Insane Emergency RE strategy

[dixonge]

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

I get the 60/40 split (Section 1256) since the majority of my trades are on SPX. And since I was doing mostly straight calls/puts in 2007-8 on AAPL - well......let's just say I have a lot of carry-forward losses to use.....

 

[Nords]

Thanks-- I've enjoyed the updates.

 

[dixonge]

further update - March and April (so far) have been big months, plus we made an overdue deposit so now up to $72K

 

[Moemg]

further update - March and April (so far) have been big months, plus we made an overdue deposit so now up to $72K

I reread the original posts . So how long do you plan to be able to live on the $72K and where ?

 

[dixonge]

I reread the original posts . So how long do you plan to be able to live on the $72K and where ?

Retirement is about a year away. If we haven't moved into the $125k range by then we may have to delay.

Also, I Do not know if I have mentioned it in this thread or not, but Plan A is now to travel in the states via a used truck/trailer combo. This is subject to change, of course, but is the current plan.

 

[dixonge]

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.)

The fact that I am responding to this particular post should tell some of you something....

I just now decided to look up this particular book. I cheated and read the summary on Wikipedia first. This particular quote resonated with me this morning:

According to Taleb: "Option sellers, it is said, eat like chickens and go to the bathroom like elephants", which is to say, option sellers may earn a steady small income from selling the options, but when a disaster happens they lose a fortune.

I can't say that I have lost a fortune but I've lost enough to quickly shatter my illusions as to this particular investment strategy. To make a long story short, when Thursday's close is 1071 but the next morning's (expiration day) settlement price is established at 1051.....well, it isn't pretty...

To recap, I have been looking for an investment strategy in which I can achieve an acceptable balance between risk/reward. Mechanical investing did great during the dot com boom, but I had no good exit strategy and ended up staying out of the market for a few years after the bust. I lost a meager 401k to a bad real estate investment deal which forced me into bankruptcy. I really liked LEAPS on AAPL except for the volatility part. I moved into index credit spreads as a way to ameliorate this volatility, and was quite content with making 2.5% on my spreads. I wasn't swinging for the fences every time. And yet I still got kicked in the gut.

Was it randomness? Volatility? Karma? Or maybe all of the above?

I'm not sure, and at this point I'm not sure I care. However, our early retirement plans are not dead. We have resolved to fight through and persevere. Fortunately we have positioned ourselves to set aside a lot of money over the next year. At this point about the only thing I am sure about is that none of that money will ever see a brokerage account. I'm done with the market, and I think I've given it a fair shake over the last decade. And frankly, if a 25-year-old were to ask my advice for long-term investing, I'm not sure what I would tell them! The market works great if the timing is right, but most will tell you that timing the market is near impossible. Buy and hold works good until a recession hits (every 5-7 years or so). And any other method that might juice your returns will also probably crush them.

Any way, were I 25 I might possibly get back in there and find another strategy, but right now the only thing that sounds half-way secure is backed by the government. I still have lots of 'options', but I'm done with Wall Street.

So sure, go ahead and tell me all the ways in which I'm wrong. Enlighten me with all of the things I *should* be doing with my money. Just don't be surprised if I remain unpersuaded...

 

[REWahoo]

So sure, go ahead and tell me all the ways in which I'm wrong. Enlighten me with all of the things I *should* be doing with my money.

I won't do any of that.

What I will do is thank you for sharing your experience with us, warts and all. People are eager to boast of their success but few have the fortitude to share the news when things don't work out as they had planned/hoped. I appreciate your willingness to tell your story.

 

[calmloki]

+1 Good fortune to you.

 

[ERD50]

I won't do any of that.

What I will do is thank you for sharing your experience with us, warts and all. People are eager to boast of their success but few have the fortitude to share the news when things don't work out as they had planned/hoped. I appreciate your willingness to tell your story.

REWahoo said it better than I could, so I'll just +1 that. I really do appreciate the updates - I wish it didn't turn out that way for you but it is what it is.

I still wouldn't 'give up' on the market. It may be the best thing out there, despite the problems. Maybe we can revisit that later.

