100% stocks with almost no downside risk

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dutchtraffic
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100% stocks with almost no downside risk

Post by dutchtraffic » Mon Apr 22, 2019 4:51 pm

I might be missing something here, so if you can shoot some holes in this, please do!
Go long QQQ or whatever index, and buy deep itm puts to hedge.

Looking at some numbers here, the QQQ 205 put expiring in DEC has just 1.29% annualized timevalue and 77 delta, and QQQ would need to rise about 7something % to be profitable.
So pretty much almost no downside risk, and plenty of upside potential per year.

Looking at historic QQQ returns this would have worked out great, especially when you put these positions on during a dip or something.

This is extremely conservative, max downside risk around 1% per year.
Am I missing something, I am unable to backtest this (no historic option prices) so I have no idea how good this would have worked out historically.
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Kbg
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Re: 100% stocks with almost no downside risk

Post by Kbg » Mon Apr 22, 2019 9:35 pm

Well slight problem. You will not get cheap options on dips.

Options on the QQQ are very efficiently priced. That’s not to say you can’t pick up a hedge cheap, as is the case when market volatility is low. However, a safe LT assumption for buying puts is you are going to subtract the cost from whatever profit you make on the long side.
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Cortopassi
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Re: 100% stocks with almost no downside risk

Post by Cortopassi » Mon Apr 22, 2019 9:39 pm

I always "wanted" to do married puts. A few years ago I went back through 25 years of trades and verified if I had them, it would have improved my return significantly. Not from added gains, but protection from losses.

At the implied volatility, with the ITM put at 205, you are correct, there seems to be little risk to the downside.

But what always got me to not put these trades on was the amount the position needed to rise to overcome the cost of the put. As you say, it needs to rise at least 7% to be profitable. In a normal world, 7% would be a damn good gain.

My experience with calls, puts, covered calls, and a variety of other strategies is the people who make the markets for these know how to price them, and the house generally wins, which leads me to say that QQQ will rise between 0 and 7% between now and Dec.

And your other comment about good when bought during dips, that's trying to time.

I recall when I first came upon these, it was a eureka moment for a little while until I realized how far the underlying needed to move to actually make money.
boglerdude
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Re: 100% stocks with almost no downside risk

Post by boglerdude » Mon Apr 22, 2019 11:54 pm

dutchtraffic
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Re: 100% stocks with almost no downside risk

Post by dutchtraffic » Tue Apr 23, 2019 3:26 am

?

For a portfolio 10 x as conservative than a PP..? ::)
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