Playing Silver: Bull Or Bear With Options On iShares Silver Trust [View article]
Hi smorgoun,
Thanks for your comments. I do have other articles in the till and hope to get them out soon.
I really, REALLY dislike leveraged ETFs.
First, they are short term (days, maybe a week) and have large tracking errors beyond that. I don't try to "time the market" so that accounts for my bias. Long term, you could actually lose money even if the market moved in the direction of your position, nevertheless not make 2x, 3x or whatever. There are many articles by SA authors that explain the reasons for the tracking error, so I won't take this time to explain why.
Second, one can easily provide their own leverage through options by using synthetic shorts or synthetic longs. (Synthetic short= sell a call and buy a put@same strike; synthetic long= buy call and sell put@same strike).
Third, options can provide a "personalized" short leverage, by simply selling deep ITM calls or "spacing strikes".
On the other hand, IRA's are not as friendly to options as taxable accounts and present some problems on synthetic shorts. But one could still buy deep ITM calls for long leverage and deep ITM puts for short leverage.
For instance, if you wanted to be 2x long 100 shares of SPY, just buy 2 options (200 shares) of ,say, January 2013 calls with a deep ITM strike of $70 at a debit of $62.91, for total investment of $12,582. The option is so deep ITM, you are paying practically nothing for the extrinsic (only about $60) and yet you will get 2x the move.
Simple, easy and minus tracking error and all the fees.
So, these are the main reasons I don't like leveraged ETFs. If any part of this is unclear or you need more, let me know.
Come to think of it, this whole topic could be expanded and turned into an article, so I think I'll work on that.
South Carolina's pension fund's push into alternative investments has done little for its returns, but has paid off well for for hedge and PE funds (not to mention its now-former investment chief). Desperate to make up shortfalls, state and local pension funds nationwide are doing the same, and Wall Street is happy to oblige. [View news story]
The national budget must be balanced. The public debt must be reduced; the arrogance of the authorities must be moderated and controlled. Payments to foreign governments must be reduced, if the nation doesn't want to go bankrupt. People must again learn to work, instead of living on public assistance.”
This statement was made by Cicero in 55 B.C.
We'll be hearing this story as long as we live, best just to ignore it and make your investing plans as usual.
The Eurogroup statement on Spain: "The loan will be scaled to provide an effective backstop covering for all possible capital requirements ... with an additional margin of safety up to €100B in total ... the Fund for Orderly Restructuring (FROB), acting as agent of the Spanish government, could receive the funds and channel them to the financial institutions concerned." [View news story]
“The national budget must be balanced. The public debt must be reduced; the arrogance of the authorities must be moderated and controlled. Payments to foreign governments must be reduced, if the nation doesn't want to go bankrupt. People must again learn to work, instead of living on public assistance.”
This statement was made by Cicero in 55 B.C.
Do you really think after 2000 years, June 17th changes anything? We'll be hearing this story as long as we live, best just to ignore it and make your investing plans as usual.
Playing 2012 With SPY Options - 'What Me Worry?' [View article]
HI income,
Yes, I bought the calls when SPY hit $137 going up. I then sold the weeklies ATM to slightly OTM. I sold the call, again when SPY hit $137 going down.
The strategy had a return of just above 9% in April when SPY was at +11%. Since then, it has given back only about 2% and stands at +7% YTD.
I have since bought $135 calls so I can continue to sell ATM, or slightly OTM without worrying too much about a bounce.
In running the strategy I determined that it was better to purchase an OTM call and sell the weeklies ATM, then trying to compensate by selling them OTM. The extra extrinsic credited for being ATM more than compensates for the cost of the call, when broken down to a weekly cost. Plus, the ability to go OTM on the weeklies givfes a little more room.
1) Every strategy can benefit from successful "timing", as you have. I generally try to stick to the plan, rather than "timing". The strategies are designed to work in either direction but can always be improved upon.
2) and 3) I continue the "worry", but recently bought a protective OTM far-dated call as my method to prepare for an uptrend. This also allows me to be slightly OTM on the weekly puts, without worrying too much about an up-swing. Just calculate your "extrinsic goal" to include the cost of the protective call. With vol high, it doesn't amount to too much.
Also, as indicated in the original article, you could sell a deep ITM put, say at strike=$100-$110, to benefit from reducing vol on a rise. This will "convert" your far-dated put to a far-dated vertical put spread.
4) I am not a believer in technicals. Sorry to say, I view them in a light similar to astrology. Instead, I base my options strategies on the "daily chatter" (sifting through for meaning) but I do rely heavily on the vix for direction. When vix is low, I tend to sell puts OTM, when hi, ITM and when neutral, ATM.
