LOL!'s Market Timing Newsletter

[utrecht]

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.

 

[papadad111]

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.

 

[LOL!]

@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.

 

[utrecht]

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.

 

[LOL!]

@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.

 

[papadad111]

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.

 

[NW-Bound]

@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.

 

[utrecht]

@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.

 

[LOL!]

Who said anything about a free lunch?

I think you did when you wrote

IMHO, this is a no brainer trade to do every year.

 

[utrecht]

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.

 

[utrecht]

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.

 

[NW-Bound]

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.

 

[bmcgonig]

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?


Sent from my iPad using Early Retirement Forum

 

[utrecht]

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.

 

[bmcgonig]

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

 

[NW-Bound]

You take the $1,000,000 in the IRA and sell 60 September 2016 $SPY call contracts at Friday’s closing bid price of 33.55, simultaneously buying 6,000 shares of the $SPY ETF at Friday’s closing ask price of 192.59. If the S&P remains above 1650 at expiration, the calls will be executed, your shares will be sold away, and your one-year return will be 6.05%, or $60,500. That includes $SPY’s ~$4.00 annual dividend...

Or here's how I see it, ignoring transaction costs.

Start with $1M. Sell 6000 calls (60 contracts) at $33.55 = $201,300. You now have $1,201,300.

Buy 6000 SPYs at $192.59 = $1,155,540, leaving you with $45,760 cash.

The S&P most likely stays above 1677.5, which corresponds to SPY at 165. Your calls get exercised.

You get 6000 x $165 = $990,000, plus the $45,760 cash, plus the dividend $4.03 x 6000 = $24,180, for a total of $1,059,940.

That's a 6% return over the original $1M.

PS. Because this is a deep-in-the-money call, it may be assigned early. Then, you do not get the dividend, and only get as little as $990,000+$45,760 = $1,035,760. But then, it's 3.5% return over a time period shorter than 1 year.

 

[NW-Bound]

By the way, the above is a good example showing options can be used to make a very conservative strategy, instead of a leveraged bet that can cost you more than what you put down. Options are just a tool, and can be used in many ways.

In essence, you are willing to give up the potential of a big win in exchange for a smaller but surer gain. It all makes sense.

 

[LOL!]

Now it's starting to be an equity-indexed annuity. How to Build Your Own Annuity

 

[utrecht]

You guys are showing returns for a covered call strategy. The article shows returns for selling puts and I dont see how he calculates those returns.

 

[utrecht]

Now it's starting to be an equity-indexed annuity. How to Build Your Own Annuity

That's exactly what his strategy is, but the beauty of it is that youre not locked into it for life like you are with an annuity. Its year by year (and you could actually get out anytime you want if you close the positions early)....and there are no exorbitant fees

 

[bmcgonig]

You guys are showing returns for a covered call strategy. The article shows returns for selling puts and I dont see how he calculates those returns.

Hes decided that its not a good idea to sell puts in an IRA so his example IS selling calls.

 

[NW-Bound]

+1

But in a table, he shows the 165 SPY put as having a return of 5.33%. This put has a bid of $8.79, and 8.79/165 = 5.33%. This is because he keeps the $165 cash to back up his option, else it would be a leveraged bet. It is also how I would compute the return of a put.

 

[utrecht]

+1

But in a table, he shows the 165 SPY put as having a return of 5.33%. This put has a bid of $8.79, and 8.79/165 = 5.33%. This is because he keeps the $165 cash to back up his option, else it would be a leveraged bet. It is also how I would compute the return of a put.

OK, now I get it. Like I said, there are lots of different way to figure returns when you are shorting something. This is a method I haven't seen before, but it makes sense for what hes trying to accomplish.

 

[bmcgonig]

Heres another question for you smart guys. Im thinking of his idea of selling the 135 calls as part of my fixed income portfolio. In other words I sell some covered calls and get the 4% per year. The only way this can go bad is if the SPY goes below 1350. However, if the SPY went below 1350 I would be rebalancing out of fixed income and into stocks anyway. The market would have to fall over 30% for that to happen, and in a 50/50 portfolio I would be selling about about 15% of my FI and buying stocks. So Im wondering if alloting 15% of my present FI to this idea is a no brainer here.

Can you guys punch holes in this?

Thanks

 

[utrecht]

Heres another question for you smart guys. Im thinking of his idea of selling the 135 calls as part of my fixed income portfolio. In other words I sell some covered calls and get the 4% per year. The only way this can go bad is if the SPY goes below 1350. However, if the SPY went below 1350 I would be rebalancing out of fixed income and into stocks anyway. The market would have to fall over 30% for that to happen, and in a 50/50 portfolio I would be selling about about 15% of my FI and buying stocks. So Im wondering if alloting 15% of my present FI to this idea is a no brainer here.

Can you guys punch holes in this?

Thanks

Actually SP500 has to fall 30% plus the 4% premium you will bring in, or 34% before you lose any money. How many times has the SP500 dropped more than 34% in a one year period? I'm guessing 3-4 times in the last 100 years?

If it drops 50% which I think has happened twice ever....you lose 16%. If you do this with 15% of your portfolio, you will only lose 2.4% of your portfolio in this once in a lifetime scenario.

Basically you will make 4% almost every year.

If you make 4% 49 years and then lose 16% one year, you have an avg return of 3.6%.

Of course you aren't limited to the 135 and 165 strikes that the author mentions. You can use any strike you want which of course changes your return and risk.

If I was going to do this I would adjust my strike based on how the SP500 was doing at the time you were starting (or the time your option expired and you were starting a new cycle). Since the Sp500 is already down about 10% from its high right now, I would adjust my strike upwards towards 145 or so giving me a better return for this cycle.