LEAPS PP

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Re: LEAPS PP

Post by AdamA » Tue Sep 13, 2011 10:51 am

stone wrote: I thought that that is what fortuitously was done with the LEAPS PP talked about here.
What you're saying is exactly right. 

Also, "fortuitously" is the key word above.
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Re: LEAPS PP

Post by stone » Tue Sep 13, 2011 11:05 am

Adam, perhaps rebalance from the TLT and GLD calls to the regular stocks (real stocks not options) whenever a rebalence band was hit and always do any toping up of the options by purchasing options expiring in sixth months time? I guess people like melvyr know how to do "dynamic hedging" of stocks using stock options and the same kind of calculations might help for this and there might?? be a mispricing of TLT and GLD options when times are tranquil and so a chance to profit when times turn out less than tranquil?  
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Re: LEAPS PP

Post by stone » Tue Sep 13, 2011 11:41 am

The "Ode to the joy of cash" on
http://www.gmo.com/America/GMOInsights/

-Shows that a 70% stocks with 30% cash buffer worked better than hedging with stock options. But perhaps just buying options when they were mispriced too cheap might beat a stock/cash blend and perhaps TLT and GLD calls might give a better chance of that than say stock puts would?? Perhaps the ideal would be to have a cash:stock:LTT:gold portfolio and to temporarily convert a bit of the LTT and gold to call options for TLT and GLD if and only if they were going cheap and then to sell half of them if the price increased 50% and the remainder if it increased a further 25% ?? 
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Re: LEAPS PP

Post by AdamA » Tue Sep 13, 2011 12:39 pm

stone wrote: Adam, perhaps rebalance from the TLT and GLD calls to the regular stocks (real stocks not options) whenever a rebalence band was hit and always do any toping up of the options by purchasing options expiring in sixth months time? I
If I were to use this strategy (which I will not do), I wouldn't use rebalancing bands.  I'd just sell the calls once a year a buy more (reablancing then).  Anything else is just guessing and will also rack up fees. 
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Re: LEAPS PP

Post by stone » Wed Sep 14, 2011 3:15 am

Adam, I was wondering whether the TLTcalls  and GLDcalls might be a way to benefit a variable portfolio that otherwise held "non-PP risk assets" such as silver, goldminers, junkbonds or whatever. Perhaps the basic structure would generally be say 20%silver:20%goldminers:20%junkbonds:40%cash BUT if "irrational complacency" was detected in the form of a low VIX, then 10% of the cash would be converted to TLTcalls and GLDcalls. If risk assets crashed and the TLTcalls and/or GLDcalls sored, then just sell all the calls to replenish the risk assets and cash??
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Re: LEAPS PP

Post by Storm » Wed Sep 14, 2011 8:03 am

Adam1226 wrote:
stone wrote: Adam, perhaps rebalance from the TLT and GLD calls to the regular stocks (real stocks not options) whenever a rebalence band was hit and always do any toping up of the options by purchasing options expiring in sixth months time? I
If I were to use this strategy (which I will not do), I wouldn't use rebalancing bands.  I'd just sell the calls once a year a buy more (reablancing then).  Anything else is just guessing and will also rack up fees. 
Likewise, I think the best way to implement this strategy is to set aside some pre-determined amount.  Divide by 12, and purchase LEAPS expiring > 1 year in the first week of every month, timing your entry as you see fit.

Sell exactly 1 year and 1 day, or time your exit after that point for tax purposes.  Some months you may lose, and some you may win, but I would be willing to bet you would have more profitable months than not.

The difficulty is that because you can only buy options in lots of 100, you might need a significant amount of startup capital to do this - at least $50K or so.
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Re: LEAPS PP

Post by stone » Wed Sep 14, 2011 8:38 am

Storm, are you saying that these options are always a bargin? It seems easy to believe that sometimes the market misprices them but you are saying that they are systematically underpriced. Would that not mean an ever accelerating increase in prices? I can't make sense of it.
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Re: LEAPS PP

Post by Storm » Wed Sep 14, 2011 11:39 am

stone wrote: Storm, are you saying that these options are always a bargin? It seems easy to believe that sometimes the market misprices them but you are saying that they are systematically underpriced. Would that not mean an ever accelerating increase in prices? I can't make sense of it.
No, I'm not saying they are always a bargain.  I'm just saying that the PP principles usually come out ahead over a 1 year timeframe.  So, for example, this year your TLT and GLD options might be up, but you take a loss on SPY.  This is not a big deal if you have 100%+ gains on TLT and GLD.  By buying all 3 options at the same time you are just applying PP principles and hoping that one or two go up enough to offset the losses on the other 2.  As we've seen with normal PP backtesting this usually holds true.

