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Old 08-14-2011, 11:07 AM   #41
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OK, I went back and recalculated. Instead of using a static 1.5% option premium, I adjusted the option premium up or down depending on the VIX. I didn't calculate the VIX for every single week. I used the avg VIX for the year to do each years calculations. VIX ranged from an avg of ~34 in 2008 to ~12.5 in 2006.

My 14 weeks real time returns stay the same because the data is real and not an amateur attempt at back testing.

Real time 14 weeks
SP500............-12%
Weekly puts...+1.3%

2011 YTD
SP500............-5.2%
Weekly puts....+15.0%

2005-Present
SP500.............+1.7%
Weekly Puts.....+16.5%


The most amazing thing to me is that once I adjusted for the VIX, this method actually came out in the black in 2008. Even though the Sp500 was -37%, the weekly puts returned +14.7%. As mentioned earlier the strategy definately under performs in a very strong market.
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Old 08-24-2011, 01:10 AM   #42
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Here are two articles I came across recently, about option collars.
Risk Management through Costless Collars and Equity Collars as an Alternative to Asset Allocation.
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Old 08-24-2011, 03:02 AM   #43
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Here are two articles I came across recently, about option collars.
Risk Management through Costless Collars and Equity Collars as an Alternative to Asset Allocation.

Interesting article unfortunately as the 2010 article points out, a strategy which was perfectly valid in 2007 during the bull market is no longer close to being achievable today.

For instance. SPY is at 116.44 a 20% out of the money call is 140. Writing that call out for Jan 2013 (1.4 years out) would earn ~$3.20. Using that 3.20 to buy a put would let us buy some 70 and few 75 put also in Jan 2013 lets say on average $72, this means the market would have to fall 38% for your puts to kick in. Even if you use the expected $3 of dividends between now an Jan 2014 to buy puts you could only purchase puts at average price of ~$88 this means your maximum loss is 24%. So the insurance is very expensive TSANTFL.

By the way I was looking at purchasing puts back in early July when VIX was in the 16 and 17 range. SPY puts were much cheaper and I did notice that is was possible to have a riskless collar although the spread was around 10% downside protection for 12% upside. In hindsight it would have been great move.
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Old 08-25-2011, 02:03 AM   #44
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[QUOTE=clifp;1104836]
Quote:
Originally Posted by kyounge1956 View Post
Here are two articles I came across recently, about option collars.
Risk Management through Costless Collars and Equity Collars as an Alternative to Asset Allocation.
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Originally Posted by clifp View Post
Interesting article unfortunately as the 2010 article points out, a strategy which was perfectly valid in 2007 during the bull market is no longer close to being achievable today.

For instance. SPY is at 116.44 a 20% out of the money call is 140. Writing that call out for Jan 2013 (1.4 years out) would earn ~$3.20. Using that 3.20 to buy a put would let us buy some 70 and few 75 put also in Jan 2013 lets say on average $72, this means the market would have to fall 38% for your puts to kick in. Even if you use the expected $3 of dividends between now an Jan 2014 to buy puts you could only purchase puts at average price of ~$88 this means your maximum loss is 24%. So the insurance is very expensive TSANTFL.
In the article they looked at it the other way around—they held the maximum allowable loss to 10%, and found that with put and call prices where they were at the time you'd have had to sell calls with a strike only about 5% higher than the index price at time of purchase. Either way you look at it, it's an expensive strategy when the market is nervous.

Quote:
By the way I was looking at purchasing puts back in early July when VIX was in the 16 and 17 range. SPY puts were much cheaper and I did notice that is was possible to have a riskless collar although the spread was around 10% downside protection for 12% upside. In hindsight it would have been great move.
There was another article about option collars on Morningstar today. For the example they actually managed to find a collar with the puts costing less than the call premium, so there was a profit from the options alone, never mind what the stock did. I wonder how long they had to look to find that one!
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Old 08-25-2011, 03:53 AM   #45
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[QUOTE=kyounge1956;1105197]
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Originally Posted by clifp View Post

In the article they looked at it the other way around—they held the maximum allowable loss to 10%, and found that with put and call prices where they were at the time you'd have had to sell calls with a strike only about 5% higher than the index price at time of purchase. Either way you look at it, it's an expensive strategy when the market is nervous.

There was another article about option collars on Morningstar today. For the example they actually managed to find a collar with the puts costing less than the call premium, so there was a profit from the options alone, never mind what the stock did. I wonder how long they had to look to find that one!

