Options and real estate wedlock - a beginner level trade on a real estate backed asset

[cyanide12345678]

@cyanide12345678

Excellent post about your put-selling strategy. I study a bit from good futures / options traders and they're very intelligent people -- very mathematically inclined. Personally, it's not my cup of tea as it's horrendously tax inefficient.

Why do you keep rolling contracts every 2 weeks? Why do you try to avoid having ITM or ATM contracts?



You are understating the risk of selling naked puts when you try to frame it nominally. You lost 200% of premium when the stock owner lost 10%. You are reducing risk because of good position sizing. It would be a good idea to go into that so someone whom decides to copy you won't blow up their account.



Essentially there will be larger supply of $. Why will increased supply of $ result in low-ish return of relative scarce asset? FYI, you should be hoping stocks go up. Because as a put seller of stocks, your profit increases if the underlying stock increases. Sure, you're also making money from theta decay but that also applies if you sell puts in non-stock assets.



It's unlikely US stock market will be like Japanese stock market. What happened to the Japanese was due to Plaza Accord. US is stronger country than Japan and can make Japan commit seppuku to boost US economy. No country can do to US what US did to Japan. Power imbalances between countries exist and there is a reason that US stocks outperformed non-US stocks for a long time. Some die-hard indexers are still waiting for when international stocks starting outperforming. Lol.

Yes very tax inefficient if you’re in a high tax bracket. But if you trade spx, ndx, xsp, rut then you are very tax efficient as even a 1 minute hold will have 60 percent of profits treated like long term capital gains

I don’t roll every two weeks. I’m giving hypothetical scenarios of an arbitrary amount of time to explain a point. I roll when I’ve achieved 35-50 percent of the profit. But in my example i had to show defined outcomes in a defined set of time.

I only stay significantly out of the money due to leverage. Premiums can go sky high if in the money. I avoid that. I have happily just dropped strikes, dropped my eventual return, for the sake of decreased risk and staying significantly out of the money. Even if i get in the money, it’s usually fine, but i almost exclusively do that when something is ridiculously under valued and i see a bottom nearby. In fact, even today i did a trade where i just dropped strike, decreased eventual return by 3k. Which is fine. Id rather get 30k return than 33k return if its more likely to happen.

My de-risking trade today as an example:

Agreed - position sizing is one of the most important things when doing naked positions. A lot of people do credit spreads - often times they easily over leverage a credit spread and can wipe out an account. I didn’t understand position sizing initially and i was selling 17-18 rut contracts in a 200k account and making 15-20k a month when i started - the market was moving my way. If the market had moved against me - i would have gotten destroyed. Now with a 4 times larger account, i barely have the guts to open 17-18 rut contracts - too big a position.

Im usually aiming for 1.5 to 2 percent cash on cash return per month (~15k a month based on 700k account size). So my 2 month out puts will basically carry 30k in premium. I maintain something similar, if I’m winning and my possible premium gain drops too much, i increase risk to add premium. If I’m losing and my possible premium has increased significantly, it is not unusual for me to drop risk and decrease total premium for a smoother ride. All in all, 15k premium per month is 2 percent of my account. A 300 percent loss this would still only be a 6 percent loss for the account. To get a 300 percent loss, the underlying will have to drop very very significantly in a very very short time.

Yes, i make money if stocks go up. That’s the easy part of selling puts - everything is going wonderfully as planned. But really the beauty of selling far out of the money puts is when you make money even when something drops.

I understand it’s unlikely to be the next japan stock market - but it’s not as unlikely to have a flat decade given the frothy valuations and deteriorating macroeconomics for the country. That was just a point i was making that even in a japan like event, most likely the put seller comes out ahead. Again - decades of research backing that up. Some of it i linked in my post above.

---

Members don't see this ad.

 

[skougess]

just because there’s someone else on the other end creating a bet, you keep on thinking it’s a zero sum game.

Just like a casino, the odds are always going to favor the put seller.

The buyer of the put and call has to get right both price movements as well as the timing of the price movement. The seller just has to get right price movement.

