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Old 07-07-2009, 08:34 AM   #121
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Originally Posted by ERD50 View Post
I may take a stab at that later ( I gotta run also).

But I always feel most comfortable when several different views of a situation re-enforce each other. And I'm having trouble reconciling what the math might say with my analysis that the buyer would be motivated to accept an expected negative return, and the seller a positive return. And that closes the "zero sum game" loop of option sales.
Here's a more intuitive "hand-waving" argument. Owning the risk-free asset and a call is equivalent to owning a stock protected by a put. This is put-call parity. Mathematically,

C + K = S + P

where

C = Call Price

K = Strike Price (present value)

S = Stock Price

P = Put Price

This equation may be rewritten as

C = ( S + P ) - K

Taking the expected return of both sides says that the expected return of the call is positive if the expected return on a stock protected by a put is greater than the risk-free rate, which I think most people would agree is the case. Although, this isn't a proof, I'm hoping you will see it as a plausibilty argument.
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Old 07-07-2009, 09:44 AM   #122
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Originally Posted by FIRE'd@51 View Post

This equation may be rewritten as

C = ( S + P ) - K

... is positive if the expected return on a stock protected by a put is greater than the risk-free rate, which I think most people would agree is the case.
Maybe I shouldn't post before more caffeine has been absorbed, but....

1) My gut is saying that those equations are ignoring the time decay of the premium. The call buyer does not just need the stock to rise, he needs it to rise more than the premium.

2) I'll think about it some more, but I don't see why we should be so agreeable that the expected return on a stock protected by a put is greater than the risk-free rate.

Again I just tend to look at balance in market forces, and if I take the case of buying a stock and buying an ATM put, that means I cannot lose money on the stock, the put is 100% insurance against that. I can only gain. My gut says that will balance out and the cost of the put will turn my stock + put into a proxy for a "risk free investment", with no greater return. I just find it hard to accept that there is a way to get an essentially risk free investment with better than essentially risk free rates. Who is funding that? Maybe you are saying the expected upward bias of stocks funds it.... hmmm, maybe, but I'm still stuck on the idea that the "other side" would want a piece of that action - no free lunch.

I guess it wouldn't be hard to run the numbers on VIX, SPY and the price of an AUG 2010 put.

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Old 07-07-2009, 10:08 AM   #123
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1) My gut is saying that those equations are ignoring the time decay of the premium. The call buyer does not just need the stock to rise, he needs it to rise more than the premium.
Actually, put-call parity follows from the argument that buying a stock, selling a call and buying a put at the same strike creates a riskless asset, which should earn the risk-free rate:

S - C + P = K

I just chose to write the equation in a different way.

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if I take the case of buying a stock and buying an ATM put, that means I cannot lose money on the stock, the put is 100% insurance against that. I can only gain. My gut says that will balance out and the cost of the put will turn my stock + put into a proxy for a "risk free investment", with no greater return. I just find it hard to accept that there is a way to get an essentially risk free investment with better than essentially risk free rates. Who is funding that? Maybe you are saying the expected upward bias of stocks funds it.... hmmm, maybe, but I'm still stuck on the idea that the "other side" would want a piece of that action - no free lunch.
While a stock protected by an ATM put has a payoff pattern that never goes below zero, you can still lose the put premium (or part of it) depending upon what the stock price does, so it is not a risk-free trade. The risk-free asset earns the risk-free rate in every period with zero standard deviation
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Old 07-07-2009, 12:38 PM   #124
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While a stock protected by an ATM put has a payoff pattern that never goes below zero, you can still lose the put premium (or part of it) depending upon what the stock price does, so it is not a risk-free trade.
Yes, you are correct about that - my analogy did not take that into account.

I'll see if I can find a better way to state that. - ERD50
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Old 07-07-2009, 08:38 PM   #125
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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...
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Old 07-07-2009, 08:59 PM   #126
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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).

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Old 07-13-2009, 08:45 PM   #127
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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.
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Old 07-14-2009, 08:58 AM   #128
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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".

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Old 07-14-2009, 10:36 AM   #129
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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...
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Old 07-14-2009, 11:46 AM   #130
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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.

Quote:
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
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Old 07-14-2009, 12:06 PM   #131
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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.
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Old 07-20-2009, 07:38 AM   #132
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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
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Old 08-04-2009, 09:59 PM   #133
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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?
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Old 08-05-2009, 07:20 AM   #134
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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:
Quote:
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
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Old 08-05-2009, 08:40 PM   #135
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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

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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
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Old 08-05-2009, 11:45 PM   #136
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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
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Old 08-06-2009, 07:06 AM   #137
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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...
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Old 08-06-2009, 07:54 AM   #138
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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
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Old 08-18-2009, 03:53 PM   #139
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One more position update:

8/7/09 - 4 SPX AUG 09 1040/1050 CALL @2.00 SPX MARK 1011.67
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Old 08-23-2009, 07:43 AM   #140
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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.
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