Author Topic: The perfect trade  (Read 5698 times)

Gregmal

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Re: The perfect trade
« Reply #10 on: October 03, 2019, 09:31:39 AM »
Thats another good point. $0 commissions and 3% margin rates....Seems look a really good or really bad environment, entirely dependent upon one's trading abilities I suppose.


Castanza

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Re: The perfect trade
« Reply #11 on: October 03, 2019, 09:49:22 AM »
Cardboard you are a very smart trader. Using your concept I started looking for similar situations. I think I found an even better one: buy Microsoft at $137, sell at $139. You could have done that about six times the last two months. So that would be around 1.05^6^6 = 68% annualized. That seems even better. The only risk is that you get stuck with a very high quality company below $137, or risk further upside above $139.

Of course if there is a calamity then Microsoft could go bankrupt or be down a lot but Bill Gates would probably bail out the company. Also, if there is a calamity, what would happen to the rest of the market?

While I know that hindsight is 20/20, I think that one could do much worst than trying this out. Especially with all the brokers going to $0 commission it seems like we can make a lot of money here. Many thanks for your idea. Do you have more suggestions? I'm looking forward to a fruitful discussion.

Writser

Why wouldn't you just do this with cash covered puts? Weekly premium ATM is $1.89. If you get assigned then it's no different than your situation. Plus you can simply buy an OTM put as a hedge which offsets your premium a bit, but provides good downside protection. That's safer than placing a large amount of capital into a single company. Both strategies are capital intensive.

« Last Edit: October 03, 2019, 09:51:29 AM by Castanza »

boilermaker75

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Re: The perfect trade
« Reply #12 on: October 03, 2019, 09:56:32 AM »
BAC's attractiveness has been discussed ad nauseam on this site for years. Unfortunately, it now suffers from a disease called interest rates not going up.

This disease is offset by retained earnings which continue to grow and solidify the business plus return of capital in the form of buybacks and dividends.

If you had bought BAC at every time it touched $27 this year and sold it at $30, you would have made 11% each time not accounting for the dividend. This could have been repeated 4 times already or a 44% return and we are now closing in on $27 again (almost touched it this morning).

The risk is that you get stuck with a high quality company trading cheaply if it goes well below $27 or fails to return quickly to $30. Or that you miss out on some larger upside above $30 if it doesn't fall back. Still how do you beat 44% in 9 months in a large mega cap with such little downside risk?

Of course if there is a calamity then BAC could go bankrupt or be down a lot from $27 but, what would happen to the rest of the market?

This could have worked with the other large bank stocks as well such as WFC, C, JPM and USB but, the channel is not as clear.

While I know that hindsight is 20/20, I think that one could do much worst than trying this out.

Cardboard

I've been religiously writing ATM cash covered puts on this all year collecting premiums. I got assigned shares a few times. I also hedged a few times buying puts that offset premiums a bit but also gave some additional protection to the downside. Been averaging about 2-3% a month on the capital. Not quite as good as your strategy but if you're not looking to hold shares I don't think it's a bad strategy. You do miss the div though.

Curious how many others on here sell covered calls or cash covered puts? In this environment it seems quite easy to do confidently. I saw Boilermaker has been doing something similar in an IRA I believe.

Although I haven't been doing it strictly on BAC.

I do it all the time with BRKB, WFC, BAC, and AMGN when AMGN 170-puts have sufficient premium.

Castanza

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Re: The perfect trade
« Reply #13 on: October 03, 2019, 10:27:40 AM »
BAC's attractiveness has been discussed ad nauseam on this site for years. Unfortunately, it now suffers from a disease called interest rates not going up.

This disease is offset by retained earnings which continue to grow and solidify the business plus return of capital in the form of buybacks and dividends.

If you had bought BAC at every time it touched $27 this year and sold it at $30, you would have made 11% each time not accounting for the dividend. This could have been repeated 4 times already or a 44% return and we are now closing in on $27 again (almost touched it this morning).

The risk is that you get stuck with a high quality company trading cheaply if it goes well below $27 or fails to return quickly to $30. Or that you miss out on some larger upside above $30 if it doesn't fall back. Still how do you beat 44% in 9 months in a large mega cap with such little downside risk?

Of course if there is a calamity then BAC could go bankrupt or be down a lot from $27 but, what would happen to the rest of the market?

This could have worked with the other large bank stocks as well such as WFC, C, JPM and USB but, the channel is not as clear.

