Insane Emergency RE strategy

[ERD50]

Since you guys have *totally* hijacked my thread , any chance any of you could point me to a free source of historical charts for SPX/RUT?

So far I can't find intraday pricing...

Yahoo has historical quotes with daily open/hi/lo/close. They also give a column which adjusts the basis for divs, splits, etc - that is nice. My broker has fancy charts where you can zoom in on 10 minute increments or something, but you need to have an account.

What I'd really like is historical data for option bid/asks - I have not seen that. The actual trades don't do much good, unless you know the underlying price at the time (yeah, for SPY you could re-create with the Black_Scholes calculator).

-ERD50

 

[dixonge]

a few new positions opened recently:

Last Wednesday (7/8)

4 RUT Aug. 400/390 bull put spreads - credit of $0.90 each - RUT @ 476
4 SPX Aug. 760/750 bull put spreads - credit of $1.00 each - SPX @ 871

Today (7/13)

4 SPX Sept. 750/740 bull put spreads - credit of $1.20 each - SPX @ 876

Set to expire this Friday (all SPX):

2 670/660 put spreads
7 730/720 put spreads
3 790/780 put spreads
5 1020/1030 call spreads
4 1040/1050 call spreads

This should free up around $10K in margin set-aside.

 

[ERD50]

Thanks dixonge, it'll be interesting to follow these.

One clarification - We've been talking that we would expect you to take the full credit w/o penalty (very roughly) eight-nine times out of ten for trades like these. I think you mentioned that you seem to be ahead of that, with 37 good trades so far and no losers. I'm not sure how you are counting, but from the list you gave, I would say that many of those are essentially the same bets, just placed at different levels and times.

So I would not view your expiring SPX as 21, or even 5 bets, but as 2 bets - one that SPX won't rise too high, and one that it won't fall too low (or even just one bet, that SPX won't be too volatile). Yes, you've spread the bets around, and that's fine, but it is really a variation on the same bet, rather than a separate "event".

-ERD50

 

[dixonge]

So I would not view your expiring SPX as 21, or even 5 bets, but as 2 bets - one that SPX won't rise too high, and one that it won't fall too low (or even just one bet, that SPX won't be too volatile). Yes, you've spread the bets around, and that's fine, but it is really a variation on the same bet, rather than a separate "event".

-ERD50

Looking at July, I think I could probably classify it as one or two iron condors with a total of 9 contracts, plus a few put spreads thrown in. And yes, I like your angle on it being one bet, a bet on lack of volatility. Other months have positions that are more one-sided, but could be viewed as one bet. So I guess you are saying that this would change the risk analysis?

I'm also guessing that this proves I have an extremely UNdiversified portfolio. I'm ok with that for now...

 

[ERD50]

Looking at July, I think I could probably classify it as one or two iron condors with a total of 9 contracts, plus a few put spreads thrown in. And yes, I like your angle on it being one bet, a bet on lack of volatility. Other months have positions that are more one-sided, but could be viewed as one bet. So I guess you are saying that this would change the risk analysis?

I don't know that I'm saying it changes the risk analysis, but I am saying it changes the way you count how many bets you placed.

I'd say that the 37 trades were probably only a few distinct bets (let's say 5 just as an example). So if a loss is to be expected roughly 1 out of 8 bets, and you have placed 5, you are not "overdue" (on average) for a loss. And of course, there can be long runs within that average. So it will take some more time to see how the law of averages come into play.

I'm also guessing that this proves I have an extremely UNdiversified portfolio. I'm ok with that for now...

Yes, I guess you can say that this is an undiversified investment in (lack of) volatility. I don't know that that's a bad thing at all, but I guess it does mean that that money is not playing in the general long term upward bias (we hope) of the market.

-ERD50

 

[dixonge]

I'd say that the 37 trades were probably only a few distinct bets (let's say 5 just as an example). So if a loss is to be expected roughly 1 out of 8 bets, and you have placed 5, you are not "overdue" (on average) for a loss. And of course, there can be long runs within that average. So it will take some more time to see how the law of averages come into play.

So in any given month I would have either an upwards bet, a downwards bet, or both (making one lack-of-volatility bet). But no matter what just one bet or position. One per expiration cycle. Based on this view I've placed nine positions with six having expired safely.

