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Old 09-17-2015, 10:20 PM   #621
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By the way, you are too bullish. Worst case the stock drops 20%. After 3% dividend+3% option, I still lose 14%.
You are not using the correct frame of reference. In the frame of reference where you would be invested in the market anyway (and taking the full 17% loss), the worst case is a runaway market which leaves you with only a 16% gain. All of the other cases you come out ahead vs someone who just straight buys the stocks on this dip.
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Old 09-17-2015, 11:09 PM   #622
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Our perspectives are different. You worry more about missing out on a bull market, but I am also thinking about the lossy side.

I think we all can see that with covered calls one gives up some upside potential in order to reduce the downside risk. It's a trade-off that I am willing to make because I do not think the market will shoot to the moon from its currently high P/E, yet does not crash. Your worst case would make me ecstatic.

It may be time for Schiller to be proven right. And so, another alternative is sitting out of the market in cash, which I would do if I were so bearish.
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Old 09-17-2015, 11:16 PM   #623
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I think you misunderstand me. I am saying I agree with you that covered calls reduce risk because they give you a bird in the hand in exchange for not being able to look in the bush.

They blow everything else out of the water in a decades long stagnant market. Imagine 20 years of everyone earning just 3% dividends while you earn 6%.
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Old 09-18-2015, 12:08 AM   #624
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I think you misunderstand me. I am saying I agree with you that covered calls reduce risk because they give you a bird in the hand in exchange for not being able to look in the bush.
OK, I think we were talking about different aspects of the same thing.

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They blow everything else out of the water in a decades long stagnant market. Imagine 20 years of everyone earning just 3% dividends while you earn 6%.
Well, that would be nice, although the crazy market may surge resulting in your shares getting called and you are now faced with waiting for a re-entry point. And in a bull market you may be out for a looong time. It's no free lunch.

I have done mostly covered calls of individual stocks, and mainly holdings that I thought were overbought and due for a correction soon. This is of course a chicken form of market timing, and that has backfired some time.

Here's a scenario. You buy stocks A and B at $100 and write calls for them both at $110. Stock A surges to $130, while stock B slumps to $70. Because stock A gets called, you now have $180. But if you did not write the calls you would still have $200.

Speaking of stocks getting called, I recently remembered owning BTU, a US coal miner, prior to the Great Recession. In 2008, my options got called and I "lost" the stock before it peaked out at $88, and I kicked myself for that although I already made good money. I was watching it for a re-entry, but I got distracted by the Great Recession, and never got back to tracking that sector. Just yesterday, remembering this stock, I looked it up to see where it was. Trading below $2 now, because coal is now a dirty word! Yikes.
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Old 09-18-2015, 03:15 PM   #625
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So with today's sell-off in the equity market and the gains in the bond market, there is a lesson and this is what I think the lesson is:

The equity ETFs that I look at ended up today priced at about where they were on Monday. These ETFs went up through the FOMC announcement.

In contrast, the bond ETFs dropped in the couple of days before the FOMC announcement and then went up with the announcement and continued up today.

It appears to me that many folks wanted a rise in Federal Funds Rate. The anticipation was palpable. Bonds dropped, but since equities rose, then fell, this portends what will happen the next time the FOMC is expected to raise rates and then follows through:

1. Equities will go up in the few days beforehand and then stay up.
2. Bond funds will go down in the few days beforehand and then stay down.

What do you think?
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Old 09-18-2015, 03:35 PM   #626
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I don't know which was stocks will go next time, but I do know they will go one way and then the other. I rarely trade in advance of the announcement because I dont have a clue which way stocks will go. I always fade the first move after the announcement. The key is the timing of it. It takes some experience to get a feel of when the initial move is stopping and reversing and you only get seconds to decide. But you don't have to be perfect because the reversal is normally pretty dramatic.
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Old 09-19-2015, 08:11 AM   #627
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Well... Who won that one LOL !

As I suggested, sell on up days. We end the week where we began it on Monday ... Pretty significant down drafts...

As soon as the fed news came out the market popped for about half an hour then slid and has has sold off rather precipitously through the Friday close...giving just about everything back from the week

"Selling the fact". as the saying goes.

Volatility will reign supreme. The fed kicked the can down the road and uncertainty prevails.

