Insane Emergency RE strategy

[dixonge]

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Originally Posted by ERD50 Volatility is what "makes it tricky", but w/o volatility, the premiums you get will be too low to make much money. VIX is at very high levels historically.

Of course if I can sell less out-of-the-money spreads to get sufficient premium due to low VIX.....

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Originally Posted by ERD50 Of course, this means that this "service" knows something the rest of the "the market" trading options doesn't know. Otherwise, "the market" would not price the options favorably for you, if they knew the same thing you knew about market direction. And if you have some certainty over market direction, why not buy options rather than sell them? Expect to see a reversion to the mean over time. You might make something slightly higher than Buy&Hold, but I sure would not expect 5% over the market each month for long.

Basically just using support and resistance and other indicators a lot of other people use. No secret sauce or kabbalistic formulas that I am aware of.

The whole point of OTM credit spreads is to attempt to discern which way the market *won't* go.....on a bull put spread the market can go way up, or a little bit up, or horizontal, or slightly down and the put spread still expires worthless. Debit spreads or straight calls require you to determine the one absolute direction the market *will* go.

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Originally Posted by ERD50 Please report how you do each option period, it should be interesting. Good luck. -ERD50

Will do - just reached 5% for June with a few trading days left to go.

[Gone4Good]

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Originally Posted by ERD50 5% per month = 79.58% annual returns (1.05^12).

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Originally Posted by dixonge Will do - just reached 5% for June with a few trading days left to go.

Sounds reasonable . . .

So over 30 years you should be able to turn $150,000 in to $6.8 Trillion (or roughly 20% of the then expected US GDP). Not bad. I wonder why no one has ever thought of that before.

[ERD50]

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Originally Posted by dixonge Of course if I can sell less out-of-the-money spreads to get sufficient premium due to low VIX.....

Well, it will be interesting to see how that works for you. I don't think it will make a big difference, the odds end up about the same, just the width of the curve changes.

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Basically just using support and resistance and other indicators a lot of other people use. No secret sauce or kabbalistic formulas that I am aware of.

And this is why most everyone with some investing experience questions the value of a service to be predictive over the long run. If 'a lot of people' use it, and it is no secret, then who are the idiots that are selling/buying these options at prices that are so obviously under/over-valued?

Keep in mind, that in every trade someone is on the other side thinking that *they* are the ones getting a good deal. What makes you "smarter" than them (not meant to be a slam, just food for thought)?

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The whole point of OTM credit spreads is to attempt to discern which way the market *won't* go.....on a bull put spread the market can go way up, or a little bit up, or horizontal, or slightly down and the put spread still expires worthless

.

I understand that - don't you think the odds/premiums are adjusted accordingly. I don't bet on horses, so my terms might not be accurate, but isn't that like saying "Hey, if I bet on a horse to show, my odds of winning are better, so it is a better than a bet on a horse to win"? But of course, the pay-offs are different, too. Is the track, or the market really going to give you a better deal on one trade than another? Why? And since the market is open (on each side), if one was really better, it would soon get bought up taking away the advantage. Unless of course, you know something others do not.


RE: keep us informed -

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Will do - just reached 5% for June with a few trading days left to go.

What options are you trading? We are one week into a four week option period. Are you trading those weekly options, I think they were created about a year ago - I have not looked at those in a while? Or maybe you don't hold to expiry, and are just tracking month-month at EOM?

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Originally Posted by . . . Yrs to Go So over 30 years you should be able to turn $150,000 in to $6.8 Trillion (or roughly 20% of the then expected US GDP). Not bad. I wonder why no one has ever thought of that before.

Lots of people have thought of it. Some have even tried it. Now, where is that successful group of early retirees on this board?

The trouble is, it can, and often does work for a few months in a row, which emboldens the player. But that can happen with a "system" on the roulette wheel too. But that nasty regression comes into play for almost everyone.

-ERD50

[dixonge]

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Originally Posted by ERD50 Keep in mind, that in every trade someone is on the other side thinking that *they* are the ones getting a good deal. What makes you "smarter" than them (not meant to be a slam, just food for thought)?