Price movement upwards makes put sellers money significantly faster, they still make money when the underlying is flat, and if it’s something significantly out of the money, then even a slow negative price movement makes the put seller money. 3 scenarios in which the pot seller makes money. The put buyer only and only makes money if price drops rapidly and within a short time frame.

It’s not a zero sum game. I’m not the one saying that actually. Years and years of research says that PUT SELLING OFFERS THE BEST RISK ADJUSTED RETURNS. Buying sp500 offers the best absolute return, but selling puts offers the best risk adjusted return since the sharpe ratio and standard deviation of those returns is lower.

Again….. I’m not saying that, research spanning decades says that:

https://cdn.cboe.com/resources/spx/bondarenko-oleg-putwrite-putw-2019.pdf

Generating Income and Managing Risk: Cash-Secured Put Writing in a Low Equity Return Environment

www.cboe.com

https://cdn.cboe.com/resources/education/research_publications/research-paper.pdf

https://www.nasdaq.com/docs/2019/12/17/NDX%20Strategies%20paper%20Nov%2028%20-%20Global%20Finesse.pdf

http://www.riverparkfunds.com/assets/pdfs/news/Structural_Alpha_White_Paper_Final.pdf

Again - selling puts is not zero sum. Years of data disagrees with you.

I actually don’t think you understand the definition of zero sum, and I don’t know how else to say that without sounding very condescending.

Aside from that, you can talk about casinos and pretend you are playing the odds like an insurance company. But at the end of the day you, as an individual, do not have the capital or transaction volume to reliably play that game (even insurance companies need reinsurance!!). Your wins have been from the ongoing bull run and the risk management strategies you’ve employed (like betting on 31 numbers in roulette). Okay sure, the 00 is in your favor with the risk premium. It’s STILL a zero sum game, fundamentally different than an investment, and you as an individual are not running this transaction at a rate that makes anything more than a gamble.

Even with this, you’ll still PROBABLY get away with this for a long time, or even for as long as you decide to do this. But it doesn’t change the fundamentals of what you are doing. It doesn’t make it any less of an unsound strategy for this forum making $300k+ yearly where wealth is all but guaranteed.

 

[cyanide12345678]

I actually don’t think you understand the definition of zero sum, and I don’t know how else to say that without sounding very condescending.

Aside from that, you can talk about casinos and pretend you are playing the odds like an insurance company. But at the end of the day you, as an individual, do not have the capital or transaction volume to reliably play that game. Your wins have been from the ongoing bull run and the risk management strategies you’ve employed (like betting on 31 numbers in roulette). Okay sure, the 00 is in your favor with the risk premium. It’s STILL a zero sum game, fundamentally different than an investment, and you as an individual are not running this transaction at a rate that makes anything more than a gamble.

I might not understand it. But read this below and answer one question only for me:

https://cdn.cboe.com/resources/spx/bondarenko-oleg-putwrite-putw-2019.pdf

My question is: How is something like selling puts on SP500, a zero sum in your opinion, result in a 9.5% compound return over a 35 year time period? That's all I need you to answer. The last I checked, gambling didn't have a reliable return over decades, and that too at a lower volatility and standard deviation.

I'm not saying owning stocks doesn't create wealth. It does in a up market through appreciation, and in a flat market through dividends. But, I'm saying that that is not the only way of creating wealth as there are option strategies that exist that also create reliable return over time in a excellent risk adjusted manner.

 

[skougess]

I might not understand it. But read this below and answer one question only for me:

https://cdn.cboe.com/resources/spx/bondarenko-oleg-putwrite-putw-2019.pdf

My question is: How is something like selling puts on SP500, a zero sum in your opinion, result in a 9.5% compound return over a 35 year time period? That's all I need you to answer. The last I checked, gambling didn't have a reliable return over decades, and that too at a lower volatility and standard deviation.

I'm not saying owning stocks doesn't create wealth. It does in a up market through appreciation, and in a flat market through dividends. But, I'm saying that that is not the only way of creating wealth as there are option strategies that exist that also create reliable return over time in a excellent risk adjusted manner.