While I know that hindsight is 20/20, I think that one could do much worst than trying this out.

Cardboard

I've been religiously writing ATM cash covered puts on this all year collecting premiums. I got assigned shares a few times. I also hedged a few times buying puts that offset premiums a bit but also gave some additional protection to the downside. Been averaging about 2-3% a month on the capital. Not quite as good as your strategy but if you're not looking to hold shares I don't think it's a bad strategy. You do miss the div though.

Curious how many others on here sell covered calls or cash covered puts? In this environment it seems quite easy to do confidently. I saw Boilermaker has been doing something similar in an IRA I believe.

Although I haven't been doing it strictly on BAC.

I do it all the time with BRKB, WFC, BAC, and AMGN when AMGN 170-puts have sufficient premium.

It's interesting to think about this at scale and why people choose to not do it. I mean if you had say 500k you could basically generate a 50-60k yearly income off this strategy with minimal risk. I mean even with say weekly SPY 280 puts (86% profit chance) you generate a $94 premium. Just say 25% for taxes so a 70.5 premium. You could do about 18 contracts a week and generate about 5k a month in income. Yeah you would get the shaft if the market tanked, but that would happen to your retirement accounts regardless.

Why is this?

LC

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Re: The perfect trade
« Reply #14 on: October 03, 2019, 10:30:50 AM »
Because it is the same strategy that people used in the housing market in 2005.

The assumption is "the market will keep going up - it has for 100s of years!"

Then you are put to.
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TwoCitiesCapital

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Re: The perfect trade
« Reply #15 on: October 03, 2019, 10:34:53 AM »
BAC's attractiveness has been discussed ad nauseam on this site for years. Unfortunately, it now suffers from a disease called interest rates not going up.

This disease is offset by retained earnings which continue to grow and solidify the business plus return of capital in the form of buybacks and dividends.

If you had bought BAC at every time it touched $27 this year and sold it at $30, you would have made 11% each time not accounting for the dividend. This could have been repeated 4 times already or a 44% return and we are now closing in on $27 again (almost touched it this morning).

The risk is that you get stuck with a high quality company trading cheaply if it goes well below $27 or fails to return quickly to $30. Or that you miss out on some larger upside above $30 if it doesn't fall back. Still how do you beat 44% in 9 months in a large mega cap with such little downside risk?

Of course if there is a calamity then BAC could go bankrupt or be down a lot from $27 but, what would happen to the rest of the market?

This could have worked with the other large bank stocks as well such as WFC, C, JPM and USB but, the channel is not as clear.

While I know that hindsight is 20/20, I think that one could do much worst than trying this out.

Cardboard

I've been religiously writing ATM cash covered puts on this all year collecting premiums. I got assigned shares a few times. I also hedged a few times buying puts that offset premiums a bit but also gave some additional protection to the downside. Been averaging about 2-3% a month on the capital. Not quite as good as your strategy but if you're not looking to hold shares I don't think it's a bad strategy. You do miss the div though.

Curious how many others on here sell covered calls or cash covered puts? In this environment it seems quite easy to do confidently. I saw Boilermaker has been doing something similar in an IRA I believe.

Although I haven't been doing it strictly on BAC.

I do it all the time with BRKB, WFC, BAC, and AMGN when AMGN 170-puts have sufficient premium.

It's interesting to think about this at scale and why people choose to not do it. I mean if you had say 500k you could basically generate a 50-60k yearly income off this strategy with minimal risk. I mean even with say weekly SPY 280 puts (86% profit chance) you generate a $94 premium. Just say 25% for taxes so a 70.5 premium. You could do about 18 contracts a week and generate about 5k a month in income. Yeah you would get the shaft if the market tanked, but that would happen to your retirement accounts regardless.

Why is this?

Because the risk you're taking is many hundreds of thousands of dollars when it doesn't work out.

You're selling insurance for a premium - it's great when the insurance doesn't have to pay, but a doozy when it does.

As far as the strategy, I trade around my core positions ALL of the time. Take gains here, average down there, roll back. Also, I sell long-dated out-of-the money calls and tend to repurchase most of them on market dips 5-10% for 50-60% less, wait for the recovery, and rinse/repeat.

All of these strategies take advantage of volatility - but they all suck-hard when they go wrong or you get whipsawed.

The buying/selling the actual shares around a core position is probably the least risky, but also the least rewarding/leveraged. As LC said, works best when done on a portfolio of multiple securities you're already comfortable holding and low commission accounts.