First, you *did* see the title of this thread, right?

Second, the 'idiots' on the other side of the trade might be covering other positions. Or maybe they are doing what I used to do, which is to try to avoid time decay while correctly and accurately predicting the near-future move of the market with little room for error. I've simply chosen to get on the other side of that strategy.

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Originally Posted by ERD50 I understand that - don't you think the odds/premiums are adjusted accordingly. I don't bet on horses, so my terms might not be accurate, but isn't that like saying "Hey, if I bet on a horse to show, my odds of winning are better, so it is a better than a bet on a horse to win"? But of course, the pay-offs are different, too. Is the track, or the market really going to give you a better deal on one trade than another? Why? And since the market is open (on each side), if one was really better, it would soon get bought up taking away the advantage. Unless of course, you know something others do not.

Doesn't sound like derivatives in general would be a profitable field based on that. And yet they are massively traded every day. I think what you are talking about is risk. If you don't take it into account and you hold every position until expiration (or assignment) then yes, everything levels out and it's difficult to profit consistently. That's where risk assessment and money management come in.

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Originally Posted by ERD50 RE: keep us informed - What options are you trading? We are one week into a four week option period. Are you trading those weekly options, I think they were created about a year ago - I have not looked at those in a while? Or maybe you don't hold to expiry, and are just tracking month-month at EOM?

My spreadsheet for tracking and projections is a bit wacky. The advisory service I use calculates gains per trade. I go a step further and break it down into monthly gain, and then divide the gain by the amount of money I have available. I may adjust that to divide it by the amount of margin set-aside for each trade. But I'm approaching it from a monthly cash-flow perspective.

For example, my most recent trades were SPX Aug 780/770 bull put spreads for a credit of $1.20 For 3 contracts the net profit is $342.30. Divide that by the margin set-aside of $2657 = 12.8% gain, divide by two months till expiration, 6.4% gain per month on that trade. I do hold until expiration unless I'm force to buy the position back. If it expires worthless there's no commission. If I am later able to add a bear call spread on top of this to make an iron condor there is no additional margin set-aside so it can easily double the % gain.

Then I take all credits received in one month and divide that by the portfolio balance available for use during the month. For projection purposes I presume that I will be 85% invested each month. I use 5% as a best-case projection and 2.5% as a more conservative one. I have also added in occasional months where I have losses.

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Originally Posted by ERD50 The trouble is, it can, and often does work for a few months in a row, which emboldens the player. But that can happen with a "system" on the roulette wheel too. But that nasty regression comes into play for almost everyone. -ERD50

I've seen several different performance charts for advisory services utilizing this method. Some are much more volatile. Some use 70% probability, some use 90%. Low risk/low reward.

Of course we all know that past performance is no predictor of future performance, but so far - if it ain't broke, don't fix it. I'll gladly adjust/shift strategies if necessary, I'm not married to any strategy or advisory service.

[haha]

The good thing about this approach, relative to other outsize return ideas that have popped up from time to time on this board is that if implemented at a reasonable level, when/if it blows up, it won't destroy the OP.

Disillusion him perhaps, but not wreck his retirement or retirement preps.

Ha

[dixonge]

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Originally Posted by haha The good thing about this approach, relative to other outsize return ideas that have popped up from time to time on this board is that if implemented at a reasonable level, when/if it blows up, it won't destroy the OP. Disillusion him perhaps, but not wreck his retirement or retirement preps. Ha

Hey, I'm right here - I can hear you! LOL

Talk about outsize return ideas. My initial foray into options was LEAPS on AAPL - talk about wreckage! Ugh. It was all sunshine, rainbows and unicorns until Jan. 2008. We talked in terms of whether or not one would be getting 100% or 300% gains each year. That's why I started reading up on risk and money management.

[ERD50]

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Originally Posted by dixonge First, you *did* see the title of this thread, right?

heh, heh, heh - OK, I'll try to keep it light-hearted But, since you are posting and responding, you seem to be interested in feedback, so I'll give it. BTW, I hope it does not come across as argumentative, I trade options and I like to engage in debate on them to test/challenge my own ideas.

