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Options ideas and help


petec

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Shameful admission: I have never owned an option. However, in theory a sensible strategy is to be almost fully invested most of the time and to use long dated calls to "juice" upside when markets sell off hard. We are not there yet, but I want to start thinking about the latter part of this formula.

 

If you have any options that you'd recommend for this purpose, or that you're watching, or if you have any (constructive!) advice, then I am all ears.

 

Thanks in advance.

 

P

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Noticed significantly smaller volume/price change in WFC leaps today compared to last week.

 

I think at some point both airlines and banks will become interesting plays with longer term calls. It  would be useful to compare option leverage to using a margin account as well.

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I basically moved to cash last week and went long Sept 2022 SPY 250 strike calls with other long dated, deep in the money options.  ~20% of the cash for ~100% of the exposure (although not from a daily $ perspective as the delta on the options are not 1).  However, if I'm holding it all the way through then I basically have all the upside and limited downside, at a cost of ~3-3.5% per annum for the "leverage" (on SPY, higher on single names due to vol). 

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Guest cherzeca

this is the taleb barbell strategy. cash on one side of the barbell to ensure survivability, long calls on the other side of barbell to afford exposure to gains.  you could have some of those options be cash collateralized short puts.  I have always thought the premium cost of the long calls was too pricey and so I have done simple majority cash with some minority long equity indexes, and one or more event catalyst stocks

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So my thinking was more to buy long dated, out of the money calls on individual stocks where I think the options will be well in the money before expiry. I was planning to move to cash, or worry about cost of volatility. Am I mad?

 

Bear in mind it’s nearly two decades since I did even basic option maths so I’m quite likely asking dumb questions.

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this is the taleb barbell strategy. cash on one side of the barbell to ensure survivability, long calls on the other side of barbell to afford exposure to gains.  you could have some of those options be cash collateralized short puts.  I have always thought the premium cost of the long calls was too pricey and so I have done simple majority cash with some minority long equity indexes, and one or more event catalyst stocks

 

Is your thinking that you'll just buy the puts back once the underlying has declined a certain %?  Like instead of long SPY 250 calls you go short 350 puts, but you'll exit the trade by 250? 

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So my thinking was more to buy long dated, out of the money calls on individual stocks where I think the options will be well in the money before expiry. I was planning to move to cash, or worry about cost of volatility. Am I mad?

 

Bear in mind it’s nearly two decades since I did even basic option maths so I’m quite likely asking dumb questions.

 

If you're buying OTM calls you'll certainly be paying for the premium of doing so.  It really depends on your level of certainty in reaching that price.  For me, I wanted to effectively have full exposure for a fraction of the cost.  Not saying it's the right one for you, just explaining my thought process.

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Don't.

 

Anything you put into it should only be the amount you are willing to see going to 0.

 

Volatility is high which means options are expensive.

 

If you really want to, you can look into mispriced spreads. It can happen at times of panic.

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Don't.

 

Anything you put into it should only be the amount you are willing to see going to 0.

 

Volatility is high which means options are expensive.

 

If you really want to, you can look into mispriced spreads. It can happen at times of panic.

 

Sorry but this is way too broad of a generalization.  Deep ITM puts or calls aren't really "expensive" (it is more so vs. two months ago, but not material enough to sway your decision if they're pretty deep in the money).  Of course, if one wants to gamble on 20% OTM calls/puts then I think your point holds most of the time, and even then they can work if used as a trading tool (vs. buy & hold). 

 

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Threads like this are very useful right now.

 

I am drawn to options as tail-risk insurance, but I know:

 

a) I have never owned any (and my CFA knowledge is rusty) so am likely to be the 'sucker' in a trade.

b) they are expensive right now because of volatility.

 

It's always good to keep learning, and I hope I'll be able to keep doing so, but so far, this has been a good reminder for wiser heads to effectively say, 'don't do it'!

 

PeteC - I think you're based the same as me - I've also struggled to find the right venue to do it.  I'd want to buy a Put, say, but most platforms seem to just do spreadbet trading, which I'm even less comfortable with.

 

I believe Swissquote may do it and UK people can access it, I think.