 

[dixonge]

All July positions expired worthless, I kept all the money - again.

Going forward, I think I'll just update the general status of my positions, as opposed to individual transactions, maybe monthly. You can at least use this info to determine if I need to buy any positions back, or roll them over. Current status:

August spread range:

RUT 430-570
SPX 780-1070

September spread range:

SPX 750-1060

 

[drcha]

I do not believe most panhandlers clear $50K a year.

That's $25 per hour or so--tax free. On a busy corner, I bet the more convincing ones might do that. I have watched plenty of people give them money. Of course, they do have expenses: cardboard sign--what else?

 

[ERD50]

All July positions expired worthless, I kept all the money - again.

Going forward, I think I'll just update the general status of my positions, as opposed to individual transactions, maybe monthly. You can at least use this info to determine if I need to buy any positions back, or roll them over. Current status:

August spread range:

RUT 430-570
SPX 780-1070

September spread range:

SPX 750-1060

I'd prefer to see it in the form you provided earlier:

4 RUT Aug. 400/390 bull put spreads - credit of $0.90 each - RUT @ 476
4 SPX Aug. 760/750 bull put spreads - credit of $1.00 each - SPX @ 871

Up to you of course, but "spread range of SPX 750-1060" doesn't tell me enough to learn or provide feedback. Just sayin'.

You can drop the contract qty if that is TMI, maybe just a multiplier if you take a different amount of different positions?

-ERD50

 

[dixonge]

ok, here's what's new since my last post: (all sold credit spreads)

7/21/09 - 6 SPX Sep 1060/1070 Calls @ .80 SPX mark 953.39
7/22/09 - 2 SPX AUG 1040/1050 CALL @.45 SPX MARK 958.78
7/22/09 - 4 SPX AUG 1040/1050 CALL @.40 SPX MARK 958.44
7/22/09 - 2 SPX AUG 1040/1050 CALL @.40 SPX MARK 958.42
7/29/09 - 3 SPX OCT 1100/1110 CALL @.95 SPX MARK 974.77
7/30/09 - 4 SPX OCT 1100/1110 CALL @1.40 SPX MARK 995.96
8/03/09 - 4 SPX OCT 1100/1110 CALL @1.50 SPX MARK 999.96

I'd prefer to see it in the form you provided earlier:


Up to you of course, but "spread range of SPX 750-1060" doesn't tell me enough to learn or provide feedback. Just sayin'.

You can drop the contract qty if that is TMI, maybe just a multiplier if you take a different amount of different positions?

-ERD50

 

[ERD50]

ok, here's what's new since my last post: (all sold credit spreads)

Thanks. I'm thinking those points look good, I expect the market to run out of steam for a while, but I didn't expect to see 1000 so soon either. So we will see.

Good luck! - ERD50

 

[dixonge]

Thanks. I'm thinking those points look good, I expect the market to run out of steam for a while, but I didn't expect to see 1000 so soon either. So we will see.

Good luck! - ERD50

Thanks. I am still hoping that the lack of volume overall this summer will deflate this fall, at least temporarily. I have a LOT of call spreads now. Makes me slightly nervous...

 

[ERD50]

I have a LOT of call spreads now. Makes me slightly nervous...

You probably have already done this, but my "gut check" on whether I'm taking too much risk is this - picture the absolute worst reasonably-possible outcome. Is that a loss you can handle? Obviously, no-pain no-gain, and I understand you are shooting for high gains and are willing to tolerate some risk. But each of those spreads can result in a 100% loss. A SPX of 1110 in October is not totally unreasonable (if it were, no one would pay for the 1100 call).

I know your Aug positions were mainly on the other side of the market, so that helps "diversify" your bet. But it also increases the chance of getting hit (a market swing either way can catch you, rather than just one way). But these are looking like pretty good positions, based on my gut feel of the market.

I keep looking at these spreads as a way to play a little side money when I get the feeling the market has moved too far too fast. But my risk tolerance as a retiree is far less, and I usually chicken out - just not enough conviction to put the $ at risk.