Now if there is true worry, perhaps the market can climb the wall of worry but I don't think so.

I'm more bearish now through end of q3 and thinking the way to work this is to buy some puts for insurance.

Where do we go from here ? Still more down in my opinion.
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Old 09-19-2015, 09:18 AM   #628
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@papadad111, I like it. My portfolio is up for the week, so everyone must've won!

Now that you have the ideas, please post the trades as they happen, so we can all decide if we should do what you do.
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Old 09-19-2015, 09:50 AM   #629
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Way back in Jan, I sold some SPY Dec 199 puts for $15.25. SPY was around 199 at the time. I love this kind of trade. If the SP500 goes nowhere (or up) between Jan and Dec, I make $1525 per contract. If you want to figure your return, you can use the amount of buying power that this takes up. There's no cash outlay but the trade reduces your buying power. One SP500 contract uses about $4000 of buying power.

So $1525 divided by $4000 is 38% return. You could also figure it by saying if you bought 100 shares of SPY it would cost $19900. $1525 profit divided by $19900 is a 7.7% return when SPY didnt actually move at all the whole 10 months.

So where is this trade now? SPY has dropped to 195.45. Of course its fairly rare for the SP500 to be down over a 8 month period but that's where we are at. The Dec 199 puts I sold for $15.25 are worth $9.23 now. So even with a 1.9% drop in SPY, I have a profit of $602 per contract (with no cash outlay up front). I sold 10 of these so I have a $6020 profit currently.

If I had bought 1000 shares of SPY in Jan, I would have a $3575 loss instead of my $6020 profit and I would've had $199,000 tied up all year.

IMHO, this is a no brainer trade to do every year. SPY has to lose almost 8% in a little less than a full year for me to lose any money and the trade costs me nothing. It just uses up some of the collateral from the other long term stocks and funds Im holding. The only thing I would like to change is to make the expiration longer than 1 year to pay less capital gains at the end of the trade. However, this hurts profits as the longer the trade, the lower the profit percentage.

Normally, I would just let this trade expire and collect the remaining $9230 profit left in the trade but due to the uncertainty of the market, Im considering buying it back and possibly selling some June2016 185 puts (or some strike in that range). I may buy them back and wait for another drop to sell more long term puts.
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Old 09-19-2015, 09:59 AM   #630
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@utrecht, you have made money so far, but these options are not such a free lunch as you describe. If they were such a free lunch lots of professional trading firms would do exactly what you did. In general, I find that options are fairly priced to their risks.

So if S&P500 has gone up beyond 2152.5, you could've made more money. Oh, look the S&500 traded around 2100 most of the year until mid-August. So that's on the upside for the S&P500.

On the downside, there are also some problems.
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Old 09-19-2015, 10:26 AM   #631
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Lol! I enjoy this thread. Lots of people smarter than me on here, you included !

I'm 95 percent buy and hold now days. Just let it ride. At 46 and FIRed I'm still playing the long game.

I have just a small 5 percent set aside for mad money and trades, mostly I just trade ERX with that position. I may do some SPY puts but lost my ass on options once and stay clear of them now - I'm not smart enough and my brain doesn't think fast enough to make complex winning options trades.
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Old 09-19-2015, 10:43 AM   #632
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@utrecht, you have made money so far, but these options are not such a free lunch as you describe. If they were such a free lunch lots of professional trading firms would do exactly what you did. In general, I find that options are fairly priced to their risks.

So if S&P500 has gone up beyond 2152.5, you could've made more money. Oh, look the S&500 traded around 2100 most of the year until mid-August. So that's on the upside for the S&P500.

On the downside, there are also some problems.
If one uses options as leveraged bets, the return can be very high. But as mentioned, I have had out-of-the-money covered calls becoming deep-in-the-money and getting assigned in a bull market, so I figure that could happen with cash-covered puts as well in a bear market.

So to be safe, I would want to have $20K of cash put aside for each $1500 of SPY puts as Utrecht described, and compute the return based on that $20K of principal. Else, I would be on margin if a crash happens, and I would not want any such event wiping me out, no matter how remote that appears.
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Old 09-19-2015, 11:38 AM   #633
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@utrecht, you have made money so far, but these options are not such a free lunch as you describe. If they were such a free lunch lots of professional trading firms would do exactly what you did. In general, I find that options are fairly priced to their risks.