 

In other UK protection considerations, I've been looking at Pershing again, as the protection seems to have worked well, and the Brevan Howard trust, which is doing what it's supposed to as it did in 2008, though it still feels a bit black box, and I don't know what opportunities there are now rates have gone down even more.  Ruffer supposedly has all this tail protection, but it still doesn't seem to be working, unless it just hasn't fed through to the NAV yet (I think they use their own funds for this, which may only be valued weekly or monthly).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Updated for real time info

 

Perhaps some actual numbers to inform the discussion. 

 

SPY currently at 280.17

 

Dec 2022 $225 calls (~20% from here) are quoted at $69 at mid.  225+69 = 294, so let's call it $13 of premiums and $55 of intrinsic value.  The way I think about that $13 is that's how much I'm paying to borrow, on a non-recourse basis, $225 bucks for ~2.75 years.  If shit hits the fan and it goes below 225, I'm fine as that's my stop loss. 

 

Another way to get long exposure is to short the puts, as suggested above.  So Dec 2022 $350 puts (~25% from here) have a mid of $90.  So intrinsic value of $70 bucks and $20 the premium.  You get upside until 350, after which you get paid nothing, but you have full downside and get paid 20 bucks for it. 

 

As mentioned above, the deltas on these things are not 1 (though close), so on a daily MTM basis you will not gain/lose the same amount vs. the underlying.  However, if you do intend to hold until maturity, the MTM question is irrelevant if you pick the strike prices as to your liking.  So the question is - do either options outlined seem "expensive?"

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Don’t forget Dividends that you forgo  That’s another $10 to add to the $14= $24

 

Updated for real time info

 

Perhaps some actual numbers to inform the discussion. 

 

SPY currently at 280.17

 

Dec 2022 $225 calls (~20% from here) are quoted at $69 at mid.  225+69 = 294, so let's call it $13 of premiums and $55 of intrinsic value.  The way I think about that $13 is that's how much I'm paying to borrow, on a non-recourse basis, $225 bucks for ~2.75 years.  If shit hits the fan and it goes below 225, I'm fine as that's my stop loss. 

 

Another way to get long exposure is to short the puts, as suggested above.  So Dec 2022 $350 puts (~25% from here) have a mid of $90.  So intrinsic value of $70 bucks and $20 the premium.  You get upside until 350, after which you get paid nothing, but you have full downside and get paid 20 bucks for it. 

 

As mentioned above, the deltas on these things are not 1 (though close), so on a daily MTM basis you will not gain/lose the same amount vs. the underlying.  However, if you do intend to hold until maturity, the MTM question is irrelevant if you pick the strike prices as to your liking.  So the question is - do either options outlined seem "expensive?"

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Updated for real time info

 

Perhaps some actual numbers to inform the discussion. 

 

SPY currently at 280.17

 

Dec 2022 $225 calls (~20% from here) are quoted at $69 at mid.  225+69 = 294, so let's call it $13 of premiums and $55 of intrinsic value.  The way I think about that $13 is that's how much I'm paying to borrow, on a non-recourse basis, $225 bucks for ~2.75 years.  If shit hits the fan and it goes below 225, I'm fine as that's my stop loss. 

 

Another way to get long exposure is to short the puts, as suggested above.  So Dec 2022 $350 puts (~25% from here) have a mid of $90.  So intrinsic value of $70 bucks and $20 the premium.  You get upside until 350, after which you get paid nothing, but you have full downside and get paid 20 bucks for it. 

 

As mentioned above, the deltas on these things are not 1 (though close), so on a daily MTM basis you will not gain/lose the same amount vs. the underlying.  However, if you do intend to hold until maturity, the MTM question is irrelevant if you pick the strike prices as to your liking.  So the question is - do either options outlined seem "expensive?"

 

They way I approached options and my portfolio was almost entirely in options on financials, BAC, AIG, etc. in the 2011/2014 period, was more along the lines of what I am likely to gain per $1 I invest and what I am likely to lose.

 

Take a very simple case in which there are only two scenarios

 

A. An expected S&P value would be 3300 in that time frame

B. An expected S&P value of 2500 in that time frame

 

So if I invest $69 in the option, I would have a gain of $36 in (A) and -$44 in (B).

 

Since we are modeling this very very simply we assume each has a 50% probability.

 

Now if you are going to invest, I would want to model it with 10 scenarios and assign probabilities to each of them.

