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Post by walnut on Nov 7, 2023 2:03:34 GMT
I see the market calls by Walnut and Glennkoks and my investment moves are rather boring in comparison. Most of my equity money is and has been for many years invested in an S&P 500 ETF, SPY. The return over the past 10 years is 12.5% compounded.
I do try to beat the S&P 500 average with some of my money. I've reported my most recent trades here. I sold SPY at 464 on 11/29/21. I rebought at 381 on 5/20/22 for an 18% gain. Now it is back up to 434 for a 14% additional gain giving an annualized gain of 17% since 11/29/21 while the S&P 500 is down by 9% from its peak.
That's 2 trades in 2 years.
Prior to 11/29/21 I recommended here a short sale of cruise companies and airline companies at the beginning of the COVID infection but I didn't put forth particular trades and prices so I can't list my specific gains as ones I've denoted here.
So I'm holding my normal SPY allocation hoping for a new high but not predicting when.
(I also trade options, but my gains are not really better the equity gains above since I'm doing it in a low risk way. I look at these as part of my "fixed income" portfolio and the returns are considerably higher than the bond and CD interest rates which are also part of my fixed income portfolio.)
If you take the advanced finance classes, they tend to boil down eventually to a theme- you cannot really expect to beat the SP 500. If you are well diversified, risk adjusted, that's about all it is rational to hope for, at best. I'm not saying that has to be true, but I think that there is some wisdom in that judgement. Over a period of several years, I was stuck on trying to find some elegant options/futures/ derivatives hack of my own design. As it turns out, options math is elegantly perfect, and you are really better off leaving them alone. The market makers know what they are doing, stay out of their casino. Selling SPY put call straddles about 2 standard deviations out of the money can work for quite awhile, but it's not going to beat MSFT or Nvidia, and it only works during the periods when implied volatility exceeds historical volatility, and nothing profound is happening in the markets. |
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Post by duwayne on Nov 7, 2023 18:21:30 GMT
On the subject of whether option trading is worthwhile......
I trade a lot of options and it is a bit of a bother to keep score of every trade, but starting in October of 2020, I've been doing exactly that. It's been very profitable, but so were my other investments. Calculating my rate of return for comparison is not straightforward.
My fixed investments (non-equity) have long included some allocation to a short term money market account. Fidelity allows me to use that money as the required commitment for the option trades I am making. In effect I'm doing the trades with no additional investment while I retain my interest earnings on the money market account plus the profits from the trades. Does that mean my rate of return is infinite since I have no additional investment?
Another way of looking at this is to calculate the rate of return by dividing the total yearly profit I've averaged over the past 3 years by the maximum commitment for my option trades for any point over that time. This results in a 9.4% return.
But I still get the return on the money market funds I have committed, and they are currently yielding 5.31%. If I add that to the return, I'm getting a 14.7% return. But there was a time when the Fed rates were near zero percent, so my return was just above 9.4%.
But, on the other hand, my commitment on average is below the maximum level I hit, so the return is actually higher if I base it on the average commitment. I haven't bothered to calculate this number but my current return on this basis is somewhat higher than 15%.
So my actual average annual return over the last 3 years on my option investments has been somewhere between 9.4% and infinity depending on how you calculate it.
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Post by walnut on Nov 8, 2023 3:01:14 GMT
On the subject of whether option trading is worthwhile......
I trade a lot of options and it is a bit of a bother to keep score of every trade, but starting in October of 2020, I've been doing exactly that. It's been very profitable, but so were my other investments. Calculating my rate of return for comparison is not straightforward.
My fixed investments (non-equity) have long included some allocation to a short term money market account. Fidelity allows me to use that money as the required commitment for the option trades I am making. In effect I'm doing the trades with no additional investment while I retain my interest earnings on the money market account plus the profits from the trades. Does that mean my rate of return is infinite since I have no additional investment?
Another way of looking at this is to calculate the rate of return by dividing the total yearly profit I've averaged over the past 3 years by the maximum commitment for my option trades for any point over that time. This results in a 9.4% return.
But I still get the return on the money market funds I have committed, and they are currently yielding 5.31%. If I add that to the return, I'm getting a 14.7% return. But there was a time when the Fed rates were near zero percent, so my return was just above 9.4%.
But, on the other hand, my commitment on average is below the maximum level I hit, so the return is actually higher if I base it on the average commitment. I haven't bothered to calculate this number but my current return on this basis is somewhat higher than 15%.
So my actual average annual return over the last 3 years on my option investments has been somewhere between 9.4% and infinity depending on how you calculate it.
You're sure that Fidelity is not charging you any interest on the options, even using the money market funds as collateral? Are you buying options or selling them? |
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Post by missouriboy on Nov 8, 2023 13:33:56 GMT
Duwayne. Do I remember correctly that your warm-season stomping grounds are in Ohio? |
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Post by duwayne on Nov 8, 2023 16:22:16 GMT
On the subject of whether option trading is worthwhile......