5) A synthetic short is the purchase of a put and the sale of a call at the same strike. This cannot be fully implemented in an IRA, as naked calls cannot be sold. The "work-around" is to use a call spread, buying a very far OTM call.
For instance, you could buy a $125 put, sell a $125 call and buy a $150 call. Looking at the Deltas, this would be about 88% "short".
An Option-Based Portfolio Strategy, Part I [View article]
Hi lpjblb,
Thanks for the added info.
IBM would need to go above $202, by July, for the gain on the stock to exceed the loss on the long put. If IBM doesn't reach $202 you lose $2, net (extrinsic on the long put). If you sold a $200 call, then holding the stock and the long put are zero-sum.
Here's how I see it:
1. Acknowledge that the strategy didn't pan out as you expected. This is always the hardest part and the cause of making more mistakes. Try not to look at it as a "salvage job", but rather..."If I had no position and was entering a trade today, what would I do ?"
2. IBM would need to reach an approx. all time high by July expiry for it to make sense to hold the stock and the long put.
3. Sellling a call is zero-sum.
4. K.I..S.S., while limiting risk....1) close out the stock and the long put and keep the $190 put, or 2) If you are a believer in a IBM bounce, then close out both puts and keep the stock, or 3) close out everything and go with an ITM or ATM short put, or 4) close out everything and try something else.
I want to stress, again, forget what the past brought, it doesn't change the future. I doubt that, looking at it a-fresh, you would insitute a strategy of a covered call a ITM long put and an ATM short put, with July expiry.
An Option-Based Portfolio Strategy, Part I [View article]
Hi lpjlb,
You really don't supply enough information for me to come to a conclusion.
What is the stock trading at, what is the expiry and strikes of the remaining puts (I assume you have a ITM Long put and an OTM short put left of the ladder)?
I also find it strange that puts would be assigned with .50-$1 extrinsic left, unless it is a very volatile stock a(such as NFLX, FB, etc.). Was the .50-$1 intrinsic value?
If the .50-$1 was extrinsic, then why not just sell the shares and resell the puts? or, if easier sell covered calls at the exercised price.
Give me some more info, and I'll do my best to help.
Hedging The SPY ETF With Options - The Seesaw Market [View article]
HI Joe,
If you believe the market is oversold and a bounce is likely then be willing to sacrifice extrinsic for (hoped for) intrinsic.
The Delta of the June 16, $135 is .80, which means even if SPY goes to $135 in the first week, you'll capture almost the entire move. In that regard, it would seem to make sense.
On the other hand, when vol is hi, like today, it's hard to give up extrinsic. I would rather sell twice as many puts at $130 than I would at $135.
If your software allows it, look at a ratio spread for June 16th, where you sell ,say, 20 $130's instead of, say 10 $135's. You have a better window of gain and actually still a reasonable amount of downside protection.
You could also sell 25 $129's instead of 10 $135's.
Selling Naked Calls In A Portfolio Strategy [View article]
Hi jn,
You analysis is correct.
I would add that .PUT tends to outperform in flat and down markets and underperform in rapidly rising markets. Keep that in the back of your head, if there is a big drop and a possible rebound, such as in March 2009 and Oct 2011.
The London Whale was hooked by a NYC "monster." The tale of how Boaz Weinstein and other hedge fund managers took JPMorgan for billions. Now running his own money, Weinstein was once a whale himself on the wrong side of a trade, he and his team at Deutsche Bank losing $1.8B in 2008. [View news story]
Actually, the GM bailout was, in its overall effect, the most profitable of them all. Had we not done it, then much more would have had to be pumped into the economy in terms of stimulus, tax breaks, unemployment benefits, bailouts, etc..
One must not lose sight that there is not only a cost to doing something, there is a cost in NOT doing something.
Master Limited Partnerships: Planning And The Death Tax [View article]
Hi John,
Thanks for taking the time to read and comment.
I've written a number of articles on this, but I'll try and summarize it here....
The IRA is a legal entity, separate from the IRA owner/beneficiary. Though most people are under the impression that all income earned by an IRA is not taxed till withdrawn, this is not the case.
As counter-intuitive as it may seem, the IRA, itself (not the owner/beneficiary) can actually have to pay taxes on certain items of income, known as UBTI. The ordinary gain on sale of a MLP in an IRA is UBTI and therefore taxed to the IRA.
And YES, that means that the after tax income is also taxed to the IRA owner/beneficiary when distributed. In essence double taxation---once at the IRA level and once at the owner/beneficiary level.
This "quirk" is one of the reasons why investors have been discouraged in using their IRAs (Roth and regular) for purchase of MLPs.
You may want to visit this article (http://bit.ly/KGA7PP) that tries to bring everything into focus.