Actually the real trick is to find a stock that you can buy for $44 and then goes up to $325 a few years later. Do that consistently and you won't have to worry about pensions, withdrawal strategies, LYBM, or even finding dates on Saturday night;

I just checked the options on Mastercard ~10% ($355) out of the money call for Jan 2012 earns 20.60 buying a 10% put ($295) cost $22.80 a fine strategy if you want protect a 600% return... but not great for the rest of us.
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Old 08-25-2011, 07:16 AM   #46
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For the example they actually managed to find a collar with the puts costing less than the call premium, so there was a profit from the options alone, never mind what the stock did. I wonder how long they had to look to find that one!
And did it exist long enough to actually place and execute the two orders? I'd be surprised. That's free money. It seems I may have seen something like that a time or two, but it's gone in a flash, and I bet the two 'righted' themselves and no one got that deal.

-ERD50
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Old 08-25-2011, 07:52 AM   #47
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And did it exist long enough to actually place and execute the two orders? I'd be surprised. That's free money. It seems I may have seen something like that a time or two, but it's gone in a flash, and I bet the two 'righted' themselves and no one got that deal.
It's not free money. If you did the collar alone (not owning the underlying stock), you could lose money if the stock price rose above the call strike by more than the amount of net premium.
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Old 08-25-2011, 08:07 AM   #48
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It's not free money. If you did the collar alone (not owning the underlying stock), you could lose money if the stock price rose above the call strike by more than the amount of net premium.
You're right. I shouldn't post on options before the second cup has been absorbed I guess I was thinking call/put at the same strike. Even holding the stock, you would be exposed to a downdraft between the two strikes.

And thinking about this a bit longer...


Quote:
There was another article about option collars on Morningstar today. For the example they actually managed to find a collar with the puts costing less than the call premium, so there was a profit from the options alone, never mind what the stock did. I wonder how long they had to look to find that one!
There is nothing unusual at all - you can almost always form a collar and take a credit. But the call strike will be closer in than the put strike. You'll trade away more upside than you gain in downside protection.


-ERD50
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Old 08-25-2011, 11:05 AM   #49
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(snip) There is nothing unusual at all - you can almost always form a collar and take a credit. But the call strike will be closer in than the put strike. You'll trade away more upside than you gain in downside protection.

-ERD50
That might be a worthwhile trade-off for fraidy-cat investors like me. So would you say the current conditions described in the 2010 article are pretty unusual? At then-current put & call prices, protecting from losses beyond 10% required the investor to forego all but about 5% of potential gains.

I am also still trying to wrap my brain around this statement from the earlier article:
Quote:
There is an additional possibility. It can generally be assumed that investors have some expectation about the average return. However, given the uncertainty, they have no idea what the next year will bring. That would depend on the stage of the business cycle. In a down cycle, you have a floor of –10% in any one year. In an up cycle, you have a 20% ceiling. Suppose the actual return next year is 20% (up cycle/bull). You have now overperformed the expected return by 11% (20% – 9%). The collar can now be set at +19/–9. As the business (up cycle) continues, you can continue to book the overperformance to future years by narrowing the collar. In this way, you can reduce the volatility around the expected return. You could advocate similar management styles if the move (collar) coincided with the beginning of a down cycle.
I think the expected return of 9% refers to the mean annual return of either the collar strategy or the mixed stock/bond portfolio used for comparisons in the article. What I haven't grasped yet is the relation if any between the amount of overperformance this year and the amount the collar can be narrowed next year. Nor do I get what a "similar management style" would be in a down market.

ISTM too there is an element of timing involved in this which is not mentioned in either article. Suppose after you get your collar all set up, we get a period of high market volatility like this last month or so. Down 5% today, back up the same tomorrow, and down even further the day after that. How do you decide whether/when to exercise your put option? If you do exercise the put, wouldn't you also want to close out the call option, lest the underlying make a sudden spike upwards and someone exercise the call, forcing you to buy said underlying at a higher price than they will pay you for it? Then you are sitting there collarless until you buy some more options and maybe the market takes a dive before you get the collar re-set. Maybe the collar would work better with European-style options, so timing of exercise is not an issue.