The reason to break it up into 12 months is on the odd chance that a few of those months you lose more than you make - if, for example the PP had a down year, in that case you're not completely wiped out.
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Re: LEAPS PP

Post by Storm » Wed Sep 14, 2011 11:47 am

Stone, another thing to keep in mind is that if you weight equal dollar amounts (or as close to equal) into the 3 options, you are effectively being contrarian all the time.  For example, if the market thinks gold is going to $2000 an ounce in the next year, the GLD at the money options are going to be very expensive, so you can't buy as much of them (underweight gold).  Likewise if the market thinks TLT won't stay this high forever, the TLT at the money options are going to be pretty cheap, so you get a lot more for the same money.

I think this is somewhat applying PP principles to options/futures trading.  Futures traders like to think they can predict the market but we know from past experience that nobody can predict the market.  You make equal bets following PP principles and ignoring your emotions, and hopefully you come out ahead.
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Re: LEAPS PP

Post by AdamA » Wed Sep 14, 2011 11:52 am

Storm wrote:
Likewise, I think the best way to implement this strategy is to set aside some pre-determined amount.  Divide by 12, and purchase LEAPS expiring in the first week of every month, timing your entry as you see fit.

Sell exactly 1 year and 1 day, or time your exit after that point for tax purposes.  Some months you may lose, and some you may win, but I would be willing to bet you would have more profitable months than not.

The difficulty is that because you can only buy options in lots of 100, you might need a significant amount of startup capital to do this - at least $50K or so.
That's a good idea. 

Fees might get to be a little bit of an issue, but I guess if you had $50K invested it would be a small percentage. 

I think if I had $50K of money to spare, I might actually try your idea...if I had $50K to spare  ;D
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Re: LEAPS PP

Post by stone » Wed Sep 14, 2011 11:53 am

Storm, I'm curious to see whether the SPYcalls will provide as much of a bonanza when stocks have their day as the TLTcalls and GLDcalls have done lately. It wouldn't seem too implausible that SPYcalls might currently be priced expecting a big rebound in stock prices. If so, then even if the stock rebound does happen, you haven't done well- merely stayed even? How much of a jump in stock prices would be needed from this point to make SPYcalls bought now as profitable as the TLTcalls or GLDcalls bought earlier this summer were?
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Re: LEAPS PP

Post by Storm » Wed Sep 14, 2011 1:32 pm

stone wrote: Storm, I'm curious to see whether the SPYcalls will provide as much of a bonanza when stocks have their day as the TLTcalls and GLDcalls have done lately. It wouldn't seem too implausible that SPYcalls might currently be priced expecting a big rebound in stock prices. If so, then even if the stock rebound does happen, you haven't done well- merely stayed even? How much of a jump in stock prices would be needed from this point to make SPYcalls bought now as profitable as the TLTcalls or GLDcalls bought earlier this summer were?
SPY calls are the most unchanged of the 3 I purchased.

Nov11 116 calls purchased at $7.17 now $7.95
Dec11 113 calls purchased at $7.84 now $10.82
Jan13 120 calls purchased at $11.25 now $12.49

There seems to be some small attempt to price in a rebound but most of these were purchased in mid-August when things were doom and gloom a little more than right now.
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Re: LEAPS PP

Post by stone » Thu Sep 15, 2011 3:16 am

Storm, do you understand why the combination of stocks and stock put options doesn't work well at all? The Hussman fund does that and seem to engineer a steady creeping loss each year. http://www.hussman.net/theFunds.html

There must be something about market psychology that makes stock put options too expensive and call options too cheap? If so, then it seems remarkable that some combination such as short puts, long calls and short underlying isn't deployed to iron out the discrepancy?? I'm probably totally confused about all of this.
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Re: LEAPS PP

