LEAPS PP

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clacy
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Re: LEAPS PP

Post by clacy » Tue Sep 06, 2011 3:44 pm

Interesting, thanks for the update.  I think using LEAPS for your variable portion would be an interesting way to stay within the framework of the HBPP (all 4 asset classes represented equally) but yet levered up for more significant returns.

Sounds like a great way to put your 10% variable portfolio to work.
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Re: LEAPS PP

Post by AdamA » Tue Sep 06, 2011 3:51 pm

I suspect it will go down as fast as it goes up...if not faster.
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Re: LEAPS PP

Post by clacy » Tue Sep 06, 2011 4:35 pm

Possibly.  But if the principles of the HBPP continue to hold, more times than not, there will a positive lift in the portfolio as a whole and some price movement.  The time decay and so forth of options might very well eat up any gains as fast as they come however.
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Re: LEAPS PP

Post by Storm » Fri Sep 09, 2011 1:03 pm

Adam1226 wrote: It's up 88% since Aug 1st, for anyone interested.
Awesome!

Nov11 GLD/SPY/TLT options - up 79.6%

Dec11 GLD/SPY/TLT options - up 40.3%

Jan13 GLD/SPY/TLT options - up 41.6%
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Re: LEAPS PP

Post by Storm » Fri Sep 09, 2011 1:07 pm

Storm wrote:
Adam1226 wrote: It's up 88% since Aug 1st, for anyone interested.
Jan13 GLD/SPY/TLT options - up 41.6%
One thing to note - the returns are highly volatile depending on entry and exit.  Notice how Adam just bought his Jan13 options about a week before mine, and he has almost 2x returns.  He bought before Aug. 2nd which had a huge impact on TLT, no doubt.

The best way to play this one, IMO, is to wait for one of those days when all 3 assets in the PP drop.  We've seen several days like that recently.  Any day that the entire portfolio is down is as good a day to enter a position as any.

It sure will be interesting to see if you would come out better by doing the short term play or the long term play over time.  I'm really curious to see what those LEAPS are worth a year from now...
"I came here for financial advice, but I've ended up with a bunch of shave soaps and apparently am about to start eating sardines.  Not that I'm complaining, of course." -ZedThou
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Re: LEAPS PP

Post by kka » Tue Sep 13, 2011 7:36 am

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Last edited by kka on Tue Sep 13, 2011 9:37 am, edited 1 time in total.
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Re: LEAPS PP

Post by stone » Tue Sep 13, 2011 8:00 am

I'm totally ignorant about this. Is part of the reason why the LEAPS PP has done so well recently is because we have made a transition from a period of mild price volatility when the options were purchased to exceptional price volatility now? If someone were to buy options now and then things quietened down, would they loose out? Is having a LEAPS PP rather than a regular PP basically a bet on future panic? If so, then might it make sense to just have regular stocks balanced against LTT and gold options since panic is unlikely to be good for stocks? So have a variable portfolio that was say 80% stocks, 10% LTT call options, 10% LTT call options?
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Re: LEAPS PP

Post by clacy » Tue Sep 13, 2011 8:05 am

stone wrote: I'm totally ignorant about this. Is part of the reason why the LEAPS PP has done so well recently is because we have made a transition from a period of mild price volatility when the options were purchased to exceptional price volatility now? If someone were to buy options now and then things quietened down, would they loose out? Is having a LEAPS PP rather than a regular PP basically a bet on future panic? If so, then might it make sense to just have regular stocks balanced against LTT and gold options since panic is unlikely to be good for stocks? So have a variable portfolio that was say 80% stocks, 10% LTT call options, 10% LTT call options?
That is a good point and one that I have asked myself as well.  I don't know a whole lot about options, but I believe volatility is important to options trading.  I think if two or three of the assets were on a small, gradual pace, you may have completely different outcomes.
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Re: LEAPS PP

Post by Storm » Tue Sep 13, 2011 10:21 am

stone wrote: I'm totally ignorant about this. Is part of the reason why the LEAPS PP has done so well recently is because we have made a transition from a period of mild price volatility when the options were purchased to exceptional price volatility now? If someone were to buy options now and then things quietened down, would they loose out? Is having a LEAPS PP rather than a regular PP basically a bet on future panic? If so, then might it make sense to just have regular stocks balanced against LTT and gold options since panic is unlikely to be good for stocks? So have a variable portfolio that was say 80% stocks, 10% LTT call options, 10% LTT call options?
Stone, that is an interesting thought.  I think you meant 80/10/10 stocks, TLT options, and GLD options, right?  In my opinion, the LEAPS PP is similar to the 2x leveraged PP, except you're cranking the leverage up to about 6x or 8x.  The time period that Adam and I purchased was right around the August 2nd debt ceiling fiasco, and both of our test portfolios benefited greatly from the jump in long bonds and gold.

If you were to purchase in a time of relative economic stability, you might not have a great enough price movements to make your options worth much.  Another big risk is that your options are worth almost nothing by the time you sell them, if those assets have dropped in value.

I think the LEAPs PP is worth pursuing with a small amount of play money in a VP, but it would require extensive backtesting and speculation to convert your entire PP to an 80/10/10 portfolio.  The problem with backtesting is that options on GLD and TLT have not been around that long, so it's difficult to really tell what would happen in certain scenarios.
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Re: LEAPS PP

Post by clacy » Tue Sep 13, 2011 10:31 am

Storm wrote:
The problem with backtesting is that options on GLD and TLT have not been around that long, so it's difficult to really tell what would happen in certain scenarios.
True, but options on Gold and Treasury futures have existed for quite some time. I don't have the ability to backtest such, but I'm sure it exists for someone that has the proper data.
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Re: LEAPS PP

Post by AdamA » Tue Sep 13, 2011 10:43 am

stone wrote: I'm totally ignorant about this. Is part of the reason why the LEAPS PP has done so well recently is because we have made a transition from a period of mild price volatility when the options were purchased to exceptional price volatility now?s?
Yes.  

Both GLD and TLT went nuts (in the up direction) right after I bought the calls.  They are already very close to their break-even price, and have a lot of time value left.  

If these two assets were to suddenly become stagnant and remained so until they reach expiration, they would expire worthless.  

Even if they make it over the break-even price, they will still continue to lose time value, so they (the underlying assets) could continue to rise, but the calls could be worth less a year from now.  

This would be a very difficulty strategy to implement, even if it back-tested well.  Would you sell your positions (up 90% after a month) or would you hang on to them as planned (until next August, when you'd, in theory, roll them over).  
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Re: LEAPS PP

Post by stone » Tue Sep 13, 2011 10:45 am

Storm, I'm not numerate enough to understand it but aren't there equations for pricing options
http://en.wikipedia.org/wiki/Black–Scholes
They are undoubtedly a bit wrong, but would give some idea of what the price is likely to be depending on what the market is doing. So if volatility is high, then option prices will reflect the fact that due to the high volatility, there is a good chance that the price will spike up so as to give a profitable exersizing of the option (I hope I'm using the correct words for all of this). So you are best buying options BEFORE everyone else thinks prices might spike in the future. I thought that that is what fortuitously was done with the LEAPS PP talked about here.

In principle you could use Black-Scholes to calculate hypothetical predicted option prices even if no options were available at that time.

I'm probably in a total muddle about all of this.
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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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