-ERD50

 

[Moemg]

I appreciate the update and hope you succeed at finding a way to live your dream !

 

[Bestwifeever]

Dixonge I admit that even though I have no idea what you were doing with your money, I was hoping it worked for you. And I give you all the credit in the world for reporting on the outcome.

 

[tryan]

Thanx for sharing.

A good friend traded options with a product called Optioneer. 4 years into it he had 60-70k in profits. Then the 08 turmiol wiped him out. Says he held his losses to 4 years of profits. Needless to say he closed his account.

But what always shocked me was the commisions the broker was collecting. Often 33% of the profits went to the broker ... and my friend had ALL the risk. That never passed the sniff test for me ... so I "steered clear".

 

[NW-Bound]

Thanks for sharing your story, dixonge. Be sure to visit with us from time to time.

 

[tulak]

Thank you for sharing.

It's rare to hear some one post about their strategy that didn't work. I hope in the end you find one that does work for you.

 

[haha]

+1. It takes a big person to tell the truth, about money or a lot of other things.

Ha

 

[kcowan]

It would help if you could share a little more details on what went wrong, dixonge. Not in specifics but just the strategic components that ddi not work.

 

[Nords]

Thanks for closing the loop, Dixonge. Too many braggarts show up here with eye-popping tales of glory and never get around to documenting their [-]losses[/-] educations... only their profits.

Knowing now what you didn't know then, would you try an options-trading strategy again? Would you tweak it, redesign it, or avoid it altogether?

 

[haha]

Dixonge, I went back and skimmed/read this entire thread. I hadn't followed it in real time. From the first page several people took the trouble to try to point out the flaws in your strategy of gathering pennies in front of tanks. ERD50 comes to mind, and the guy who recommended Natenburg. Both these people know what they are talking about. But you appeared to not understand, and not really care to explore it further.

It isn't clear whether you lost enough money to damage your retirement plans, or if it just became clear that your self-characterized "insane plan" was just that.
Now, in your scenario of advice to a 25 year old you suggest that you might tell him that the markets are not a good place to build wealth. They are certainly not the usual place to get rich, but used sensibly they have often been a very good way to grow wealth over time, and likely the best passive way. My mind is not yet made up about whether they are a good place for retirees, or near retirees, to place money. I think it is a qualified yes- if a person is sensible, if s/he is overfinanced, and if s/he is willing to study and spend some time creating a good understanding of markets, and perhaps even more important, of one's own interactions with the markets.

So your summary to the 25 year old is based on a continued misunderstanding. In any game, to win you have to be taking only positive expectation bets. That does not mean that you will win all or even most of them, but ex ante each bet must be a winner when judged by mathematical expectation. Your option game was based on a confusion of frequency with expectation. It really doesn't matter if you win 99 in a row if #100 kills you, as you found out. But there are easier ways to find out, and usually they involve study and investigation before stepping up to the betting window.

I am not trying to promote the stock market, to you or to anyone else. Success does take a certain attitude, and I believe that it also takes axioms that are fundamentally sound.

Generally people who come here with a fixation on some theory have something to sell. You did not, and apparently do not.

So what gives?

Ha

 

[dixonge]

It would help if you could share a little more details on what went wrong, dixonge. Not in specifics but just the strategic components that ddi not work.

One thing I was looking for was a strategy that did not require my attention at all hours. Stop loss triggers theoretically solve this, but in reality they result in either churn or big losses or limit trades that get blown by and never execute. The net result is that I did end up watching the market all day during times of increased volatility. This in turn causes emotion to become a much bigger factor.

I was attempting to make 2.5% while staying as far OTM as possible. But when the market drops you end up making decisions like "lose 5000 now and risk doing so for nothing, or lose nothing now but risk losing 15,000 later.". This particular system worked well for awhile, but recent volatility has meant frequent decisions like that. My risk tolerance has been breached severely.

 

[dixonge]

Thanks for closing the loop, Dixonge. Too many braggarts show up here with eye-popping tales of glory and never get around to documenting their [-]losses[/-] educations... only their profits.

Knowing now what you didn't know then, would you try an options-trading strategy again? Would you tweak it, redesign it, or avoid it altogether?

