Author Topic: The perfect trade  (Read 5714 times)

Castanza

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Re: The perfect trade
« Reply #20 on: October 03, 2019, 12:14:58 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!

The writing of puts takes very little effort on blue chip stocks especially if you're not greedy about premiums and go decently out to 95%+ profitability range. I just don't see how this is anymore risky than owning the underlying stock. As Greg pointed out. Value investors are just as likely to hold BAC on the way to zero as someone who would write puts for premiums with the risk of potentially getting assigned. Now if you do this on say Beyond Meat yeah you're a moron. But doing this on SPY or other securities you would hold long-term, I don't see the risk. Maybe I'm missing something....the majority of you on here are much better investors than myself.

How many of you would liquidate a portfolio of $SPY if it dropped 15% in a day? If this were to happen the person who got assigned shares now has the advantage vs the person who is holding. I could write covered calls and collect premiums while you have to hold until SPY climbs back to your dca before you could sell or write covered calls.


LC

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Re: The perfect trade
« Reply #21 on: October 03, 2019, 12:29:44 PM »
There is little economic difference between selling puts and going long. Compare the payoff curves.

The key is you need to be correct on underlying direction. Whether you are long the underlying or short the put, you need to be right on the stock. This is where I want to put my analytic efforts and take my brain damage.

Shorting puts present more brain damage in the form of portfolio management. Now you are sorting through another calculation. Which puts to sell? 3 month, 6 month, 1 week? What prices are fair? I'll let you guys with more energy and brain power to get paid from taking that brain damage :D
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TwoCitiesCapital

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Re: The perfect trade
« Reply #22 on: October 03, 2019, 12:30:43 PM »
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.

Have been doing something similar myself, bit it's based entirely on "when markets do well, Trump has enough flexibility to hang himself with it".

As long as that dynamic holds, this trade will be profitable. But hard to know when he finally decides to let things ride OR isn't going to save the market by backing down.

TwoCitiesCapital

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Re: The perfect trade
« Reply #23 on: October 03, 2019, 12:34:45 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!

The writing of puts takes very little effort on blue chip stocks especially if you're not greedy about premiums and go decently out to 95%+ profitability range. I just don't see how this is anymore risky than owning the underlying stock. As Greg pointed out. Value investors are just as likely to hold BAC on the way to zero as someone who would write puts for premiums with the risk of potentially getting assigned. Now if you do this on say Beyond Meat yeah you're a moron. But doing this on SPY or other securities you would hold long-term, I don't see the risk. Maybe I'm missing something....the majority of you on here are much better investors than myself.

How many of you would liquidate a portfolio of $SPY if it dropped 15% in a day? If this were to happen the person who got assigned shares now has the advantage vs the person who is holding. I could write covered calls and collect premiums while you have to hold until SPY climbs back to your dca before you could sell or write covered calls.

Think about worst case scenario. Stocks gaps down due to bad earnings or after-market news.

Let's say 20% on a $1,000,000 investment. You're out 200k if you owned the stock, but you can close the position and move on.

If you sold the same notional in cash secured puts, you're going to have to pay more than 200k above your sale price to close the contract because now vol has exploded across the term structure and the puts you sold are now going to be at a premium (unless if they're WAY out of the money - and even then, massive bid/ask spreads).

So your two choices are to accept a loss greater than 20% to close the position and stop the bleeding OR to be stuck with the position.

It's NOT the same dynamic as owning the underlying stock.

LC

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Re: The perfect trade
« Reply #24 on: October 03, 2019, 12:39:58 PM »
Quote
Let's say 20% on a $1,000,000 investment. You're out 200k if you owned the stock, but you can close the position and move on.

If you sold the same notional in cash secured puts, you're going to have to pay more than 200k above your sale price to close the contract because now vol has exploded across the term structure and the puts you sold are now going to be at a premium (unless if they're WAY out of the money - and even then, massive bid/ask spreads).


For institutional trader yes. For PAs you can wait until expiration and take delivery or close out with limited vega and theta exposure.
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TwoCitiesCapital

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Re: The perfect trade
« Reply #25 on: October 03, 2019, 12:54:59 PM »
Quote
Let's say 20% on a $1,000,000 investment. You're out 200k if you owned the stock, but you can close the position and move on.

If you sold the same notional in cash secured puts, you're going to have to pay more than 200k above your sale price to close the contract because now vol has exploded across the term structure and the puts you sold are now going to be at a premium (unless if they're WAY out of the money - and even then, massive bid/ask spreads).


For institutional trader yes. For PAs you can wait until expiration and take delivery or close out with limited vega and theta exposure.

Well yes, that is what I characterized as being stuck in the position. The capital is tied up until expiry OR you lock in a loss greater than the common stock.

If you're only selling 1 month puts, being locked up isn't a big deal, but your premiums are tiny, transaction costs eat most of it, and you can expect these things to move against you more frequently. 

If you sell them further out, much more opportunity to make greater premiums, less frequency of a negative outcome if held until maturity, but ALSO tying up capital when you're wrong OR taking greater losses than in the common.

It's not the same thing as stock ownership and comes with its own set of psychological barriers/problems/biases to work through.

I personally like options, but they're not easy and certainly not a substitute for outright stock exposure IMO.

Castanza

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Re: The perfect trade
« Reply #26 on: October 03, 2019, 01:00:25 PM »
Quote
Let's say 20% on a $1,000,000 investment. You're out 200k if you owned the stock, but you can close the position and move on.