So if S&P500 has gone up beyond 2152.5, you could've made more money. Oh, look the S&500 traded around 2100 most of the year until mid-August. So that's on the upside for the S&P500.

On the downside, there are also some problems.
Who said anything about a free lunch? Of course there is risk. There is risk in anything that has a reward. The SP500 rarely has periods of 10-12 months where it drops more than 8% so I believe these are low risk bets.

Like I said in my post describing this trade, I feel a little queasy about the downside risk right now so Im going to buy back the puts and lock in the profits I have already. I may or may not sell longer dated puts with a lower strike, which would significantly lower my risk while still allowing for more profit.
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Old 09-19-2015, 11:49 AM   #634
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Who said anything about a free lunch?
I think you did when you wrote
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IMHO, this is a no brainer trade to do every year.
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Old 09-19-2015, 11:50 AM   #635
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If one uses options as leveraged bets, the return can be very high. But as mentioned, I have had out-of-the-money covered calls becoming deep-in-the-money and getting assigned in a bull market, so I figure that could happen with cash-covered puts as well in a bear market.

So to be safe, I would want to have $20K of cash put aside for each $1500 of SPY puts as Utrecht described, and compute the return based on that $20K of principal. Else, I would be on margin if a crash happens, and I would not want any such event wiping me out, no matter how remote that appears.
One strategy might be to put $20K into a 1 year CD for every put sold. That would add another 1.25% or so to your return, while making sure you have the cash in case you do get the stock assigned to you. I wouldn't do it that way but if a person did you would basically be getting a return of about 10%.

Here's a very basic breakdown of what happens in different scenarios with very rounded and approx. numbers

Person A buys 100 shares of SPY for $20K
Person B sells a put and buys a CD with the $20K

SPY stays flat
Person A breaks even
Person B makes 10%

SPY drops 10%
Person A loses 10%
Person B breaks even

SPY drops 15%
Person A loses 15%
Person B loses 5%

SPY rises 10%
Person A makes 10%
Person B makes 10%

SPY has to rise more than 10% before Person A beats Person B because Person B's profit is locked at 10%.

In the long run, if you did this every year, both strategies will work out pretty closely profit wise, but Person B will have much lower variance in his returns. Person B also has much more flexibility in moving in and out of the market or rolling up or down to different strikes.
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Old 09-19-2015, 11:52 AM   #636
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I said its a no brainer trade to do every year because I like the risk / reward ratio better than just buying the stock. Not because there is no risk.
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Old 09-19-2015, 12:18 PM   #637
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Some months after the 2000 market top, I was thinking of a similar strategy. Back then, I could get 5% on interest rate. So, what if I put it all in a safe fixed-income asset, then use the 5% return to buy calls on the stocks? If market goes up, I make good money. If it goes down, my calls become worthless and I am flat for the year.

Then, I thought of inflation losses, and the dividends that I would have if I held the stocks. This makes it more complicated, so I never finished figuring it out and never implemented it.
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Old 09-19-2015, 01:01 PM   #638
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I've been following this thread with interest. Given the topic I like this article about what's the best investment for the next year given the authors theoretical constraints.

http://www.philosophicaleconomics.com/2015/09/invest/

It's long but interesting analysis. However you could just skip to the conclusion where he proposes the option bets and figures out that he can make 6% over the next year if the SP stays over 1650, or 4% over 1350. I'm particularly intrigued by the 4% number if you wanted to buy it for part of your fixed income allocation. Only if the market was down about 30% would you get called, and if the market was down that low you would probably be rebalancing from bonds to,stocks anyway. What do you guys think?


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Old 09-19-2015, 01:16 PM   #639
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People calculate returns from selling puts in all kids of different ways. I cant figure out what formula he's using to calculate his 6% or 4% returns.
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Old 09-19-2015, 01:52 PM   #640
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This is how I see it:


Outlay:

1155540
- 201300
=====
$954240

Money Back:

990000 Stock at 1650
+24000 Dividends
=====
1014000


Total Return = 1014000 - 954240 = 59670
% return = 59670/954240 = 6.26
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