Eric Peterson

Eric Peterson
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  • Selling Puts And Calls: A Better Recipe  [View article]
    Hi TD,

    I'm already trying this out, but in my futures account with E-mini SP500 options. Just to get a feel and see how the mechanics of rollover actually work (on November 16). I sold an equal number of November 1400 puts and 1430 calls for a total premium of 28 points on Wednesday last week when the futures contract was trading at 1402. So I got about 2% of the index in premium, even though there were only 12 trading days left before expiration.

    The time value goes away fastest at the end. I estimate in a typical monthly expiration cycle, only 1/3 of the time value goes away in the first half, and 2/3 in the second half.

    At November expiration on the 16th, ITM options are assigned into December futures positions. So I'll just offset the futures, instead of buying back the options. Or do nothing if the contract is between 1400 and 1430, because everything expires worthless. Then I'll write puts and calls for December with strikes 30 points apart.
    Nov 5, 2012. 02:40 PM | Likes Like |Link to Comment
  • These Are The Most Shorted S&P 500 Stocks  [View article]
    I see lots of articles listing the most-shorted stocks. But I don't see articles calculating the performance of a portfolio that buys these stocks, and holds them for 6 months or a year. Then replaces the holdings with the current most-shorted stocks. That would be something interesting.

    Maybe there's an ETF that does this? There are ETFs for everything these days.
    Nov 5, 2012. 02:13 PM | 1 Like Like |Link to Comment
  • 5 New Jim Rogers Commodities ETNs Coming Soon, Delayed By Storm  [View article]
    I've been trading futures since 1988, and I have no idea what you are asking! :)
    Nov 4, 2012. 10:35 PM | Likes Like |Link to Comment
  • Selling Puts And Calls: A Better Recipe  [View article]
    Hi TD,

    Very nice analysis! Thanks. I think it shows that the one-put strategy returns just about the same as the variable-put strategy during a crash and recovery cycle, with less drawdown at the bottom. So maybe it's preferred.

    The only problem I see with this is the asset allocation part of it. Let's say you have a diversified portfolio of SP500, gold, bonds, and cash and you want to keep 50% in the stock market. When you start out, you sell enough puts to be equivalent to 50% in the market. But at the bottom of the crash, if you are still selling the same number of puts, your equivalent stock market allocation has dropped to around 25% of your portfolio.

    I guess this can be handled in the usual way, by rebalancing yearly, quarterly, or whatever. On the rebalancing dates, you change the number of puts. Although this messes up the performance charts, because of the sudden changes in the number of puts.

    Have you seen the chart for PUT performance in 2012? (forgot the link). It is barely outperforming the SP500, and requires a lot more trades, time, and commissions than just holding the SP500 and ignoring the market. I would have thought the PUT strategy works best in modestly climbing markets like 2012 where the average monthly percentage gains in the SP500 are close to or less than the put premium received each month (which seems to average around 2% of the index value). But maybe the PUT strategy outperforms the most in violent markets such as the 2007 to 2009 crash and recovery.

    Regarding the SOQ and strike prices: My understanding of the mechanics of the PUT index is the puts are always cash-settled at the SOQ, which is made public at 11:00am, but is based on stock prices when they opened, between 9:30-9:40am. Then option prices are monitored between 11:30-12:00 and the put is sold at the average price during that period. I would assume the strike price is also determined by the average SP500 price during those 30 minutes, but I don't think that's clearly stated in the document.

    So I guess the difference between SOQ and the strike price is due to big moves in the market between 9:30am and 11:30am. Those were crazy days back then, I remember them well, trading futures.

    Regarding buying back the puts on Thursday's close: I don't think that would work very well, because there is always some time premium left due to possible moves in the market before the open. You would miss out on that time premium decay. Also, bid-ask spread seem very bad around the close the day before expiration, especially on ITM options.
    Nov 4, 2012. 12:14 PM | Likes Like |Link to Comment
  • The 5 Minute Guide To The DB Commodity Index Tracking Fund  [View article]
    If I hold DBC in an IRA account, can I just ignore the K-1 when I do my taxes?
    Nov 3, 2012. 11:04 PM | Likes Like |Link to Comment
  • S&P 500 Snapshot: The November Liftoff  [View article]
    Doug, you always have very nice charts showing the big picture. I especially like the labels with percentage declines and gains for the major moves. Thanks.
    Nov 3, 2012. 10:09 PM | Likes Like |Link to Comment
  • 7 Investments With Low Correlation To The S&P 500  [View article]
    Interesting article and thought provoking. It made me think about what the real purpose of diversification is. I don't think it is your last sentence:

    "Adding some of these low correlation investments to your portfolio can potentially smooth out the day to day volatility."