-ERD50

 

[dixonge]

One more position update:

8/7/09 - 4 SPX AUG 09 1040/1050 CALL @2.00 SPX MARK 1011.67

 

[dixonge]

August expirations update:

They all expired.

I'm now back to about half of my portfolio tied up in margin set-aside, the other half available for use.

If I am now using the correct spreadsheet formula, my deposits (starting in 11/08) represent 79% of my balance, my gains represent 21%. Had I timed the market correctly I could have made more by just straight investing in calls. But who times everything right and gets out at just the right time? Not me.

Hoping to add more positions before the end of the month.

 

[drcha]

I don't want to discourage people from trading options, since I use them a lot and I think they are an excellent tool. But I think that ERD50 is speaking truth. The probabilities are priced in. Options do not constitute a free lunch. Things do mean-revert.

I want to point out to the novices who may be reading this post that you can lose your entire margin in a credit spread (or you can lose your entire investment in a debit spread, which is essentially the same thing as a credit spread--it's just a question of whether the money is tied up in the option or in your required cash margin). And if 1987 happens tomorrow, you *will* lose it all. You may argue that 1987 isn't going to happen tomorrow. Well, it probably isn't. But it will happen again, sometime.

So trade small, set some stops if that's your style, get out before expiration--essentially, establish some prudent entry and exit rules for yourself and follow them. Trade at a level where you would not be too adversely effected if 1987 did happen tomorrow.

 

[dixonge]

I don't want to discourage people from trading options, since I use them a lot and I think they are an excellent tool. But I think that ERD50 is speaking truth. The probabilities are priced in. Options do not constitute a free lunch. Things do mean-revert.

How does this apply to short-term Out-of-the-money spreads on both sides of the price? I can't imagine an index mean-reverting both up *and* down 100-150 points within a 30-day period. Well sure, anything is possible, but that seems like a rare event.

But even if it happened, just roll your positions up and out...

I want to point out to the novices who may be reading this post that you can lose your entire margin in a credit spread (or you can lose your entire investment in a debit spread, which is essentially the same thing as a credit spread--it's just a question of whether the money is tied up in the option or in your required cash margin). And if 1987 happens tomorrow, you *will* lose it all. You may argue that 1987 isn't going to happen tomorrow. Well, it probably isn't. But it will happen again, sometime.

If you have all your money in put credit spreads, yes. It's a major reason for an iron condor type of approach...

So trade small, set some stops if that's your style, get out before expiration--essentially, establish some prudent entry and exit rules for yourself and follow them. Trade at a level where you would not be too adversely effected if 1987 did happen tomorrow.

With credit spreads I rarely get out early, although there is no commission to buy them back at .05 or lower. But yes, rules and position size and risk are all important. It's the main reason I stopped doing straight calls on individual stocks. Way over my risk tolerance!

UPDATE: I really don't care to continue posting details of individual trades but my portfolio has now gone from $5k to $50k in one year and I've been invested around 80% all year in credit spreads. I've learned good lessons which will serve me well in the coming years regarding position size, putting multiple positions on one strike and month, and legging out vs. rolling. My average monthly gain is 3.4% and projections still look good.

 

[ERD50]

The probabilities are priced in. Options do not constitute a free lunch. Things do mean-revert.

How does this apply to short-term Out-of-the-money spreads on both sides of the price? I can't imagine an index mean-reverting both up *and* down 100-150 points within a 30-day period. Well sure, anything is possible, but that seems like a rare event.

Think about it - if you bet on BOTH sides of the price, it is true that only one can get 'hit', but you doubled your chances that one of them will get hit. It didn't change a thing, risk/reward wise.

Back to the roulette analogy - easier to look at this from the 'house' side:

A gambler comes in and puts bet after bet on #17. The 'house' would not laugh and say, 'hey, this guy just keeps losing, this is a great bet for the house!'. The house knows that in the long run, that bet is no different than playing red/black, even/odd, etc.

You are similar to the 'house' here - you keep winning small bets time after time, but somewhere along the line that big payout will come. If that was not the case, I can assure you that people smarter than both of us combined, with more resources and connections would be playing these with computers. But as enough people did that, they would drive the prices back into balance (where I think they are now).