Lastly I want to understand how a collar would be formed using cash-settled index options. I think FIRE'd@51's comment will throw some light on that but there's no time to ponder it now, alas. Off to w@rk I must go.
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Old 08-26-2011, 01:47 PM   #50
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Anyone here think the market is going to gap down at the open due to the hurricane? I'm going to violate the rules for my options trading this weekend only and open a new position Monday after the opening instead of today before the close. The market gapped down 3.5% on Monday after hurricane Ike hit Galvaston in 2008, although I have no idea what else was going on that weekend.
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Old 09-09-2011, 10:32 PM   #51
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Update: Now 17 weeks in

Real time real trades selling weekly SPY puts:

Puts...+5.6%
SPY....-13.9%

YTD returns including back test using estimated option prices prior to May

Puts...+16.7%
SPY....-7.0%
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Old 09-11-2011, 07:55 AM   #52
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In all fairness to dixonge's strategy, had he been trading SPY options, and been assigned he wouldn't have suffered the big whipsaw loss he did. Remember, he was trading SPX options which are cash-settled at the opening on expiration day (he had failed to roll them out). That abrubtly dropped his beta to zeo, just before the market recovered strongly that day, a recovery he didn't participate in.
There are reasons for everything I did back then. First, SPX versus SPY - had to do with commissions and margin calculations if I remember correctly.

Re: rolling out, that was one major problem I had. As part of my general risk protection strategy, I attempted to spread positions out over both time and strikes. When a position moved against me, I could roll forward, or out, or both. For that particular weekend in question, I ended up with several positions that had already been rolled a couple of times, thus eating into my profit already. Another roll would have killed profit, a close-out would have been a loss. Of course, hindsight being 20/20 all of those would have been better than the hit I took when they fixed the price about $20 below the previous night's closing strike. And then the actual price went right back up.

I wrote in more detail about this somewhere, perhaps on this forum, but I can't find it right now...
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Old 09-11-2011, 07:58 AM   #53
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Don't forget the updates:

Still Homeless, but Living in an SUV

and

A Bigger Tent - on Wheels
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Old 09-11-2011, 08:01 AM   #54
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OMG! That's him (same avatar)! I guess he can be tracked by the home page on his contact info here.

Well, he was clearly a "different drummer" type, he may be very happy with that life. I hope so.

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That may be the kindest thing you've ever said to me! LOL

So far, yes. Very happy. We've toured all of the great national parks and landmarks of the western U.S. Now we're getting in some long overdue visits with family and friends. By November we'll be back in Texas, end of Phase I.
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Old 09-11-2011, 08:12 AM   #55
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By November we'll be back in Texas, end of Phase I.
Please bring some rain and cool temps with you.
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Old 09-11-2011, 08:17 AM   #56
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What troubled me about dixonge's strategy is, he never seemed to be able to understand what the risks were.

Perhaps if it was clearer to him, at all times, what his max downside risk was, he would have been more careful to monitor those positions and roll them out, or just close them out to limit exposure.
I very sincerely believed that I had a firm grasp on the risk. Obviously, I did not. Investor Psychology 101. But I did read a lot about it, and I was actively seeking a balance between risk and reward.

My final conclusion is that few can overcome the big boys in investing in the long run. Most of you will disagree, but I think the numbers back me up. The mark never knows he's a mark...I know I didn't...
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Old 10-08-2011, 04:35 PM   #57
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Latest Update...21 weeks into real time trades

Selling Weekly Puts...+6.5%
SPY.........................-14.3%
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Old 10-08-2011, 05:45 PM   #58
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Thanks for the update. Seems like you have done well so far.
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Old 10-29-2011, 08:36 AM   #59
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Someone asked how this strategy would work in a market going straight up. The last 5 weeks, the SP500 is up 14% or so. My strategy of selling the SPY weekly puts is +9%.

Overall real time results over 24 weeks

SPY....-2.8%
Naked Puts...+11.5%

So far, Ive kept 40% of the premium collected each week on average. According to my back test, long term it should be closer to about 33%.

Ive done some more research and have decided to add another component which I plan to track separately. Ive started selling SPY ATM puts on the day of expiration. For example, yesterday I sold the 128 Puts when SPY was at 128.05 about 30 minutes after the open. I collected 0.43 each. That's a .34% premium and expiration is in 6 hours. Nobody can tell what the market will do in any 6 hour period. It may go up and it may go down. If it goes up, I make money. If it goes down but less than .34% I make money.

My research shows that I should be able keep 25% of the premiums collected on average. I believe as long as I stick with this long term, there's mathematically no way to lose money unless there's some research somewhere that shows the market drops more on Fridays than on other days.
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Old 10-29-2011, 04:27 PM   #60
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Utrecht what are your trading cost? Schwab charges $8.95 + .75/contract so I think my commission would eat up any trading costs on a 6 hour trade.

I have been taking advantage of the volatility by writing spreads, slightly out of the money calls and puts. My Nov position was written when the SPY was ~123.5 and consisted of a 121 put and 126 call. I got $5.25 so I make money as long as the SPY closes between 116 and 131.

If the VIX drops and stay below 30, I'll stop doing this.
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