The perfect trade

[Castanza]

Of course I know that. My point was that the return you generate doesn't tell you whether the underlying strategy has blow-up potential or not. You can pick up pennies with high turnover, or with high leverage, or with high profit margins, but, to answer your question, even if your strategy returns 30% p.a., yes, in the end you are still picking up pennies in front of a steamroller.

 

Also, you sell insurance on blue chips. I don't know how you calculate your ROC but consider me extremely skeptical about that strategy generating a 30%-40% risk-adjusted return for a retail investor. It's not exactly rocket science.

 

I was just using numbers based on the original post.

[writser]

I was just using numbers based on the original post.

 

My bad.

[Castanza]

I was just using numbers based on the original post.

 

My bad.

 

I mean I have had months doing 30% on capital with the put writing strategy. But that’s pretty much luck that I didn’t get assigned. Boilermakers strategy is much more conservative and you can generate 5-10% with confidence.

[boilermaker75]

I think these “perfect trades” are a well known staple in trading. It’s called picking up pennies in front of a steamroller.

 

Is it really picking up pennies when your making 30-40% ROC a year?

 

And you are not going to get steamrolled if you are purchasing companies like BRKB, WFC, and BAC. There has never been a time where getting put to on BRKB was not a good thing.

 

Hind sight bias.

 

Seems like plenty of people would have been steamrolled doing this with WFC or BAC in 2007/2008.

 

Plenty of people would have been steamrolled doing this with KHC/GE in 2018/2019.

 

Every year, there is a "safe" and "solid" blue Chip that has dismal performance. Hindsight bias makes us feel comfortable taking risks with these names, but it can be a pretty bad deal if you're selling puts on margin on one of these when that occurs.

 

If options were so easy to make money in, everyone would do it. The problem is that there are occasional blow-ups where the loss on the position wipes out multiple prior trades' gains.

 

As you point out no more risky than owning the stock outright as far as getting steamrolled. Actually slightly less risky because of the put premium plus however much your wrote the put out-of-the money. The biggest drawback I see is missing out on the gain you get with the stock if it surges up.

 

No it is not easy, but the same difficulty as LTBH. I have been writing puts for about 25 years. I have had some that have not worked and sold for a loss. But the same with LTBH, which I have been doing since the late sixties.

[Jurgis]

I think that the two sides are talking past each other mostly based on the put position sizing (which acts like leverage).

 

If you position size so that put+cash ~= stock position if put-to, you have lowish risk but also lowish return on total amount. IMO that's where pro-this-strategy-people's "low risk" comes from - but they forget "low return".

 

If you position size that put(s) are >> cash if put-to, then you have high risk and high return (before you blow up). IMO that's where pro-this-strategy-people's "high return" and against-this-strategy-people's "high risk" comes from.

 

If you're expert like boilermaker75, you might be able to position somewhere in the middle of two without burning and by adding some return to your portfolio. But likely it's not as trivial as pro-this-strategy-people make it out to be.

 

 

[TwoCitiesCapital]

I think that the two sides are talking past each other mostly based on the put position sizing (which acts like leverage).

 

If you position size so that put+cash ~= stock position if put-to, you have lowish risk but also lowish return on total amount. IMO that's where pro-this-strategy-people's "low risk" comes from - but they forget "low return".

 

If you position size that put(s) are >> cash if put-to, then you have high risk and high return (before you blow up). IMO that's where pro-this-strategy-people's "high return" and against-this-strategy-people's "high risk" comes from.

 

If you're expert like boilermaker75, you might be able to position somewhere in the middle of two without burning and by adding some return to your portfolio. But likely it's not as trivial as pro-this-strategy-people make it out to be.

 

I agree the conversation is moving past each other - position sizing is part of what is being missed, but it's much more than that.

 

1) the examples people have brought up encompass out, at, and in the money options. All 3 behave differently  with different risk/rewards based on moves in the underlying. Same could be said for varying tenures of the contract

 

2) Further complicating the conversation is loose interpretations of what is being said - like when I say an option isn't a proxy for the underlying, some people are understanding that to mean options are worse than the underlying or that options are bad

 

3) People are still making the assumption all options contracts are held to maturity in their arguments when one of my very first posts was you may not have that luxury if the thesis on the underlying changes while you hold the contract

 

Everyone is arguing different things, different contracts, and different tenures - different scenarios but still trying to say it's all the same as owning the underlying stock which is only true in a handful of scenarios AND requires you to hold to maturity which is a big assumption IMO.

 

[boilermaker75]

Yes I should have mentioned something about position sizing and what I do. Back when the banks were trading for single digits I was writing naked puts where if put to on everything I would have been heavily margined. I did occasionally get on some margin, but I turned around and wrote covered calls and was never on margin long. The put premiums were also much larger back then.

