-heh - I've explained that the payouts are adjusted to your chance of winning (at the tables, at the track, or at the market) about a half-dozen ways. If you can't see (or fail to accept) that taking a bet or option that has a greater chance of winning (or of not losing) means that bet or option will have a comparably lower payout, then I doubt that explaining it again will make a difference.

No, I can't seem to offer an analogy for you that matches your criteria 100% perfectly. So please continue to post your trades, and let's see how it goes. Remember, I expect that one can do OK selling options in the long run - I just don't think they can make the kind of rates you are hoping for.

If you don't care to work out the B/E, max/min profit/loss points, then please include the basics:

Ticker/Price/date of the underlying.
Strike Price, exp date, put or call, credit or debit amount for each leg.

Trust me, there is nothing I'd like better than to be proven wrong. If there is a way to consistently make 5% per month, I am all ears.

Back in my working days, people wondered why I spent as much time as I did talking with the "crazy" ones - heck, a lot of time those "crazy" people had some good ideas, but no one would listen. I struck gold occasionally. And the truly crazy ideas were sometimes entertaining, or sometimes triggered a thought that could be made practical. Gotta look outside the box once in a while, but don't forget that there *is* a box.

So keep us informed, this could take a while though. Like I said, I had a pretty good 18 month streak....

-ERD50