    Most investors don't really care about the day to day volatility of their portfolios. The overwhelmingly important purpose of diversification is to protect you in times of crisis, so that you don't have to change your spending habits or retirement plans as a result of major losses in your investments.

    For this reason, I think the correlations between the various investments over the past 3 years might not be the best correlations to look at. I think we should look at the correlations during significant declines in the SP500. For example, the 50+% drop into March 2009, the 18% drop in July-August 2011, etc.

    These are the times that investors get a sick feeling when their investments drop significantly, and these are the times we will be thankful we have un-correlated or negatively-correlated holdings. It would be interesting to calculate correlations only for those times, and see what the results are with an article similar to this one.

    For example, during the many-months crash into March 2009, GLD was actually up a lot, so it had a strong negative correlation. But in recent months GLD has been moving in step with the SP500. This suggests that certain investment categories might have one correlation during "peaceful" times, and a very different correlation during a crisis.
    Nov 3, 2012. 09:33 PM | 1 Like Like |Link to Comment
  • Selling Puts - Investing Made Easy  [View article]
    Regarding the ROI and the "$234" margin requirement: Nobody (hopefully) trades so that they are maxxed out on margin. You always need extra cash in your account so you don't get a margin call the next day after a move in the wrong direction. So it's much more realistic to assume you need twice as much, or $468, to back up that put. Then the ROI is half as much (but still very good).
    Nov 3, 2012. 05:43 PM | 1 Like Like |Link to Comment
  • 6 Ways To Get Your Dividends In Gold And Silver Bullion  [View article]
    Wow, someone actually quoted a comment I made on some other article! I'm flattered.

    This article isn't about opinions. It just presents information. But not really enough information to learn anything new.

    Another example of missing info: The article seems to imply you need dividends worth a full ounce in order to receive real bullion, but it never states that is the specific rule of any of these companies.
    Nov 3, 2012. 03:14 PM | Likes Like |Link to Comment
  • Gold To Rally Strongly In November After Expected October Correction  [View article]
    So far gold is down $40 in November. If the title is correct "rally strongly in November" it's got to recover that $40 and then add on a lot more.
    Nov 3, 2012. 01:48 PM | Likes Like |Link to Comment
  • 6 Ways To Get Your Dividends In Gold And Silver Bullion  [View article]
    This article is really lacking in details! Will the companies actually send the gold or silver to your house? How, by UPS? What are the extra costs for shipping and insurance? And do you pay a premium on the bullion like you do from a dealer, or do you get the bullion at the spot price?

    All the important info is left out. Anybody with a calculator can figure out the simple math presented in this article, so there is not much here.
    Nov 3, 2012. 01:23 PM | Likes Like |Link to Comment
  • Selling Puts And Calls: A Better Recipe  [View article]
    One more thought: Since Ken's charts show performance for a varying number of puts combined with a single call, and we know that this outperforms the SP500, maybe we should stick with that, and not also vary the number of calls.

    The drawback to this is that after a number of years of outperformance by the PUT index, we might be selling 5 puts for every 1 call, which would start to be ridiculous. But I'm wary of matching the number of calls and puts because we don't really know what the performance was in the past, or even if it outperformed the SP500.

    Hopefully Ken can get back on full time after he recovers from Sandy and enlighten us all and make us rich! :)
    Nov 3, 2012. 08:19 AM | Likes Like |Link to Comment
  • Selling Puts And Calls: A Better Recipe  [View article]
    Hi again td94306,

    Since you seem to be very interested in this, and looked at the details in the CBOE document, I have a question for you: In the table on page 13, they show the value of the SP500 index and the strike price of the ATM put that was sold each month at rollover. In many cases, the strike price is far away from the SP500 value. Can you figure out why? The strike is supposed to be as close as possible to the index.

    During the decline, the strike price was sometimes as much as 40 points below the index value, which of course helps greatly in the performance during the decline! For example, September 2008, SP500 at 1279, and put sold had a strike of 1235. How convenient, since the SP500 dropped to 922 that month! This seems to me to be sort of cheating by the CBOE, or am I missing something?
    Nov 3, 2012. 08:02 AM | Likes Like |Link to Comment
  • Selling Puts And Calls: A Better Recipe  [View article]
    Hi td94306,

    Very good additional comments and ideas on the system.

