LEAPS PP

A place to talk about speculative investing ideas for the optional Variable Portfolio

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AdamA
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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% ?? 
"Good judgment comes from experience. Experience comes from bad judgment." - Mulla Nasrudin
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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.
"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 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.
"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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