LEAPS PP

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Gosso
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Re: LEAPS PP

Post by Gosso » Wed Apr 18, 2012 10:12 pm

AdamA wrote:
Gosso wrote: Of course the problem with this is if we see two or three six month periods in a row where all the PP assets perform poorly or remain flat, which I think is highly unlikely, but possible.
It only has to happen once to kill the portfolio.
Yes, it would kill the VP portfolio if you decided to go 100% call options.  But you could use 1/3 of the VP for call options, while keeping the rest in cash, so that if the call options blow up then you have some dry powder to buy new call options at rock bottom prices (hopefully).  The cash effectively lowers you leverage from ~10x down to ~3x.  Although if you drop down to 3x, then it might be easier to just buy a 3x levered ETF...
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Re: LEAPS PP

Post by Gosso » Thu Apr 19, 2012 3:19 pm

I was looking at the Dec 22, 2012 call options and noticed that a few were overpriced in comparison to the Black–Scholes model:

- SPY: +48%
- GLD: +24%
- TLT: -1%

Does this mean that the options on SPY and GLD have already factored in a significant price increase?  Then if there was a price increase, is it possible the call options would actually decrease in value?

I'm beginning to like this scenario less and less.

Any expert option traders want to throw in their two cents on this?  Is it normal for GLD and SPY to be overpriced like this?
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Re: LEAPS PP

Post by AdamA » Thu Apr 19, 2012 6:16 pm

Gosso wrote: The cash effectively lowers you leverage from ~10x down to ~3x...
It also would lower your yield.  I suspect this setup would probably not do as well as the regular PP.
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Re: LEAPS PP

Post by clacy » Thu Apr 19, 2012 8:35 pm

Clive, I possess 1/10th of your backtesting abilities (and I'm not joking).  My backtesting is more or less relegated to etfreplay.  What rebalance time interval are you using on your etfreplay charts?
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Re: LEAPS PP

Post by Gosso » Fri Apr 20, 2012 3:17 pm

If I ever decide to buy options, then I'd likely use a Bull Call Spread.  What this does is limit your upside to a 10-20% gain in the underlying stock, and for this sacrifice you are given back about 20% of your initial investment.  This seems to be perfect for the PP's moderately volatile assets.  Another benefit is that it takes greed off the table since once the stock moves 10-20% then you can no longer profit from it, so you might as well rebalance and take your profits off the table.

The downside is the additional transaction costs, and inability to profit from a massive move...although you can simply purchase a new Bull Spread once the previous one reaches the cap, but again the transaction costs hurt.

Think of it as a forced rebalancing, but still pays back ~20% (Edit: of your original investment) even if the stock falls below your strike price.  An 80% loss is better than 100%.

I don't believe that this hurts the leverage, although I could be wrong.

***

Something else I was thinking about is buying call options with equal premium prices, instead of all ATM.  For example, lets say we want to buy Dec 21, 2012 call options for TLT GLD SPY all at $10.  This means we'd have to go moderately ITM for TLT, slightly ITM for SPY, and ATM for GLD.  Does this give a more appropriate risk and leverage profile?  Since TLT is historically less volatile, it would make sense to buy moderately ITM, since it is more likely to remain flat.

Or does it not make a difference?
Last edited by Gosso on Sat Apr 21, 2012 1:32 pm, edited 1 time in total.
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Re: LEAPS PP

Post by Storm » Fri Apr 20, 2012 3:43 pm

Gosso wrote: I was looking at the Dec 22, 2012 call options and noticed that a few were overpriced in comparison to the Black–Scholes model:

- SPY: +48%
- GLD: +24%
- TLT: -1%

Does this mean that the options on SPY and GLD have already factored in a significant price increase?  Then if there was a price increase, is it possible the call options would actually decrease in value?

I'm beginning to like this scenario less and less.

Any expert option traders want to throw in their two cents on this?  Is it normal for GLD and SPY to be overpriced like this?
Gosso, I'm about as novice of an options trader as they come, but I think you're correct.  It seems like the futures price tends to be what most market participants believe is going to happen: they think gold and stocks will rise by December, so the consensus is already priced in.

The reason I would caution you to not use our previous test data (especially the $20K to $32K increase) is that we made those options bets a month or so before the debt ceiling deadline last summer.  The market had already priced in what they thought was going to happen, which, according to general consensus, was that treasury yields were going to soar and all of that outflow from the bond selloff was going to rush into equities.  As we all know, the exact opposite happened.  Treasury yields fell and this made our TLT options soar in value.

You can make a lot of money when the market is wrong, but if you bet money now that gold is going to $2000 an ounce, don't be too surprised if it does, and you still don't make a lot of money, because the market has already priced that consensus view in.

Good luck.
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Re: LEAPS PP

Post by MachineGhost » Sat Apr 21, 2012 8:17 am

Storm wrote: Basically, I'm just holding these options until January of next year and hoping there is a big move in gold or equities due to QE3.  If things stay relatively flat I've lost money.
Time decay and volatility collapse will get you every time.  There is no way to do options succesfully without factoring those two variables into it.  Options aren't straight up substitutes for the underlying, like stock futures.  Even though 100 shares of stock, 1 ATM option and 1 ATM stock futures are all equivalent in terms of $ gain.