Post by Storm » Thu Sep 15, 2011 10:52 am

stone wrote: Storm, do you understand why the combination of stocks and stock put options doesn't work well at all? The Hussman fund does that and seem to engineer a steady creeping loss each year. http://www.hussman.net/theFunds.html

There must be something about market psychology that makes stock put options too expensive and call options too cheap? If so, then it seems remarkable that some combination such as short puts, long calls and short underlying isn't deployed to iron out the discrepancy?? I'm probably totally confused about all of this.
Stone, admittedly I am not very well educated on options trading.  I'm a total newbie, if you will.  :)  But, as I understand it, purchasing a put option on a stock you are long is just a way to give up some of the upside in exchange for some downside protection.  It is possible that by using this strategy they are continually eating into their gains.

From the link you sent, it looks like the management fees are very high (>1%) and I would expect their put strategies eat another point or two of gains.  They are probably lucky to be able to show the 10 year returns that they do.  I would expect this strategy to barely outperform inflation, considering the large management fees and put options eating some of your gains.

To be honest though, I have no idea if call options are underpriced.  It is possible that they are because a lot of investors are selling covered calls, which creates too much sell side pressure, but honestly that is just a guess.
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Re: LEAPS PP

Post by stone » Fri Sep 16, 2011 7:31 am

Storm, I guess all LEAPs options are not issued as an act of charity. The people engineering them will be making a good living so they will entail plenty of (inbuilt) costs even if those are not as transparent as the quoted TER for a mutual fund??? My impression is that the PP works because it exploits a systematic goofyness in that markets always over-react. Hopefully you are right in thinking that LEAPs harvest such over-reactions in a more effective way. Best of luck with it!
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Re: LEAPS PP

Post by Storm » Fri Sep 16, 2011 8:56 am

stone wrote: Storm, I guess all LEAPs options are not issued as an act of charity. The people engineering them will be making a good living so they will entail plenty of (inbuilt) costs even if those are not as transparent as the quoted TER for a mutual fund??? My impression is that the PP works because it exploits a systematic goofyness in that markets always over-react. Hopefully you are right in thinking that LEAPs harvest such over-reactions in a more effective way. Best of luck with it!
I decided that in October, I'm going to sell some of my VP, realize some long term gains, and try a LEAPS PP out for a bit.  I only have enough money to do about 3 purchases, and I'll do them about a month apart each.  We'll see how they go.
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Re: LEAPS PP

Post by clacy » Fri Sep 16, 2011 8:58 am

Thanks for sharing storm.  Please keep us up to speed on how that goes.
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Re: LEAPS PP

Post by Storm » Fri Sep 16, 2011 9:03 am

clacy wrote: Thanks for sharing storm.  Please keep us up to speed on how that goes.
I will be sure to report back and let you know how it goes.  The biggest question I have is whether I should hold them the entire 1 year and 1 day or sell early if I'm up something like 80%...  It's going to be tough to decide and I'm not sure if the time value decrease will be too great as you approach the option date.
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Re: LEAPS PP

Post by Storm » Mon Oct 10, 2011 9:00 am

I put my money where my mouth is and bought the first $10K Jan2013 call options today.  At the money was difficult because most trade at $5 increments.

I'm a little bit overweight GLD options, but heck, this is a VP after all and I expect gold to be significantly higher by Jan. 2013.  ;D

10/10/2011 YOU BOUGHT OPENING TRANSACTION
-GLD
130119
C165 CALL (GLD) SPDR GOLD TR GOLD JAN 19 13 $165 (100 SHS)
Cash Contracts: +2.000 Price: $23.00 Amount: -$4,609.49
Comm: $9.45
Fees: $0.04

Settlement Date: 10/11/2011
10/10/2011 YOU BOUGHT OPENING TRANSACTION
-SPY
130119
C125 CALL (SPY) SPDR S&P 500 ETF JAN 19 13 $125 (100 SHS)
Cash Contracts: +3.000 Price: $10.33 Amount: -$3,109.27
Comm: $10.20
Fees: $0.07

Settlement Date: 10/11/2011
10/10/2011 YOU BOUGHT OPENING TRANSACTION
-TLT
130119
C120 CALL (TLT) ISHARES BARCLAYS 20+ JAN 19 13 $120 (100 SHS)
Cash Contracts: +4.000 Price: $7.67 Amount: -$3,079.04
Comm: $10.9
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Re: LEAPS PP

Post by AdamA » Mon Oct 10, 2011 11:38 pm

Storm wrote: I put my money where my mouth is and bought the first $10K Jan2013 call options today.  At the money was difficult because most trade at $5 increments.