Now take that a step further - the gambler start betting on #17 AND # 15. He CAN'T win both! So the house will never lose both either (just like you can't lose with spreads on both sides of the price)! But again, it doesn't change the odds, because he doubled the chance that one or the other will come up. The 'house' just yawns.

UPDATE: I really don't care to continue posting details of individual trades but my portfolio has now gone from $5k to $50k in one year and I've been invested around 80% all year in credit spreads. I've learned good lessons which will serve me well in the coming years regarding position size, putting multiple positions on one strike and month, and legging out vs. rolling. My average monthly gain is 3.4% and projections still look good.

And now VIX is down, making this a bit tougher game to play. It's great that you are ahead of the game now, I'm hesitant to "wish you luck" though - because it is increased confidence that gets people in trouble with these things. The more you put in the worse the eventual 'hit' may be. So instead, I'll say I'm glad for your success (and not surprised, that's how these work), but as they said in Hill Street Blues, "Be careful out there!".

-ERD50

 

[walkinwood]

Dixonge,

How much time have you spent in the countries you propose to live in?

Your plan - especially the aggressive investment scheme - sounds scary to me, but all the best. You may want to put away a sum equal to your budgeted expenses in a safe investment & be aggressive with the rest. I haven't read every post in this thread, so if I missed that - apologies.

 

[dixonge]

Think about it - if you bet on BOTH sides of the price, it is true that only one can get 'hit', but you doubled your chances that one of them will get hit. It didn't change a thing, risk/reward wise.

In theory, yes. But in real-world trading, not so much. For example, on 10/16 I purchased Dec 940/930 put spread on SPX which was around 1084 at the time. This morning I purchased De. 1170/1180 call spread around 1109 on the SPX. This second position was added after the SPX moved 25 points away from where it was on 10/16, not to mention the time value decay. (I could close the 940/940 today for commission only) So my risk on the put spread has dropped off when adding the spread on the call side.

And now VIX is down, making this a bit tougher game to play.

To keep the same gains requires moving closer to the price, yes. But since volatility is down, the odds are better for NOT having the price move against you. Six of one, half dozen of the other (in a sense)

 

[ERD50]

In theory, yes. .... So my risk on the put spread has dropped off when adding the spread on the call side.

Dropped off, but not eliminated. If it was eliminated, that would show in the price.


re low VIX:

To keep the same gains requires moving closer to the price, yes. But since volatility is down, the odds are better for NOT having the price move against you. Six of one, half dozen of the other (in a sense)

Agreed 100%. My point was that the game has 'changed' in that you do have to move closer to the strike - some people view that as 'riskier', but I think that is misguided.

It's all 'six of one, half dozen of the other', plus or minus a bit. The gain/loss is generally aligned closely with the odds. With your approach, it can be a long time before the pattern appears. Just like my previous roulette example with the house and the #17 gambler - the 'house' should not be surprised at all if the house 'wins' 37 times in a row, or even 74 times in a row. But in the long run, the house has a 5.26% advantage. No more, no less. Regardless of the bet placed.

-ERD50

 

[Square]

Dixonge, The only thing I have to say is that there is a reason the MM are trading these small spreads with you. I could be assuming incorrectly, but I really think you should understand better what you are doing. Though Ill admit I didnt read every post or know your options understanding.

Read understand and live natenberg " Option Volatility & Pricing: Advanced Trading Strategies and Techniques" from front to back many times to understand options models we put tens of millions of dollars into building our models. Your 5k-50k is just a situation of "fooled by randomness" your an outlier waiting to get crushed. ("fooled by randomness" another great book btw, but focus on natenberg first.)

 

[Nords]

Dixonge, how 'bout an update?

 

[dixonge]

Dixonge, how 'bout an update?

By Monday my balance will be up to $63K. Trades are still expiring worthless as planned. Recently had to roll a couple of positions up and out since the market is irrationally continuing to go up ( ) which resulted in those positions giving up about 10% of their original gain. That affected my overall gain for the month very minimally, and that is generally how things have gone from day one. Even though volatility is down I'm still averaging 2.7% monthly gains (calculated as credit - commissions / portfolio balance)

 

[Bimmerbill]

How does tax affect your monthly gain? Income, capital gains, etc?