Castanza

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Re: The perfect trade
« Reply #16 on: October 03, 2019, 10:43:31 AM »
BAC's attractiveness has been discussed ad nauseam on this site for years. Unfortunately, it now suffers from a disease called interest rates not going up.

This disease is offset by retained earnings which continue to grow and solidify the business plus return of capital in the form of buybacks and dividends.

If you had bought BAC at every time it touched $27 this year and sold it at $30, you would have made 11% each time not accounting for the dividend. This could have been repeated 4 times already or a 44% return and we are now closing in on $27 again (almost touched it this morning).

The risk is that you get stuck with a high quality company trading cheaply if it goes well below $27 or fails to return quickly to $30. Or that you miss out on some larger upside above $30 if it doesn't fall back. Still how do you beat 44% in 9 months in a large mega cap with such little downside risk?

Of course if there is a calamity then BAC could go bankrupt or be down a lot from $27 but, what would happen to the rest of the market?

This could have worked with the other large bank stocks as well such as WFC, C, JPM and USB but, the channel is not as clear.

While I know that hindsight is 20/20, I think that one could do much worst than trying this out.

Cardboard

I've been religiously writing ATM cash covered puts on this all year collecting premiums. I got assigned shares a few times. I also hedged a few times buying puts that offset premiums a bit but also gave some additional protection to the downside. Been averaging about 2-3% a month on the capital. Not quite as good as your strategy but if you're not looking to hold shares I don't think it's a bad strategy. You do miss the div though.

Curious how many others on here sell covered calls or cash covered puts? In this environment it seems quite easy to do confidently. I saw Boilermaker has been doing something similar in an IRA I believe.

Although I haven't been doing it strictly on BAC.

I do it all the time with BRKB, WFC, BAC, and AMGN when AMGN 170-puts have sufficient premium.

It's interesting to think about this at scale and why people choose to not do it. I mean if you had say 500k you could basically generate a 50-60k yearly income off this strategy with minimal risk. I mean even with say weekly SPY 280 puts (86% profit chance) you generate a $94 premium. Just say 25% for taxes so a 70.5 premium. You could do about 18 contracts a week and generate about 5k a month in income. Yeah you would get the shaft if the market tanked, but that would happen to your retirement accounts regardless.

Why is this?

Because the risk you're taking is many hundreds of thousands of dollars when it doesn't work out.

You're selling insurance for a premium - it's great when the insurance doesn't have to pay, but a doozy when it does.

As far as the strategy, I trade around my core positions ALL of the time. Take gains here, average down there, roll back. Also, I sell long-dated out-of-the money calls and tend to repurchase most of them on market dips 5-10% for 50-60% less, wait for the recovery, and rinse/repeat.

All of these strategies take advantage of volatility - but they all suck-hard when they go wrong or you get whipsawed.

The buying/selling the actual shares around a core position is probably the least risky, but also the least rewarding/leveraged. As LC said, works best when done on a portfolio of multiple securities you're already comfortable holding and low commission accounts.

I get that but my point if if you're simply holding SPY and the market crashes you're going to be down a ton anyways. If you're holding cash and you get assigned shares selling puts what's the difference?

Spekulatius

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Re: The perfect trade
« Reply #17 on: October 03, 2019, 11:09:10 AM »
Or buy puts when VIX is<14 and SPY >300. I am 3:0 on this trade. I think I made about 70% on average each time, just closed my last round yesterday. Itís definitely a no brainer, especially when in addition to above Trump says that trade talks are going well.

I am almost serious about this.
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Liberty

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Re: The perfect trade
« Reply #18 on: October 03, 2019, 11:33:41 AM »
This is "the perfect trade"?

I guess we live in a world of hyperbole...
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LC

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Re: The perfect trade
« Reply #19 on: October 03, 2019, 12:00:41 PM »
It's a pretty good idea - I am not denying that.

The other component is the "brain damage" associated with this.

I do not invest for a living, so I have to ask myself, what do I want to spend my energy on:

1- trying to be correct in the long term, or;
2- trying to be correct in the long term AND trying to trade around relative valuation AND trying to value put premiums on a risk adjusted basis AND trying to manage exposure per trade and per portfolio?

For those with the time and energy, it is a great idea. Just take a look at boilermaker's posts about doing this with BRK over the years, he is an inspiration in this sense!
"Lethargy bordering on sloth remains the cornerstone of our investment style."
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