I'm a little bit overweight GLD options, but heck, this is a VP after all and I expect gold to be significantly higher by Jan. 2013.  ;D

10/10/2011 YOU BOUGHT OPENING TRANSACTION
-GLD
130119
C165 CALL (GLD) SPDR GOLD TR GOLD JAN 19 13 $165 (100 SHS)
Cash Contracts: +2.000 Price: $23.00 Amount: -$4,609.49
Comm: $9.45
Fees: $0.04

Settlement Date: 10/11/2011
10/10/2011 YOU BOUGHT OPENING TRANSACTION
-SPY
130119
C125 CALL (SPY) SPDR S&P 500 ETF JAN 19 13 $125 (100 SHS)
Cash Contracts: +3.000 Price: $10.33 Amount: -$3,109.27
Comm: $10.20
Fees: $0.07

Settlement Date: 10/11/2011
10/10/2011 YOU BOUGHT OPENING TRANSACTION
-TLT
130119
C120 CALL (TLT) ISHARES BARCLAYS 20+ JAN 19 13 $120 (100 SHS)
Cash Contracts: +4.000 Price: $7.67 Amount: -$3,079.04
Comm: $10.9

You're making me antsy.  I'm dying to try this, but have so far talked myself out of it.


So far, the portfolio I setup is up around 100%, but that's almost soley b/c of the performance of the TLT calls.
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Re: LEAPS PP

Post by clacy » Fri Oct 14, 2011 2:10 pm

Has anyone here considered selling puts, rather than buying calls?  If someone has the means to backtest options strategies, that might be interesting.

With put selling, you have time decay on your side, as well as the upward drift of the four asset classes together.
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Re: LEAPS PP

Post by AdamA » Fri Oct 14, 2011 3:29 pm

clacy wrote: Has anyone here considered selling puts, rather than buying calls?  If someone has the means to backtest options strategies, that might be interesting.

With put selling, you have time decay on your side, as well as the upward drift of the four asset classes together.
I don't think HB would approve, although it's an interesting idea.  There's unlimited loss potential, in theory at least.
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Re: LEAPS PP

Post by Storm » Fri Oct 14, 2011 8:41 pm

Adam1226 wrote:
clacy wrote: Has anyone here considered selling puts, rather than buying calls?  If someone has the means to backtest options strategies, that might be interesting.

With put selling, you have time decay on your side, as well as the upward drift of the four asset classes together.
I don't think HB would approve, although it's an interesting idea.  There's unlimited loss potential, in theory at least.
Yeah, I wanted a VP strategy that gave me potentially leveraged gains, without using leverage.  I suppose this is the closest thing, however, this strategy really plays on the whole "nobody knows what is going to happen next" theory.  I mean, look at GLD calls, they are ridiculously expensive.  Everyone expects GLD to soar by 2013.  But who knows what will really happen.  It could be that TLT calls save the day, or even SPY.

I'm beginning to think that short term options are better because you're not paying as much for the time value... The 2013 options really have a premium for time value that isn't present in a 90 or 120 day option.
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Re: LEAPS PP

Post by clacy » Fri Oct 14, 2011 8:53 pm

Adam1226 wrote:
clacy wrote: Has anyone here considered selling puts, rather than buying calls?  If someone has the means to backtest options strategies, that might be interesting.

With put selling, you have time decay on your side, as well as the upward drift of the four asset classes together.
I don't think HB would approve, although it's an interesting idea.  There's unlimited loss potential, in theory at least.
LOL, very true. I think we can all agree that Harry would not approve of much of what is posted on this website.
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Re: LEAPS PP

Post by AdamA » Fri Oct 21, 2011 4:35 pm

Storm wrote: I'm beginning to think that short term options are better because you're not paying as much for the time value... The 2013 options really have a premium for time value that isn't present in a 90 or 120 day option.
It occurred to me that you may be able to pull this off just using SPY and TLT.

They basically have a negative correlation, whereas gold seems to do it's own thing.

Again, all just conjecture. 
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