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Doesn't sound like derivatives in general would be a profitable field based on that. And yet they are massively traded every day.

Well, insurance is sold (traded - there is a buyer and a seller) every day, and people who are honest and educated/honest with themselves realize that they will not, on average, make a profit. But they (and I), buy it anyway, in order to reduce risk. Now, the sellers expect to profit on average, I just don't think it is reasonable to expect a 5%/month profit in an openly traded product that does not have huge barriers to entry. Ill take a stab at a more detailed analysis of your post, but I gotta run for a while.... But I will add that measuring returns is key - If this is money that you would have just put into a Buy&Hold strategy on a SPY ETF for example, then you need to make sure you are doing apples-apples, and measuring against the returns that you would have gotten with the same amount of dollars at risk in the S&P (and count divs). Lotsa people trick themselves into some fictitious accounting here.

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Originally Posted by haha The good thing about this approach, relative to other outsize return ideas that have popped up from time to time on this board is that if implemented at a reasonable level, when/if it blows up, it won't destroy the OP. Disillusion him perhaps, but not wreck his retirement or retirement preps. Ha

Well, I'll try to give more details later, but I think you can wipe yourself out with this approach. It is unlikely, and I think it would *probably* happen slowly enough that most people would give up before losing it all. -ERD50

[haha]

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Originally Posted by ERD50 Well, I'll try to give more details later, but I think you can wipe yourself out with this approach. It is unlikely, and I think it would *probably* happen slowly enough that most people would give up before losing it all. -ERD50

I hope you do come back to it. I know nothing about it, but the little bit I read after the OP showed up made it appear relatively safe, unless done too big.

Ha

[ERD50]

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Originally Posted by haha I hope you do come back to it. I know nothing about it, but the little bit I read after the OP showed up made it appear relatively safe, unless done too big. Ha

I got a small start on it. The "unless done too big" is an important piece, and where most comparisons fall apart, IMO. The big returns count on big investments, and you quickly get "too big" and take on more risk than a roughly equiv Buy & Hold. If you are taking on more risk, it isn't apples-to-apples.

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Originally Posted by dixonge For example, my most recent trades were SPX Aug 780/770 bull put spreads for a credit of $1.20.

dixonge, can you tell me the price/date of SPX when you placed the credit spread? Approx numbers are fine, it just makes it easier to put in writing with numbers.

-ERD50

[dixonge]

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Originally Posted by ERD50 I got a small start on it. The "unless done too big" is an important piece, and where most comparisons fall apart, IMO. The big returns count on big investments, and you quickly get "too big" and take on more risk than a roughly equiv Buy & Hold. If you are taking on more risk, it isn't apples-to-apples.

I try to limit risk by position sizing and diversification (multiple indexes, expiration dates, strike prices, etc.) Currently all positions are generally 3 contracts.

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Originally Posted by ERD50 dixonge, can you tell me the price/date of SPX when you placed the credit spread? Approx numbers are fine, it just makes it easier to put in writing with numbers. -ERD50

June 22, 2:00PM (Central time I think)

As best I can tell the S&P 500 was around 898 at that time.

[haha]

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Originally Posted by dixonge I try to limit risk by position sizing and diversification (multiple indexes, expiration dates, strike prices, etc.) Currently all positions are generally 3 contracts. June 22, 2:00PM (Central time I think) As best I can tell the S&P 500 was around 898 at that time.

Dixonge, a couple questions-

1) At any given time, how many of your "credit spreads" are bullish slants, and how many bearish? Wouldn't most of your postitions be exposed to the same bullish or bearish moves of the overall market?

2) Since on entry you establish what your maximum losses might be, at any given time when you are pursuing this strategy, how much money at risk do you have?

Thanks, Ha

[dixonge]

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Originally Posted by haha Dixonge, a couple questions- 1) At any given time, how many of your "credit spreads" are bullish slants, and how many bearish? Wouldn't most of your postitions be exposed to the same bullish or bearish moves of the overall market?