If you sold the same notional in cash secured puts, you're going to have to pay more than 200k above your sale price to close the contract because now vol has exploded across the term structure and the puts you sold are now going to be at a premium (unless if they're WAY out of the money - and even then, massive bid/ask spreads).


For institutional trader yes. For PAs you can wait until expiration and take delivery or close out with limited vega and theta exposure.

Well yes, that is what I characterized as being stuck in the position. The capital is tied up until expiry OR you lock in a loss greater than the common stock.

If you're only selling 1 month puts, being locked up isn't a big deal, but your premiums are tiny, transaction costs eat most of it, and you can expect these things to move against you more frequently. 

If you sell them further out, much more opportunity to make greater premiums, less frequency of a negative outcome if held until maturity, but ALSO tying up capital when you're wrong OR taking greater losses than in the common.

It's not the same thing as stock ownership and comes with its own set of psychological barriers/problems/biases to work through.

I personally like options, but they're not easy and certainly not a substitute for outright stock exposure IMO.

Again, I'm not denying the risk. But I think you're overstating it. MSFT has better premiums doing it weekly than it does monthly. Also avoiding earnings weeks can help reduce risk. Plus if you're really worried about a 20% drop you can offset premiums buy buying a few OTM puts.

edit: And you could get whipsawed on that hedge put. So it doesn't completely negate risk.
« Last Edit: October 03, 2019, 01:02:41 PM by Castanza »

TwoCitiesCapital

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Re: The perfect trade
« Reply #27 on: October 03, 2019, 01:34:14 PM »
Quote
Let's say 20% on a $1,000,000 investment. You're out 200k if you owned the stock, but you can close the position and move on.

If you sold the same notional in cash secured puts, you're going to have to pay more than 200k above your sale price to close the contract because now vol has exploded across the term structure and the puts you sold are now going to be at a premium (unless if they're WAY out of the money - and even then, massive bid/ask spreads).


For institutional trader yes. For PAs you can wait until expiration and take delivery or close out with limited vega and theta exposure.

Well yes, that is what I characterized as being stuck in the position. The capital is tied up until expiry OR you lock in a loss greater than the common stock.

If you're only selling 1 month puts, being locked up isn't a big deal, but your premiums are tiny, transaction costs eat most of it, and you can expect these things to move against you more frequently. 

If you sell them further out, much more opportunity to make greater premiums, less frequency of a negative outcome if held until maturity, but ALSO tying up capital when you're wrong OR taking greater losses than in the common.

It's not the same thing as stock ownership and comes with its own set of psychological barriers/problems/biases to work through.

I personally like options, but they're not easy and certainly not a substitute for outright stock exposure IMO.

Again, I'm not denying the risk. But I think you're overstating it. MSFT has better premiums doing it weekly than it does monthly. Also avoiding earnings weeks can help reduce risk. Plus if you're really worried about a 20% drop you can offset premiums buy buying a few OTM puts.

edit: And you could get whipsawed on that hedge put. So it doesn't completely negate risk.

The aggregate of shorter term premiums typically exceeds long term premiums. (I.e. selling 4 1-week puts would generate more premiums than a 1- month put), but that excludes transaction costs (which aren't insignificant for options and you have 4x as many) and means you'll be assigned shares more frequently because your options have to be near-the-money to make anything.

I just think it's a false equivalence to say they're the same just because they are IF you hold to maturity. IF the thesis changes in the underlying, you don't have that luxury and paid a massive penalty for it.

The only times options are a decent proxy for the underlying is when you have a long time frame (I e. LEAPS) and are massively in the money so the vol premium is near zero and your delta is 1.

I do this all the time in my IRA to get leverage, but it's going long deep-in-the-money calls with 15-18 month expiries.

You could do the same selling deep-in-the-money puts and watch the premium erode while the stock rises in value, but this basically ties up the same capital as  owning the underlying.





« Last Edit: October 03, 2019, 02:52:19 PM by TwoCitiesCapital »

Spekulatius

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Re: The perfect trade
« Reply #28 on: October 03, 2019, 03:16:18 PM »
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.

Have been doing something similar myself, bit it's based entirely on "when markets do well, Trump has enough flexibility to hang himself with it".

As long as that dynamic holds, this trade will be profitable. But hard to know when he finally decides to let things ride OR isn't going to save the market by backing down.

Itís basically a bet that Trump blows some kind of gasket, or that an generally overvalued market falls or that the continued weakness in many sectors leads to some economic trouble impacting the stock market. The amazing thing to me is not that any of the above frequently occurs, but that Mr Market returns to a state of piece and quite in between where puts become cheap again (with allow VIX).

That said, the 3:0 is probably just luck. There is no free lunch and sooner or later  Mr Market will score against that trade.
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DooDiligence

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Re: The perfect trade
« Reply #29 on: October 03, 2019, 08:09:26 PM »
So the consensus is "trade around core positions that you'd be OK owning in an extended downturn".
Healthcare 25.9% - CVS EW NVO // BRK.B - 23.1% // Auto's & Oil 15.0% - CLB GPC VDE

Entertainment 4.8% - DIS // Banking 9.9% - WFC // Drinkers & Smokers 4.9% - MO

%'s held @ MV 08/29/2019 minus 16.4% investable cash

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