I trade a lot of options and it is a bit of a bother to keep score of every trade, but starting in October of 2020, I've been doing exactly that. It's been very profitable, but so were my other investments. Calculating my rate of return for comparison is not straightforward.
My fixed investments (non-equity) have long included some allocation to a short term money market account. Fidelity allows me to use that money as the required commitment for the option trades I am making. In effect I'm doing the trades with no additional investment while I retain my interest earnings on the money market account plus the profits from the trades. Does that mean my rate of return is infinite since I have no additional investment?
Another way of looking at this is to calculate the rate of return by dividing the total yearly profit I've averaged over the past 3 years by the maximum commitment for my option trades for any point over that time. This results in a 9.4% return.
But I still get the return on the money market funds I have committed, and they are currently yielding 5.31%. If I add that to the return, I'm getting a 14.7% return. But there was a time when the Fed rates were near zero percent, so my return was just above 9.4%.
But, on the other hand, my commitment on average is below the maximum level I hit, so the return is actually higher if I base it on the average commitment. I haven't bothered to calculate this number but my current return on this basis is somewhat higher than 15%.
So my actual average annual return over the last 3 years on my option investments has been somewhere between 9.4% and infinity depending on how you calculate it.
You're sure that Fidelity is not charging you any interest on the options, even using the money market funds as collateral? Are you buying options or selling them? Yes, I'm sure I'm not paying interest on the options. I do pay a 67 cent brokerage fee when I sell an option which is a nominal amount since the value of the stock the SPY option is for is around $42,000. Per your second question, I'm selling options.
Have you sold options and paid interest?
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Post by duwayne on Nov 8, 2023 17:07:47 GMT
Duwayne. Do I remember correctly that your warm-season stomping grounds are in Ohio? I'm still a warm-weather Ohioan. Who would have thought that Ohio could soon become the world's leading producer of high-tech chips?
I have to admit I'm a little skeptical about Intel's intentions. Are they just building a pilot plant (a big one) to prove the leading-edge technology works at the Ohio location? Or will this truly become their future production center even though Ohio isn't a current "brain center" or manufacturing center for chips.
Ohio has promised Intel a $2 billion subsidy for their new facility.
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Post by walnut on Nov 8, 2023 20:02:21 GMT
You're sure that Fidelity is not charging you any interest on the options, even using the money market funds as collateral? Are you buying options or selling them? Yes, I'm sure I'm not paying interest on the options. I do pay a 67 cent brokerage fee when I sell an option which is a nominal amount since the value of the stock the SPY option is for is around $42,000. Per your second question, I'm selling options.
Have you sold options and paid interest?
No, I've never paid any interest on options. I was just wondering that they let you trade options when you didn't have any free equity as I understood it, unless they were covered calls, in which case yeah I get it. As I have seen, Fidelity kind of plays by their own rules, and can seem pretty loose at times. |
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Post by missouriboy on Nov 8, 2023 23:00:49 GMT
Duwayne. Do I remember correctly that your warm-season stomping grounds are in Ohio? I'm still a warm-weather Ohioan. Who would have thought that Ohio could soon become the world's leading producer of high-tech chips?
I have to admit I'm a little skeptical about Intel's intentions. Are they just building a pilot plant (a big one) to prove the leading-edge technology works at the Ohio location? Or will this truly become their future production center even though Ohio isn't a current "brain center" or manufacturing center for chips.
Ohio has promised Intel a $2 billion subsidy for their new facility.
Ohio would be lucky to land that. In theory, good for many years to come. |
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Post by walnut on Nov 9, 2023 2:09:35 GMT
Yes, I'm sure I'm not paying interest on the options. I do pay a 67 cent brokerage fee when I sell an option which is a nominal amount since the value of the stock the SPY option is for is around $42,000. Per your second question, I'm selling options.
Have you sold options and paid interest?
No, I've never paid any interest on options. I was just wondering that they let you trade options when you didn't have any free equity as I understood it, unless they were covered calls, in which case yeah I get it. As I have seen, Fidelity kind of plays by their own rules, and can seem pretty loose at times. They're paying you interest on the money market even though you are using the funds to finance options writing. Yes, that's a great deal for you, and once again just sounds like Fidelity is making mistakes. |
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Post by duwayne on Nov 9, 2023 16:19:07 GMT
No, I've never paid any interest on options. I was just wondering that they let you trade options when you didn't have any free equity as I understood it, unless they were covered calls, in which case yeah I get it. As I have seen, Fidelity kind of plays by their own rules, and can seem pretty loose at times. They're paying you interest on the money market even though you are using the funds to finance options writing. Yes, that's a great deal for you, and once again just sounds like Fidelity is making mistakes. Did you verify that Fidelity allows this? Fidelity is covered since the money market funds are available to cover any exercised put.
To answer your previous question, most of my trades are selling puts. I do sell some calls, but they are covered calls so no funds are required as collateral.
Another point, I do all my trading in my Roth IRA account, so I pay no taxes on my gains, ever. All the rates of return I listed above are after tax.