As of right now I have 3 bull put positions for July (12 contracts) and 2 bear call spreads (9 contracts). For Aug. 2 bull put spreads (9 contracts) and one bear call (3 contracts). Sept. I only have 2 bull puts (6 contracts).

The basic strategy seems to be to buy put spreads when the market reaches the bottom of a trading range or a support position. So if the market has been bouncing between 880 and 920 I would buy 780 puts near 880 and 1020 calls near 920.

In the middle of Feb. I sold several APR put spreads in the 590-600 range while the S&P was dropping below 800. As we now know it bottomed near 670 on Mar. 6 and never looked back. If I had waited the premium could have been better, but that's why I pay someone to tell me when to pull the trigger. I did one trade on my own during that time, an APR 710/700. That position spent a full week underwater in early March but eventually expired worthless. I stopped doing my own side-bets around then.

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Originally Posted by haha 2) Since on entry you establish what your maximum losses might be, at any given time when you are pursuing this strategy, how much money at risk do you have? Thanks, Ha

It fluctuates. ThinkOrSwim uses the term 'buying power' to indicate how many options I can buy, which is usually double the figure for stocks. Right now that number is about 40% of my total portoflio, so I'm 60% invested. It is lower right after expiration day, then grows throughout the month. I try to maximize it, leaving a little lying around for either dry powder or to give me room to leg out of some spreads if necessary.

[haha]

Thank you.

[BunsGettingFirm]

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Originally Posted by dixonge One other update to our plan - instead of just immediately moving overseas we are now planning on purchasing a used vehicle and travel trailer and exploring the nation's sights. Lots of time will be spent in national parks, BLM land, etc. Disneyland, no. Yosemite, yes. This will hopefully allow for acclimation to retired life first, then we can do the international thing later after we've got all the other issues resolved.

I still don't get the motivation for quitting your job now. You didn't say that you can't stand your job or that the stress is causing you to have health problems, and you are putting away money every month. Why not take longer unpaid vacations three time a year? Perhaps you'll find that 10 weeks off a year is enough. I find that about 4 weeks off in a row is enough to fully recuperate. After that, I go a bit crazy. I tried it in 2006.

If you really think that full time life on the road is the life you want, then check out this site: Could RV Living Be Your Dream? Let's Find Out!!. These guys left their jobs in their early 40s to travel and work camp across the country. They are still on the road 4 years later.

[dixonge]

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

Wait, isn't this the Early Retirement forum? I want to retire.........EARLY!

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Originally Posted by BunsGettingFirm You didn't say that you can't stand your job or that the stress is causing you to have health problems, and you are putting away money every month. Why not take longer unpaid vacations three time a year? Perhaps you'll find that 10 weeks off a year is enough. I find that about 4 weeks off in a row is enough to fully recuperate. After that, I go a bit crazy. I tried it in 2006.

My job is ok, I'm just tired of working.

I'd love to take these 10-week vacations you speak of. Unfortunately my employer has and will never allow for such without qualifying for the Family Leave act. Doubly so for my wife's job.

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Originally Posted by BunsGettingFirm If you really think that full time life on the road is the life you want, then check out this site: Could RV Living Be Your Dream? Let's Find Out!!. These guys left their jobs in their early 40s to travel and work camp across the country. They are still on the road 4 years later.

I've been reading just about every RV/Van/Vagabonding/Travel web site out there for a couple of years now.

[ERD50]

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Originally Posted by haha I hope you do come back to it. Ha

OK, you asked....

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Originally Posted by dixonge As best I can tell the S&P 500 was around 898 at that time.

OK (ignoring comm/fees), so your example credit spread could profit $1.20/share (this represent the sale of the 780 put, minus the cost of the 770 purchased put) with a max loss of $8.80/share (the $10 diff of the 780-770 strikes, offset by the $1.20 credit).

