Synthetic Long LEAPS PP Experiment

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Dum
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Synthetic Long LEAPS PP Experiment

Postby Dum » Thu Apr 20, 2017 6:06 am

Hi, I am a long time lurker of this forum and now, first time poster. I am very interested in the HBPP and so, I was invested in it for sometime now. I personally think that this is the way to go. I also want to propose this experiment for the VP.

In a paper trading account, I have already bought the following in the following proportions. Although, if you think about it, the proportions don't matter here as we are getting a credit for these transactions.

10 SPY ATM Calls and Sell 10 ATM Puts with ~365 days till expiration with a buying power effect of 22k
10 TLT ATM Calls and Sell 10 ATM Puts with ~365 days till expiration with a buying power effect of 18k
10 GLD ATM Calls and Sell 10 ATM Puts with ~365 days till expiration with a buying power effect of 7k

If you think about it, it will be apparent that these options positions have the same payoff and profit as the underlying. But with a very big difference, they are about 6 times leveraged. The total cost to put on these positions was about $5000 in inflow (stressing on inflow as opposed to outflow).

These are what we learnt in my Masters as Synthetic Long Stocks. Synthetic became they mimic the underlying moves with the same payoff pattern as the underlying.

So far, so good. Please comment your ideas. Thanks. I'll add additional details as time passes.
Last edited by Dum on Fri Apr 21, 2017 1:09 am, edited 1 time in total.
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Cortopassi
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Re: Synthetic Long LEAPS PP Experiment

Postby Cortopassi » Thu Apr 20, 2017 1:37 pm

My comments after years of playing with short term and long term leaps is that the leaps always gave me a sense of security, hell, the expiration date was 1-2 years out, the underlying will have gone gangbusters by then, etc.

However, with very little exception, all I usually experienced was the drip drip drip of the premium melting away.

You already are likely paying a large bid/ask spread, so are already in the hole after the initial purchase, plus the commission, depending on where you are doing these adds a decent amount to your cost.

I will be interested to see how it goes for you as the premium decays and the markets move up and down.

At some point a month or two from expiration, you'll need to decide whether to roll them over, and hopefully you won't just let them have to expire because they are worthless....

I would ask why you did ATM and not ITM calls? I know they cost you less, but the further ITM you go, the less leverage you have but the more protection you have from too large of a premium. I haven't done calls in a long time; with volatility so low, maybe premiums are a lot smaller than the last time I did options.
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Re: Synthetic Long LEAPS PP Experiment

Postby Dum » Fri Apr 21, 2017 1:08 am

This is for the VP actually. I do agree with you on the drip drip drip of premium in LEAPS. Yet, I did these transactions at a credit overall so, there is no debit to drip away.

As for at the money options, I would say they are the ones used to make synthetic positions.

Besides that, are there any better way?
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Cortopassi
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Re: Synthetic Long LEAPS PP Experiment

Postby Cortopassi » Fri Apr 21, 2017 9:32 am

If there are any other/better ways, I am not the one to ask!

Sorry, I only saw the long call trades, I see the short puts now as well. So as long as you got a credit for the trade, I think you are in the best shape you can be for this setup.

There are four parts I don't like, the finite amount of time, the lack of any downside protection, possibility of assignment and not getting any dividends. The time is what it is, but the lack of protection, my concern for you is in a year, if any of those are significantly underwater, you will get burned on having to buy the stock because of the puts or roll them and hope. If the put is way in the money, you could also get assigned at any time and be screwed. And finally, since you are doing this on VTI and TLT, I believe you lose out on the dividends.
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Re: Synthetic Long LEAPS PP Experiment

Postby Dum » Fri Apr 21, 2017 10:59 am

Sorry, I added the puts as an edit. Forgot to mention them. My bad.

I think you know this already but, assignment is not a bad thing. If I am assigned (provided that this becomes more than an experiment) and supposing that I don't have much money in account to buy the shares either, I will have 5 days to dispose of the shares from almost any broker. (I think it is a FINRA rule or something) As for downside protection, the only way I know is to use some of the credit received to buy some puts with a lower strike price.

If you look at the return profile of this kind of strategy, dividends are the last thing on my mind.

BTW, I am not long VTI. But SPY, TLT and GLD.
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Cortopassi
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Re: Synthetic Long LEAPS PP Experiment

Postby Cortopassi » Fri Apr 21, 2017 11:16 am

Good luck. I hope it works out. Some people I know have ended up doing really well with options and penny stocks too. Just wasn't for me.
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Re: Synthetic Long LEAPS PP Experiment

Postby clacy » Sat Apr 22, 2017 2:13 pm

If I was more up to speed on backtesting methods and in particular selling options, I think it would be interesting to see how selling puts on Gold, S&P and T-bonds would perform.
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Kbg
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Re: Synthetic Long LEAPS PP Experiment

Postby Kbg » Sat Apr 22, 2017 2:41 pm

For the s&p there's an index and an ETF for that...the s&p 500 put write index and associated ETFs. I believe there is a gold related ETF as well but it is like gold and some other asset.

Google will bring up the details

The PTW index beats the sp500 index on every measure you can think of. Unfortunately the ETF version loses the edge with fees.
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Re: Synthetic Long LEAPS PP Experiment

Postby clacy » Tue Apr 25, 2017 12:18 pm

Kbg wrote:For the s&p there's an index and an ETF for that...the s&p 500 put write index and associated ETFs. I believe there is a gold related ETF as well but it is like gold and some other asset.

Google will bring up the details

The PTW index beats the sp500 index on every measure you can think of. Unfortunately the ETF version loses the edge with fees.


Yeah, I think the downside of put writing is the black swan event.

Not to say that can't happen with the PP too, but there's a lot more protection built in with the PP's 4-asset mix.

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