MG
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Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet.  I should not be considered as legally permitted to render such advice!
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Re: LEAPS PP

Post by AdamA » Sun Jul 29, 2012 11:25 pm

AdamA wrote: I just setup a virtual trading account at OptionsExpress.com with the following positions

1/3 SPY Jan 2013 Call
1/3 GLD Jan 2013 Call
1/3 TLT Jan 2013 Call

(all at the money options).

My plan would be to rebalance in one year, selling losers with one day left in the year, and winners the next day for tax reasons.  I'd then rebuy the options with later expiration dates.

Does anyone think that such a plan could work?

Note, this is a virtual account and contains no real money.  

I didn't use a cash ETF b/c none of them have LEAPS as far as I can tell.

This portfolio returned about 100% over the past year, almost exclusively due to the TLT LEAPS which basically quadrupled (!) in value.  

I will sell all of the positions and repeat again this year.  I will sell the TLT and SPY LEAPS on Aug 2 (1 year + 1 day) b/c they were winners, and the GLD LEAPS tomorrow b/c it was a loser.

As interesting as this idea is to me, there is no amount of backtesting that would ever make me comfortable using it...unless maybe I was really really really rich, and using a very small portion of my invested money.
Last edited by AdamA on Sun Jul 29, 2012 11:42 pm, edited 1 time in total.
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Re: LEAPS PP

Post by Storm » Mon Jul 30, 2012 8:35 am

AdamA wrote:
AdamA wrote: I just setup a virtual trading account at OptionsExpress.com with the following positions

1/3 SPY Jan 2013 Call
1/3 GLD Jan 2013 Call
1/3 TLT Jan 2013 Call

(all at the money options).

My plan would be to rebalance in one year, selling losers with one day left in the year, and winners the next day for tax reasons.  I'd then rebuy the options with later expiration dates.

Does anyone think that such a plan could work?

Note, this is a virtual account and contains no real money.  

I didn't use a cash ETF b/c none of them have LEAPS as far as I can tell.

This portfolio returned about 100% over the past year, almost exclusively due to the TLT LEAPS which basically quadrupled (!) in value.  

I will sell all of the positions and repeat again this year.  I will sell the TLT and SPY LEAPS on Aug 2 (1 year + 1 day) b/c they were winners, and the GLD LEAPS tomorrow b/c it was a loser.

As interesting as this idea is to me, there is no amount of backtesting that would ever make me comfortable using it...unless maybe I was really really really rich, and using a very small portion of my invested money.


My actual LEAPS purchased after the debt ceiling showdown of last year have been negative for most of the year.  Just recently they have started to push into almost break-even territory (around $9600 out of $10,000).  I'm on track to sell them in October, so if there are no major market moves until then, it's highly likely I'll take a small loss, or a small profit.

If you try this strategy, you run the very real risk that the PP is mostly flat during your short term time horizon, and that pretty much sucks for options.

AdamA, if only we'd put real money on those "fake trades"...  By the way, I think this is what Harry Browne talks about in his books.  He says something like "the best winning trading strategy will lose money when you try it."
"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 Gosso » Mon Jul 30, 2012 10:19 am

AdamA,

Have you checked the "real" spread on the TLT options.  For some reason the very deep ITM options for TLT have giant spreads on them -- I'm talking 15-20%.  The spread for ITM options on GLD and SPY are much more reasonable at approx 1-2%.

For me, this almost makes TLT a non-starter for options, since if the TLT does perform well and ends deep ITM then you have to pay a 15% spread to close the trade.  Although, I suppose you could let the option expire and then sell the shares on the open market...
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Re: LEAPS PP

Post by clacy » Mon Jul 30, 2012 11:34 am

Gosso wrote: AdamA,

Have you checked the "real" spread on the TLT options.  For some reason the very deep ITM options for TLT have giant spreads on them -- I'm talking 15-20%.  The spread for ITM options on GLD and SPY are much more reasonable at approx 1-2%.

For me, this almost makes TLT a non-starter for options, since if the TLT does perform well and ends deep ITM then you have to pay a 15% spread to close the trade.  Although, I suppose you could let the option expire and then sell the shares on the open market...
I would assume most who are trading options on long bonds are trading futures options on the 30-yr bond future instead.
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Re: LEAPS PP

Post by AdamA » Tue Jul 31, 2012 12:58 am

Gosso wrote: AdamA,

Have you checked the "real" spread on the TLT options.  For some reason the very deep ITM options for TLT have giant spreads on them -- I'm talking 15-20%.  The spread for ITM options on GLD and SPY are much more reasonable at approx 1-2%.

For me, this almost makes TLT a non-starter for options, since if the TLT does perform well and ends deep ITM then you have to pay a 15% spread to close the trade.  Although, I suppose you could let the option expire and then sell the shares on the open market...
As the options get closer to expiration, the spread closes. 
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