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.
100% stocks with almost no downside risk
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Re: 100% stocks with almost no downside risk
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.
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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Re: 100% stocks with almost no downside risk
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.
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.
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Re: 100% stocks with almost no downside risk
?
For a portfolio 10 x as conservative than a PP..?
![Roll Eyes ::)](./images/smilies/rolleyes.gif)
Re: 100% stocks with almost no downside risk
If I felt compelled to do something (an options + QQQ...and/or a variant of QQQ) like this, I wouldn't fool around with deep ITM puts (i.e. puts that are far in the money because they are above the current price of the underlying asset). I wouldn't mess with puts that are ITM at all.
Instead, I might consider buying TQQQ and then--with a small portion--say anywhere from 3% to maybe 8% of the portfolio--buying a bunch of deep OTM puts on QQQ or on the NDX-100 index (whichever is cheaper)......and then rebalancing annually. Say a ladder of the longest-possible-time-until-expiry puts (i.e. the put equivalent of LEAPS) that was anywhere from 15% to maybe 25% OTM at the current price of QQQ. This would give you an asset that would explode in value when the NASDAQ-100 had catastrophic years like 2008, 2002, 2001, 2000, 1974, 1973, 1969-70, etc...thus giving you some "dry powder" to rebalance into TQQQ at when TQQQ was down 90% or more.
This wouldn't help much in years like 1981, 1984, 1990, etc when the NASDAQ-100 was only down mildly and even TQQQ would've (had it existed then) likely been down maybe 45 to 60%; with that said, with a highly leveraged asset like TQQQ it isn't the "small" drops of 50% that kill you; those can be recovered from surprisingly quickly; it is the 85 or 90% (or more!) drops that can't be recovered from easily in any span of time much less than 20-25 years at minimum seeing as how a 90% decline requires a 900% gain to get back to even and a 99% loss requires a stunning 9,900% gain to get back to even. FWIW if you had invested $10,000 in a hypothetical "100% TQQQ and nothing else portfolio" on 1-1-2000 you would've had around six bucks left at the end of 2002, just under three bucks at the end of 2008, and even by the end of Jan 2022 you'd still be at under $1250 (and that's not counting the carnage so far this month....if you go by YTD returns it would be just under $600 in value). OTOH, if on 1-1-2000 you had invested in, say, a 50/50 portfolio of TQQQ/cash (and by "cash" I am not referring to T-bills or a money market fund.....I mean cash actually earning nothing i.e. just cash in a checking account earning zero percent) and rebalanced each year on 12-31 you would as of today's market close on 2-23-2022 have almost $60,000.
The deep OTM puts are just mentioned here as an alternative to cash because they enable a lot of firepower for their size which in turn enables you to have less in the "rebalancing asset" and more in (hopefully) high-returning-over-the-long-run TQQQ.
I can't claim to be the inventor of this strategy or anything like it BTW....this "a tiny dollop of deep OTM puts plus a large chunk of risk assets" is very similar to what Universa does with its tail-risk strategies.
Instead, I might consider buying TQQQ and then--with a small portion--say anywhere from 3% to maybe 8% of the portfolio--buying a bunch of deep OTM puts on QQQ or on the NDX-100 index (whichever is cheaper)......and then rebalancing annually. Say a ladder of the longest-possible-time-until-expiry puts (i.e. the put equivalent of LEAPS) that was anywhere from 15% to maybe 25% OTM at the current price of QQQ. This would give you an asset that would explode in value when the NASDAQ-100 had catastrophic years like 2008, 2002, 2001, 2000, 1974, 1973, 1969-70, etc...thus giving you some "dry powder" to rebalance into TQQQ at when TQQQ was down 90% or more.
This wouldn't help much in years like 1981, 1984, 1990, etc when the NASDAQ-100 was only down mildly and even TQQQ would've (had it existed then) likely been down maybe 45 to 60%; with that said, with a highly leveraged asset like TQQQ it isn't the "small" drops of 50% that kill you; those can be recovered from surprisingly quickly; it is the 85 or 90% (or more!) drops that can't be recovered from easily in any span of time much less than 20-25 years at minimum seeing as how a 90% decline requires a 900% gain to get back to even and a 99% loss requires a stunning 9,900% gain to get back to even. FWIW if you had invested $10,000 in a hypothetical "100% TQQQ and nothing else portfolio" on 1-1-2000 you would've had around six bucks left at the end of 2002, just under three bucks at the end of 2008, and even by the end of Jan 2022 you'd still be at under $1250 (and that's not counting the carnage so far this month....if you go by YTD returns it would be just under $600 in value). OTOH, if on 1-1-2000 you had invested in, say, a 50/50 portfolio of TQQQ/cash (and by "cash" I am not referring to T-bills or a money market fund.....I mean cash actually earning nothing i.e. just cash in a checking account earning zero percent) and rebalanced each year on 12-31 you would as of today's market close on 2-23-2022 have almost $60,000.
The deep OTM puts are just mentioned here as an alternative to cash because they enable a lot of firepower for their size which in turn enables you to have less in the "rebalancing asset" and more in (hopefully) high-returning-over-the-long-run TQQQ.
I can't claim to be the inventor of this strategy or anything like it BTW....this "a tiny dollop of deep OTM puts plus a large chunk of risk assets" is very similar to what Universa does with its tail-risk strategies.