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Post by walnut on Nov 9, 2023 17:01:33 GMT
They're paying you interest on the money market even though you are using the funds to finance options writing. Yes, that's a great deal for you, and once again just sounds like Fidelity is making mistakes. Did you verify that Fidelity allows this? Fidelity is covered since the money market funds are available to cover any exercised call.
To answer your previous question, most of my trades are selling puts. I do sell some calls, but they are covered calls so no funds are required as collateral.
Another point, I do all my trading in my Roth IRA account, so I pay no taxes on my gains, ever. All the rates of return I listed above are after tax.
No, I'm not sure what their rules are exactly. We used to have to call them about their margin fairly often when we were trading aggressively and it was obvious that the people on the phone didn't know either. We eventually gave up and moved. I'm glad that they are working fine for you though. |
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Post by walnut on Nov 9, 2023 17:54:37 GMT
You know one reason that it is better to sell calls than puts- if the underlying moves more than you expected when you made the trade, if it moves up, then implied volatility tends to stay low. So your cover price is not too bad. But if the underlying moves down by the same amount, (market) implied volatility will always go up more, so your buyback price when covering puts will tend to be worse. For that matter, stock returns are not really normally distributed, actually somewhat lognormal, so the corrections can sometimes be sharper than the bull runs.
Offsetting that somewhat is the fact that in a bull market, the SPY seems always to be marching higher into your call strike prices (lognormal pattern).
The eventual big problem with selling options is the "fat tails" of the distribution curve. Kurtosis means that the extreme events are worse (or more frequent) than would be predicted by a normal distribution curve, and can really "get ya". In fact, this is what eventually gets almost all of the "pros" who get big working an options writing strategy. Options are priced on a normal distribution model (the only way to maintain put-call pricing parity), but reality is a little different.
If I remember, that was the mistake made by this fund manager:
I know that this is probably all academic to you Duwayne because you are keeping your trades a manageable size.
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Post by duwayne on Nov 10, 2023 16:21:32 GMT
You know one reason that it is better to sell calls than puts- if the underlying moves more than you expected when you made the trade, if it moves up, then implied volatility tends to stay low. So your cover price is not too bad. But if the underlying moves down by the same amount, (market) implied volatility will always go up more, so your buyback price when covering puts will tend to be worse. For that matter, stock returns are not really normally distributed, actually somewhat lognormal, so the corrections can sometimes be sharper than the bull runs. Offsetting that somewhat is the fact that in a bull market, the SPY seems always to be marching higher into your call strike prices (lognormal pattern). The eventual big problem with selling options is the "fat tails" of the distribution curve. Kurtosis means that the extreme events are worse (or more frequent) than would be predicted by a normal distribution curve, and can really "get ya". In fact, this is what eventually gets almost all of the "pros" who get big working an options writing strategy. Options are priced on a normal distribution model (the only way to maintain put-call pricing parity), but reality is a little different. If I remember, that was the mistake made by this fund manager: I know that this is probably all academic to you Duwayne because you are keeping your trades a manageable size. I agree that puts are riskier for the reasons you give, but that's why the put premiums are higher. In fact, they are enough higher in my experience to make puts a better option than calls. |
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Post by code on Nov 10, 2023 22:16:21 GMT
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Post by walnut on Nov 11, 2023 0:36:50 GMT
You know one reason that it is better to sell calls than puts- if the underlying moves more than you expected when you made the trade, if it moves up, then implied volatility tends to stay low. So your cover price is not too bad. But if the underlying moves down by the same amount, (market) implied volatility will always go up more, so your buyback price when covering puts will tend to be worse. For that matter, stock returns are not really normally distributed, actually somewhat lognormal, so the corrections can sometimes be sharper than the bull runs. Offsetting that somewhat is the fact that in a bull market, the SPY seems always to be marching higher into your call strike prices (lognormal pattern). The eventual big problem with selling options is the "fat tails" of the distribution curve. Kurtosis means that the extreme events are worse (or more frequent) than would be predicted by a normal distribution curve, and can really "get ya". In fact, this is what eventually gets almost all of the "pros" who get big working an options writing strategy. Options are priced on a normal distribution model (the only way to maintain put-call pricing parity), but reality is a little different. If I remember, that was the mistake made by this fund manager: I know that this is probably all academic to you Duwayne because you are keeping your trades a manageable size. I agree that puts are riskier for the reasons you give, but that's why the put premiums are higher. In fact, they are enough higher in my experience to make puts a better option than calls. Yes, a little more, but over time you are earning it by living with that directional risk. I'm a big believer in only selling options if they are significantly overpriced based on a pricing model, I usually just use IB's which seems to be a modified Black-Scholes. But keeping in mind that generally they are overpriced for a reason. Basically I had a couple of good runs with options but I don't do it anymore. It seems to me that the market makers have gotten too sophisticated these days and it is harder to win. Different I think than the early 90's when I made a bunch of money for my stock clients and won on almost every trade. I'm glad you are doing well and I wish you continued success. |
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