The Cautious Bull Strategy [View article]
Thanks for parsing the article. Yes, you are right (seems you've "caught" me several times---good work).
Sometimes I see double by the time I finish an article and appreciate your pointing out this error.
RK
Playing Silver: Bull Or Bear With Options On iShares Silver Trust [View article]
Thanks for your comments. I do have other articles in the till and hope to get them out soon.
I really, REALLY dislike leveraged ETFs.
First, they are short term (days, maybe a week) and have large tracking errors beyond that. I don't try to "time the market" so that accounts for my bias. Long term, you could actually lose money even if the market moved in the direction of your position, nevertheless not make 2x, 3x or whatever. There are many articles by SA authors that explain the reasons for the tracking error, so I won't take this time to explain why.
Second, one can easily provide their own leverage through options by using synthetic shorts or synthetic longs. (Synthetic short= sell a call and buy a put@same strike; synthetic long= buy call and sell put@same strike).
Third, options can provide a "personalized" short leverage, by simply selling deep ITM calls or "spacing strikes".
On the other hand, IRA's are not as friendly to options as taxable accounts and present some problems on synthetic shorts. But one could still buy deep ITM calls for long leverage and deep ITM puts for short leverage.
For instance, if you wanted to be 2x long 100 shares of SPY, just buy 2 options (200 shares) of ,say, January 2013 calls with a deep ITM strike of $70 at a debit of $62.91, for total investment of $12,582. The option is so deep ITM, you are paying practically nothing for the extrinsic (only about $60) and yet you will get 2x the move.
Simple, easy and minus tracking error and all the fees.
So, these are the main reasons I don't like leveraged ETFs. If any part of this is unclear or you need more, let me know.
Come to think of it, this whole topic could be expanded and turned into an article, so I think I'll work on that.
Thanks for the idea.
RK
Apple Vs. Netflix: A Tale Of 2 Cities [View article]
Thanks, I try (try is the operative word) to find a catchy title.
RK
South Carolina's pension fund's push into alternative investments has done little for its returns, but has paid off well for for hedge and PE funds (not to mention its now-former investment chief). Desperate to make up shortfalls, state and local pension funds nationwide are doing the same, and Wall Street is happy to oblige. [View news story]
This statement was made by Cicero in 55 B.C.
We'll be hearing this story as long as we live, best just to ignore it and make your investing plans as usual.
The Eurogroup statement on Spain: "The loan will be scaled to provide an effective backstop covering for all possible capital requirements ... with an additional margin of safety up to €100B in total ... the Fund for Orderly Restructuring (FROB), acting as agent of the Spanish government, could receive the funds and channel them to the financial institutions concerned." [View news story]
This statement was made by Cicero in 55 B.C.
Do you really think after 2000 years, June 17th changes anything? We'll be hearing this story as long as we live, best just to ignore it and make your investing plans as usual.
Enterprise Products Partners Will Remain Down A Bit Longer [View article]
Playing 2012 With SPY Options - 'What Me Worry?' [View article]
Yes, I bought the calls when SPY hit $137 going up. I then sold the weeklies ATM to slightly OTM. I sold the call, again when SPY hit $137 going down.
The strategy had a return of just above 9% in April when SPY was at +11%. Since then, it has given back only about 2% and stands at +7% YTD.
I have since bought $135 calls so I can continue to sell ATM, or slightly OTM without worrying too much about a bounce.
In running the strategy I determined that it was better to purchase an OTM call and sell the weeklies ATM, then trying to compensate by selling them OTM. The extra extrinsic credited for being ATM more than compensates for the cost of the call, when broken down to a weekly cost. Plus, the ability to go OTM on the weeklies givfes a little more room.
Market Direction Doesn't Matter [View article]
Nice to hear from you again.
1) Every strategy can benefit from successful "timing", as you have. I generally try to stick to the plan, rather than "timing". The strategies are designed to work in either direction but can always be improved upon.
2) and 3) I continue the "worry", but recently bought a protective OTM far-dated call as my method to prepare for an uptrend. This also allows me to be slightly OTM on the weekly puts, without worrying too much about an up-swing. Just calculate your "extrinsic goal" to include the cost of the protective call. With vol high, it doesn't amount to too much.
Also, as indicated in the original article, you could sell a deep ITM put, say at strike=$100-$110, to benefit from reducing vol on a rise. This will "convert" your far-dated put to a far-dated vertical put spread.
4) I am not a believer in technicals. Sorry to say, I view them in a light similar to astrology. Instead, I base my options strategies on the "daily chatter" (sifting through for meaning) but I do rely heavily on the vix for direction. When vix is low, I tend to sell puts OTM, when hi, ITM and when neutral, ATM.