Now, there is a chance that you could lose the whole $8.80 (SPX < 770), and a higher chance that you could lose half or more (SPX < 775.60). Remembering that there are people on both sides of this trade, it would seem that the market consensus is that there is about a 1 in 8 chance that you could lose it all, based on what they are willing to pay out, versus what they are willing to take in (1.20/8.80). That would be ~ 14% drop in SPX from where you traded the options. Recall that SPY dropped 35% in two months from Sept 19 to the Nov 21, 2008 option expiry. Stuff happens.

Now, if I was B&H the index, there is no real world chance that the index would go to zero in 2 months (we would have bigger things to worry about if that happened!), and very unlikely (certainly less than 1 in 8) that the index would drop by half in 2 months. So you would clearly need to put up much less than half your money in these kinds of options in order to have less downside exposure than just buying the index. So that effectively cuts your return on these by that factor. To illustrate, it doesn't do me much good to even have a "guaranteed" 100%/month return, if I can only allocate $1 to it.

And again, I would really question your expectations to make a regular 5%/month over the long haul, even on a smaller portion of the account. There are people on the other side of the trade, and they ain't giving money away.

I read a bunch of option books shortly after I retired, as I didn't understand options and wanted to learn. I finally got to McMillan's tome, and skimmed over most of the later chapters on all these fancy constructs (Iron Condors, Iron Butterflies, etc) once I realized all they do is allow you to define the place on the curve where you want to play (which is quite interesting to me). But, I think a lot of people mistake this for thinking that it can somehow fundamentally change the risk-reward relationship. I see it more like deciding whether to play even-odd or a single number in Roulette. One is "riskier", but the payoff is higher. One is "safer", but the payoff is lower. And in the long run, they payoff exactly the same - a negative ~5.26% (2/38).

-ERD50

[dixonge]

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Originally Posted by ERD50 Now, there is a chance that you could lose the whole $8.80 (SPX < 770), and a higher chance that you could lose half or more (SPX < 775.60). Remembering that there are people on both sides of this trade, it would seem that the market consensus is that there is about a 1 in 8 chance that you could lose it all, based on what they are willing to pay out, versus what they are willing to take in (1.20/8.80). That would be ~ 14% drop in SPX from where you traded the options. Recall that SPY dropped 35% in two months from Sept 19 to the Nov 21, 2008 option expiry. Stuff happens.

I wasn't utilizing this strategy then, but with higher VIX I can see taking positions even farther away from the current price, or perhaps just calls?

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Originally Posted by ERD50 Now, if I was B&H the index, there is no real world chance that the index would go to zero in 2 months (we would have bigger things to worry about if that happened!), and very unlikely (certainly less than 1 in 8) that the index would drop by half in 2 months. So you would clearly need to put up much less than half your money in these kinds of options in order to have less downside exposure than just buying the index. So that effectively cuts your return on these by that factor. To illustrate, it doesn't do me much good to even have a "guaranteed" 100%/month return, if I can only allocate $1 to it.

But I'm *not* shooting for less downside exposure necessarily. If your overriding concern is safety, stay away from *any* options strategy (except for hedging). I again refer you to this thread title

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Originally Posted by ERD50 And again, I would really question your expectations to make a regular 5%/month over the long haul, even on a smaller portion of the account. There are people on the other side of the trade, and they ain't giving money away.

You are assuming that the people on the other side of the trade are all successful professional traders....and I'm ok with 2.5% - 5% is my optimal projection.

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Originally Posted by ERD50 I see it more like deciding whether to play even-odd or a single number in Roulette. One is "riskier", but the payoff is higher. One is "safer", but the payoff is lower. And in the long run, they payoff exactly the same - a negative ~5.26% (2/38). -ERD50

So B&H on the S&P will get you a negative 5.26%?

[ERD50]

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Originally Posted by dixonge I wasn't utilizing this strategy then, but with higher VIX I can see taking positions even farther away from the current price, or perhaps just calls?

A high or low VIX does not fundamentally change the "game". It only changes how wide that curve is.

High VIX means high expected changes in the underlying index/stock, and the options will be priced accordingly. You will have to move further away from the index/stock price to see the same prices for those options that you would at a low VIX. But your risk/reward is still going to be the same - you just play "closer in" when VIX is low, and "farther out" when VIX is high. As long as VIX is reasonably accurate - no fundamental change in the game.