 

Then do an estimate of what my gain is and what my downside is. Using the simple example, the upside and expected return does not seem all that good for using options. Since you are risking $69 and the likely upside seems to be about 50% gain.

 

So personally I only use options when upside is pretty extreme and I can think of potential scenarios where I can imagine the investment going to be zero however unlikely it might be. So we had 10 to 1 or 5 to 1 odds many times with BAC for example and that worked out.

 

You need to be in a position to play this game at least 3 times, so that would inform your limits as well. You need to think about what happens if it ends up being somewhere around 2300 in that time frame and you lose pretty much everything. You need to be able to go for another round. And plan to leave enough cash for another round at least.

 

Again, this is my own personal preference.

 

Vinod

 

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Don't.

 

Anything you put into it should only be the amount you are willing to see going to 0.

 

Volatility is high which means options are expensive.

 

If you really want to, you can look into mispriced spreads. It can happen at times of panic.

 

Sorry but this is way too broad of a generalization.  Deep ITM puts or calls aren't really "expensive" (it is more so vs. two months ago, but not material enough to sway your decision if they're pretty deep in the money).  Of course, if one wants to gamble on 20% OTM calls/puts then I think your point holds most of the time, and even then they can work if used as a trading tool (vs. buy & hold).

 

I was trying to dissuade someone without options experience, at lease as a disclaimer. It was also written from a VI perspective.

 

Yes, I'm not talking about really deep ITM, always seemed pointless to me considering the risk: reward.

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Don’t forget Dividends that you forgo  That’s another $10 to add to the $14= $24

 

Updated for real time info

 

Perhaps some actual numbers to inform the discussion. 

 

SPY currently at 280.17

 

Dec 2022 $225 calls (~20% from here) are quoted at $69 at mid.  225+69 = 294, so let's call it $13 of premiums and $55 of intrinsic value.  The way I think about that $13 is that's how much I'm paying to borrow, on a non-recourse basis, $225 bucks for ~2.75 years.  If shit hits the fan and it goes below 225, I'm fine as that's my stop loss. 

 

Another way to get long exposure is to short the puts, as suggested above.  So Dec 2022 $350 puts (~25% from here) have a mid of $90.  So intrinsic value of $70 bucks and $20 the premium.  You get upside until 350, after which you get paid nothing, but you have full downside and get paid 20 bucks for it. 

 

As mentioned above, the deltas on these things are not 1 (though close), so on a daily MTM basis you will not gain/lose the same amount vs. the underlying.  However, if you do intend to hold until maturity, the MTM question is irrelevant if you pick the strike prices as to your liking.  So the question is - do either options outlined seem "expensive?"

 

You're right, my mistake.  I usually have options on things that don't pay a div vs. the index so this was overlooked.  Thanks for pointing it out. 

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So personally I only use options when upside is pretty extreme and I can think of potential scenarios where I can imagine the investment going to be zero however unlikely it might be. So we had 10 to 1 or 5 to 1 odds many times with BAC for example and that worked out.

 

You need to be in a position to play this game at least 3 times, so that would inform your limits as well. You need to think about what happens if it ends up being somewhere around 2300 in that time frame and you lose pretty much everything. You need to be able to go for another round. And plan to leave enough cash for another round at least.

 

Again, this is my own personal preference.

 

Vinod

 

I agree with the comments above. 

 

1) 100% this is not a 1 round game.  Hence my ~80% in cash comment previously.  I would of course advise against anyone levering up with all their capital because one does need to prepare to face the scenario of a zero on that particular investment.  Having said that, it's also not a binary outcome either.  At any time prior to the expiry the holder can adjust the position for sizing and go in or out of the position.  SPreads are larger vs. stocks generally speaking, but anyone going in I'm going to assume they know that (otherwise they didn't pay attention while entering the trade!).

 

2) I also agree with you that options are more useful in extreme scenarios, especially the vol is underpriced.  Here, I'll admit that I've not encountered many situations where upside is 5-10x vs. downside.  I don't know if BAC presented such a situation at some point a few years ago - it looks like it did and I'm glad it worked out for you.  I would love to find such situations in this market so if you can share some of the experience I'd certainly appreciate it.

 

 

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