    Since most people will be trading this system in an account mixed with other holdings, it would be necessary to calculate the PUT strategy balance on each rollover date as you describe using an Excel sheet, instead of just looking at your brokerage balance. Then we know how many puts to sell (and how many calls if we are going to match the two).

    We still have the problem that we don't think the performance charts presented by Ken for the "double strategy" are correct, because they merge varying number of puts with constant number of calls.
    The charts don't match either Case 1) one put and one call or Case 2) varying number of puts and matching number of calls.

    So we don't really know how a "double strategy" using either Case 1 or Case 2 would perform.

    I'm not sure I agree with the second sentence of your idea "2%OTM CALL performs well in down market and not as well in up market. Hence, sell more CALLs in down market should improve performance".

    Because when we reach the bottom, we are now holding the maximum number of calls, and as the market rockets up in the first few months of a rebound (as it often does), we are going to under-perform the SP500 by a lot more than if we held a constant number of calls and had not increased the number at the bottom.

    As you can see in the table on page 13, as the market recovered, the number of options held was GREATER than the number held while going down. So it's even possible that increasing the number of calls could hurt performance. Can't know without backtesting using actual option prices available at those rollover times.

    Regarding interest rates on T-bills, luckily (or unluckily) those are so close to zero now that we can put zero into all the formulas in the document, and the formulas simplify down to something very easy to understand intuitively. If or when interest rates rise, it will be more difficult to calculate the correct number of puts and calls to use each month.

    When I initially read Ken's article, I was thinking this is fantastic, and I can vary the number of options I want to sell based on my market outlook. For example, 5 when I'm bearish, 10 when I'm neutral and 15 when I'm bullish. But now, with the varying number of options involved in implementing a single instance of the strategy, that becomes much more complicated.
    Nov 3, 2012. 07:54 AM | 1 Like Like |Link to Comment
  • Selling Puts And Calls: A Better Recipe  [View article]
    Hi Ken,

    Ok, here is the research into my own question about the varying number of puts sold each month in the PUT index. I'll summarize what I found from the CBOE's own publication on the exact mechanics of how they run the index, available at:

    First the proof that the number of puts sold varies each month:

    In the table on page 13, the CBOE presents details of trades for the period June 2007 to October 2009 (during the big crash and initial recovery). As you can see in the column labelled "Number of New Puts sold" the number varied from a minimum of 0.64 in June 2007 when the SP500 was at 1534 to a maximum of 0.98 when the SP500 was at 789 in March 2009. (Don't complain about the fractional number of puts, it's theory not practice!)

    So we have proven that the number of puts sold varies each month in the PUT index. (BXY, the "sell a 2% OTM call each month" index DOES have a constant value of exactly one call).

    Also we see the genius of the PUT index system: more puts are sold at bottoms than at tops! As a side note, I suspect the superior return of PUT versus the SP500 may be due to this alone, and not due to option strategies being superior to buy and hold! In that case, a strategy of selling exactly one put each month, and not varying the number, might NOT outperform the SP500 over the long run. (I can't prove that without backtesting).

    Why and how does the number of puts sold each month vary?

    The number of puts sold is based on the value of the portfolio (or the PUT index, same thing) and NOT on the value of the SP500! That's the key. If we determined the number only on the value of the SP500, we would always be selling exactly one put.

    But because the PUT strategy outperforms the SP500 during a massive decline as in 2008, the PUT strategy actually has some "extra money" with which to cover the puts. So we can sell more puts at the bottom than we could sell at the top!

    As an example, say we start with $100,000 and sell 10 puts (exactly cash covered by the $100,000, no more, no less). The SP500 then declines by 50%. If we had invested directly in the SP500, we would now have only $50,000. But we were doing the PUT strategy, and we have $70,000 instead (lucky us).

    Now how many puts will we sell now? Well, we have $70,000 and each put is now based on an underlying index (SP500) that has only half the value. 10 puts now only requires $50,000 to cash cover. So we can now sell 14 cash-covered puts!

    Ok, what does this all mean? I think it means that:

    Performance charts based on adding, subtracting, slicing and dicing the PUT and BXY indices do NOT represent the performance of a "sell one put and sell one call each month" strategy!

    They represent the performance of an ETF that implements the complicated varying-number-of-puts strategy, which does not currently exist.

    Hmm, what to do now?

    Nov 2, 2012. 05:41 PM | Likes Like |Link to Comment