IOW, do you really think that the market wants to give a different set of odds on a trade, just because of some change in VIX? No, they will (and do) adjust for it.

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But I'm *not* shooting for less downside exposure necessarily. If your overriding concern is safety, stay away from *any* options strategy (except for hedging). I again refer you to this thread title

OK, as long as you understand you are taking higher risk - I thought I saw a ref to "conservative strategy" earlier. Options can be used to increase, duplicate, or decrease the risk of a holding.

OK, if you are magnifying gains, you will also be magnifying losses (remember the 8:1 ratio you have there). Now, I suppose the "insane" part of your thread title refers to you being able to beat the market while being leveraged. With leverage, you can't afford to be wrong for long.

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You are assuming that the people on the other side of the trade are all successful professional traders....and I'm ok with 2.5% - 5% is my optimal projection.

Nope, I'm assuming that pros will jump on whatever side they can make money. Pros would kill for an "easy" and steady 34%/year (1.025^12). You are (insanely ) saying they won't, and you can. Here's to the "crazy ones"!

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So B&H on the S&P will get you a negative 5.26%?

Sometimes, but I meant that a Roulette wheel will, regardless of whether you place a "risky" or a "safe" bet.


-ERD50

[dixonge]

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Originally Posted by ERD50 OK, as long as you understand you are taking higher risk - I thought I saw a ref to "conservative strategy" earlier. Options can be used to increase, duplicate, or decrease the risk of a holding.

Well, conservative compared to straight calls. I should have clarified.

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Originally Posted by ERD50 OK, if you are magnifying gains, you will also be magnifying losses (remember the 8:1 ratio you have there). Now, I suppose the "insane" part of your thread title refers to you being able to beat the market while being leveraged. With leverage, you can't afford to be wrong for long.

The very nature of a spread helps alleviate some of the risk. Buy a put, sell a put. Limited gain, limited risk.

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Originally Posted by ERD50 Nope, I'm assuming that pros will jump on whatever side they can make money. Pros would kill for an "easy" and steady 34%/year (1.025^12). You are (insanely ) saying they won't, and you can. Here's to the "crazy ones"!

I'm not saying they can't. I'm not even saying that I can. I'm only saying it's worked for me so far, and my projections are based on the info I have. Who knows, I may be ranting about the evils of credit spreads in a few months *shrug* Maybe I should daytrade?

[ERD50]

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Originally Posted by dixonge The very nature of a spread helps alleviate some of the risk. Buy a put, sell a put. Limited gain, limited risk.

Well, maybe this is just semantics, but I think it is where many option traders go astray. I disagree entirely that these spreads "alleviate some of the risk". They do *define* your risk. In your earlier example, you can gain $1.20 max, and lose $8.80 max. That does not "alleviate some of the risk", it defines it.

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"?

Sure, you can reduce your exposure by putting up less total $ in these spreads to reduce the risk, but that is then just a shell game - on average, have you accomplished anything (other than buying some leverage - which just amplifies gains & losses)?

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I'm only saying it's worked for me so far, and my projections are based on the info I have. Who knows, I may be ranting about the evils of credit spreads in a few months *shrug* Maybe I should daytrade?

Well, I tried a much more conservative strategy - shooting for 1%/month gains over and above the market. I did it pretty consistently, I had superior gains and lower volatility compared to B&H - the "Holy Grail" for a retiree. And if 1% sounds shabby to you, that is 12% annual, which means I could spend 4x my current budget - I'd be living large. Or, I could be prudent and spend 2X (which would still be a *lot* of fun, since it would ALL be discretionary spending ) and bank the other half for a rainy day.

Well, my strategy worked well for 18 months, then that old devil regression caught up with me. I adjusted again (before I gave back all the excess gains fortunately), went even more conservative (targeting ~.75% above the market each month, and expecting to give back some of it once or twice a year for maybe 3-4% annually), and even with that I gave back almost all of the excess gains over the past 6 months in just one month.

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.

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