 

I would not do that in today's market. Must of the puts I write are cash-secured, or I might get slightly on margin, 1-2%, if put to on everything. But my puts are spread out in time. The WFC puts I wrote yesterday would put me on margin but I have 46.5-strike WFC puts expiring Friday that would put all my put positions back at being cash secured if they expire. And I will probably buy those Friday positions back rather than try to squeeze another dollar or two out.

[boilermaker75]

I couldn't help myself, I just wrote some BAC 27.5-stirke, October 11 expiration puts for $0.30 per share. I did it in my IRA so they are cash-secured.

[lnofeisone]

I couldn't help myself, I just wrote some BAC 27.5-stirke, October 11 expiration puts for $0.30 per share. I did it in my IRA so they are cash-secured.

 

Boilermaker - just curious if you can share your strategy around picking the strike price vs. premium collected (which in my calculations consists of things such as time value, volatility, etc.) vs. probability of assignment (here I have my betas, deltas, vegas).

 

 

[muscleman]

It is amazing how quickly this thread turned from a 40% a year perfect trade to put writing strategies that yields stable 8-10%. If you are not the athlete trying to be the Olympic champion making 40% a year, why not just put your money into an index fund?

 

[boilermaker75]

I couldn't help myself, I just wrote some BAC 27.5-stirke, October 11 expiration puts for $0.30 per share. I did it in my IRA so they are cash-secured.

 

Boilermaker - just curious if you can share your strategy around picking the strike price vs. premium collected (which in my calculations consists of things such as time value, volatility, etc.) vs. probability of assignment (here I have my betas, deltas, vegas).

 

Nothing scientific. 90% of my writes have an expiration from a couple of days to a couple of weeks and I look for a premium of at least 1%.

[boilermaker75]

It is amazing how quickly this thread turned from a 40% a year perfect trade to put writing strategies that yields stable 8-10%. If you are not the athlete trying to be the Olympic champion making 40% a year, why not just put your money into an index fund?

 

I am a LTBH investor. I am not writing puts on my whole portfolio. Today it is mainly on the cash portion, which is small because I am almost fully invested. Here are more details of what I do.

 

First, I use writing puts to enter positions. All my current positions were entered that way. It gives me the discipline to wait for my price. I don’t have that patience with just limit orders. Besides I get paid while waiting to be exercised, probably why I am more patient, and it lowers my basis by the put premium. A criticism would be not acquiring a position because you don’t get put to. This has only happened to me once. I wanted to acquire some MCD at $50 and was never put to. So, I missed out on a four-bagger so far.

 

Secondly, I use puts to do some trading. Usually stocks I already own and at prices I would not mind if I were put to. Most of my positions are written when the expiration is a few days to about a month out. For the rest the expiration is 1-2 months out when I write the put. I am selling insurance and collecting very nice premiums, but unlike insurance, if I have to pay a claim I end up with a stock I don’t mind owning at the price I am put to.

 

Third, it is also a way to be margined in the sense if I would be exercised on all my outstanding puts I would be on margin. From 2008-2016, if I were put to on all my outstanding puts, I would have been around 25% on margin. I only ended up slightly on margin a couple times and by writing covered calls (equivalent to writing a put) I was quickly off of margin. Recently, I have been writing puts where I would be just slightly on margin if put to on everything. Currently I am short puts on BRKB, WFC, and BAC.

 

Fourth, I also like to write puts to play risk arbitrage. For instance, when BRK was acquiring BNI I was writing at-the-money puts on BNI. If I outright bought BNI, I would have to wait till the acquisition closed to know my return. By writing puts I was setting the date when my play would be completed and what my return would be. I then followed an expiration with writing more puts. I did this till BRK closed on BNI.

 

[Cardboard]

"Or buy puts when VIX is<14 and SPY >300. I am 3:0 on this trade. I think I made about 70% on average each time, just closed my last round yesterday. It’s definitely a no brainer, especially when in addition to above Trump says that trade talks are going well."

 

We are getting close for this one to work again IMO. There could be some interesting excitement if a semi-trade deal happens (seems like the odds are raising) but, it could be short lived as focus will return to interest rates not coming down due to it, incomplete deal and a weak Q3 for earnings.

 

[Spekulatius]

"Or buy puts when VIX is<14 and SPY >300. I am 3:0 on this trade. I think I made about 70% on average each time, just closed my last round yesterday. It’s definitely a no brainer, especially when in addition to above Trump says that trade talks are going well."

 

We are getting close for this one to work again IMO. There could be some interesting excitement if a semi-trade deal happens (seems like the odds are raising) but, it could be short lived as focus will return to interest rates not coming down due to it, incomplete deal and a weak Q3 for earnings.

 

It’s pretty close to these targets. Based in the press (from unnamed sources  - ha) there actually isn’t any deal yet, just the promise of a kick the can deal - the Chinese buy some AG goods, Trump delays the tariffs. Better than a poke in the eye, but not a breakthrough. We will see where this goes next week.

 

One comment # if a pattern keeps repeating, it’s probably not a good signal any more.