Most option strategies are leveraged and directional. You fight time decay and only one market direction will offset this decay with a gain. OTM credit spreads benefit from decay and are much less directional, but it appears that an appropriate risk level is reached near where the commissions erase the profit.

I do not plan on doing any more equity-related investments again.

 

[dixonge]

It isn't clear whether you lost enough money to damage your retirement plans, or if it just became clear that your self-characterized "insane plan" was just that.

The 'insane' part has more to do with the total nest egg size vs. Conventional wisdom, not the investment strategy. The nest egg size and/or retirement date may shift, but not the rest of the plan.

Now, in your scenario of advice to a 25 year old you suggest that you might tell him that the markets are not a good place to build wealth. They are certainly not the usual place to get rich, but used sensibly they have often been a very good way to grow wealth over time, and likely the best passive way.

I would now recommend getting out of debt, rent vs own and no equities. Those returns exceed equities when risk, inflation and taxes are factored in.

So your summary to the 25 year old is based on a continued misunderstanding. In any game, to win you have to be taking only positive expectation bets. That does not mean that you will win all or even most of them, but ex ante each bet must be a winner when judged by mathematical expectation. Your option game was based on a confusion of frequency with expectation. It really doesn't matter if you win 99 in a row if #100 kills you, as you found out. But there are easier ways to find out, and usually they involve study and investigation before stepping up to the betting window.

This mischaracterizes my understanding. I am not saying that pros can not manage money and position size, etc. in order to avoid being wiped out by the losing positions. It can be done. But I was unable to do so while working during all market hours.

 

[ERD50]

I would now recommend getting out of debt, rent vs own and no equities. Those returns exceed equities when risk, inflation and taxes are factored in.

Again, thanks for coming back to share your (unfortunately unfortunate) experience, it is quite refreshing and admirable. But it is how we all learn.

Unfortunately, I think you are now making a second mistake. Your bad experience with options has turned you off from the market altogether. This one could take much longer than a year to learn from, and by then it may be too late to adjust. Or like many others, you adjust at precisely the wrong time.

While most of the forum is pretty conservative and content with some basic AA and Buy&Hold (which is fine), there are a few of us still looking for an edge. We've been around too long and seen too much to expect a 'silver bullet', but we keep looking for something that might eek out a few percent or lower the risk or some combo. But I don't think anyone can provide good data that says ignore equities (unless they cherry-pick the dates). Think about it.

-ERD50

 

[Purron]

But I don't think anyone can provide good data that says ignore equities (unless they cherry-pick the dates). Think about it.

-ERD50

I respect your opinion and would like to hear what you think about decreasing the percentage of equities as you get older. Seems to me a heavy allocation of equities makes less sense to someone in their 60s or older. Less time to bounce back from a downturn. Are you "age adjusting" your portfolio as time goes by?

 

[kcowan]

...I would now recommend getting out of debt, rent vs own and no equities. Those returns exceed equities when risk, inflation and taxes are factored in.

How much of this is colored by the market behaviour in the last year or so?

...This mischaracterizes my understanding. I am not saying that pros can not manage money and position size, etc. in order to avoid being wiped out by the losing positions. It can be done. But I was unable to do so while working during all market hours.

Why not just conclude that options trading is not for the amateur?

 

[haha]

How much of this is colored by the market behaviour in the last year or so?


Why not just conclude that options trading is not for the amateur?

It can be very trying for the so-called pros too. Remember Victor Niederhoffer? He is a very smart guy who liked to take the high frequency payoffs of selling options and doing spreads that depended on the fact that most options expire worthless. Then he got absolutely massacred and was for a time out of the game. His counterparty to a lot of these trades was Taleb. For the most part, I would not want to be opposite to Nassim Taleb.

I think selling time is a very smart strategy if the professional can attract enough money that his own capital contribution becomes small. The steady attractive returns easily attract investors and the manager if he understands the game can keep taking a handsome rake in cash. Then when the train wreck comes, he is pretty much off the train.

Typical sensible index type investing works fairly well no matter how sophisticated or naive the investor is.

Other areas often are more demanding of thoughtfull analysis. A lot more.

Ha