5) A synthetic short is the purchase of a put and the sale of a call at the same strike. This cannot be fully implemented in an IRA, as naked calls cannot be sold. The "work-around" is to use a call spread, buying a very far OTM call.
For instance, you could buy a $125 put, sell a $125 call and buy a $150 call. Looking at the Deltas, this would be about 88% "short".
If you need more, let me know.
An Option-Based Portfolio Strategy, Part I [View article]
Thanks for the added info.
IBM would need to go above $202, by July, for the gain on the stock to exceed the loss on the long put. If IBM doesn't reach $202 you lose $2, net (extrinsic on the long put). If you sold a $200 call, then holding the stock and the long put are zero-sum.
Here's how I see it:
1. Acknowledge that the strategy didn't pan out as you expected. This is always the hardest part and the cause of making more mistakes. Try not to look at it as a "salvage job", but rather..."If I had no position and was entering a trade today, what would I do ?"
2. IBM would need to reach an approx. all time high by July expiry for it to make sense to hold the stock and the long put.
3. Sellling a call is zero-sum.
4. K.I..S.S., while limiting risk....1) close out the stock and the long put and keep the $190 put, or 2) If you are a believer in a IBM bounce, then close out both puts and keep the stock, or 3) close out everything and go with an ITM or ATM short put, or 4) close out everything and try something else.
I want to stress, again, forget what the past brought, it doesn't change the future. I doubt that, looking at it a-fresh, you would insitute a strategy of a covered call a ITM long put and an ATM short put, with July expiry.
Let me know if you need more.
RK
An Option-Based Portfolio Strategy, Part I [View article]
You really don't supply enough information for me to come to a conclusion.
What is the stock trading at, what is the expiry and strikes of the remaining puts (I assume you have a ITM Long put and an OTM short put left of the ladder)?
I also find it strange that puts would be assigned with .50-$1 extrinsic left, unless it is a very volatile stock a(such as NFLX, FB, etc.). Was the .50-$1 intrinsic value?
If the .50-$1 was extrinsic, then why not just sell the shares and resell the puts? or, if easier sell covered calls at the exercised price.
Give me some more info, and I'll do my best to help.
Hedging The SPY ETF With Options - The Seesaw Market [View article]
If you believe the market is oversold and a bounce is likely then be willing to sacrifice extrinsic for (hoped for) intrinsic.
The Delta of the June 16, $135 is .80, which means even if SPY goes to $135 in the first week, you'll capture almost the entire move. In that regard, it would seem to make sense.
On the other hand, when vol is hi, like today, it's hard to give up extrinsic. I would rather sell twice as many puts at $130 than I would at $135.
If your software allows it, look at a ratio spread for June 16th, where you sell ,say, 20 $130's instead of, say 10 $135's. You have a better window of gain and actually still a reasonable amount of downside protection.
You could also sell 25 $129's instead of 10 $135's.
Play with it a little.
Master Limited Partnerships: Planning And The Death Tax [View article]
Sounds like workable plan.
Best of luck with it.
RK
Selling Naked Calls In A Portfolio Strategy [View article]
You analysis is correct.
I would add that .PUT tends to outperform in flat and down markets and underperform in rapidly rising markets. Keep that in the back of your head, if there is a big drop and a possible rebound, such as in March 2009 and Oct 2011.
RK
RK
The London Whale was hooked by a NYC "monster." The tale of how Boaz Weinstein and other hedge fund managers took JPMorgan for billions. Now running his own money, Weinstein was once a whale himself on the wrong side of a trade, he and his team at Deutsche Bank losing $1.8B in 2008. [View news story]
One must not lose sight that there is not only a cost to doing something, there is a cost in NOT doing something.
Let's not lose sight of the Big Picture.
Master Limited Partnerships: Planning And The Death Tax [View article]
Thanks for taking the time to read and comment.
I've written a number of articles on this, but I'll try and summarize it here....
The IRA is a legal entity, separate from the IRA owner/beneficiary. Though most people are under the impression that all income earned by an IRA is not taxed till withdrawn, this is not the case.
As counter-intuitive as it may seem, the IRA, itself (not the owner/beneficiary) can actually have to pay taxes on certain items of income, known as UBTI. The ordinary gain on sale of a MLP in an IRA is UBTI and therefore taxed to the IRA.
And YES, that means that the after tax income is also taxed to the IRA owner/beneficiary when distributed. In essence double taxation---once at the IRA level and once at the owner/beneficiary level.
This "quirk" is one of the reasons why investors have been discouraged in using their IRAs (Roth and regular) for purchase of MLPs.
You may want to visit this article (http://bit.ly/KGA7PP) that tries to bring everything into focus.