Zero sum means that the “winners” and “losers” add up to $0. It doesn’t necessarily mean 50/50 odds. Wealth is only transferred from one hand to another, not created in a zero-sum environment. As options were originally conceived, they were not zero-sum. They were closer to insurance products, where someone needs a hedge against price movement. In these cases, there is value in the hedge that the contract provides. In the same way that we don’t feel bamboozled or that we “lost” when we buy disability insurance for 15 years and don’t end up using it. It’s subtle, but as option contracts are commonly bought and sold today, the only value is in the speculation and money earned. In this way it transitions into zero-sum territory, because the holder of a “losing” contract got no value out of holding the contract for its own sake.

I concede that with premiums delivered, there is a house edge. So my previous analogy of the long term rate of return being 0% was incorrect, since it is not a 50/50 gamble. The biggest issue I have is what I previously posted, that you as an individual are not a financial bohemouth that can absorb capital losses or have the transaction volume to make this reliable income. What you see as reliable income is a mirage of your risk management strategies and the bull market.

My secondary issue would be that with all the work you put into this, what kind of hourly rate are you getting? I know this doesn’t apply to you specifically since you enjoy getting into it, but you have to admit that there should be some kind of return adjustment for labor cost. But mostly it’s the first part.

Edit: I would just again point out that something can generate returns and make individuals wealthy without being a wealth creator. Wealth is not created with options with the exception of the first case I alluded to earlier in this post (where both parties “win” because they are both happy with the transaction). Wealth is just transferred.

 

[GatorCHOMPions]

As someone who has flirted with jumping into this stuff, I am thoroughly enjoying the back and forth. It sure beats the typical EM doom and gloom.

 

[skougess]

As someone who has flirted with jumping into this stuff, I am thoroughly enjoying the back and forth. It sure beats the typical EM doom and gloom.

I hope cyanide realizes that as heated as I get, I think he/she is not the type of person to get themselves into the poor house. They will likely continue to be wealthy and thriving no matter the twists and turns. Strong opinions are just strong.

 

[Mount Asclepius]

I also appreciate the back and forth arguments. Thank you both. Even if not for me, I like to hear what others are doing and why others think it’s either a good or bad strategy.

Sometimes people get caught up in the weeds of a slightly better return. Not pointing fingers at any one here, but more so commenting in general. I’ve certainly known more people in real life than even on SDN who are looking for a pot of gold. The best path for EPs to become high net wealth individuals is to maximize what you can make during your peak earning years, work for as long as tolerable without wasting any extra time in the pit than necessary, save aggressively, and in general invest allowing for the time value of money to build wealth.

A colleague of mine once got a little bent out of shape about certain 401K fees, but made far less per hour and in annual income. While I agree low fees are important, they missed the bigger picture in that the amount of income they were missing out on per clinical hour far outweighed small savings in retirement account fees.

In the same vein, people can debate the risks/benefits of trading options, but at the end of the day peak earning potential multiplied by years worked, aggressive saving, and just investing early in general, will have far great impact. Some might do well with their own specific investing interest (i.e. options), but I don’t think it’s easy, as guaranteed or as low risk as some make it sound, or broadly applicable to others.

For me personally, seeing and billing more ankle sprains then saving/investing that income will add more to my bottom line over time than any marginal benefit I can try to obtain by outperforming the S&P 500. I think the effort and risk are lower. The calculus may be different for others though.

 

[cyanide12345678]

Zero sum means that the “winners” and “losers” add up to $0. It doesn’t necessarily mean 50/50 odds. Wealth is only transferred from one hand to another, not created in a zero-sum environment. As options were originally conceived, they were not zero-sum. They were closer to insurance products, where someone needs a hedge against price movement. In these cases, there is value in the hedge that the contract provides. In the same way that we don’t feel bamboozled or that we “lost” when we buy disability insurance for 15 years and don’t end up using it. It’s subtle, but as option contracts are commonly bought and sold today, the only value is in the speculation and money earned. In this way it transitions into zero-sum territory, because the holder of a “losing” contract got no value out of holding the contract for its own sake.

I concede that with premiums delivered, there is a house edge. So my previous analogy of the long term rate of return being 0% was incorrect, since it is not a 50/50 gamble. The biggest issue I have is what I previously posted, that you as an individual are not a financial bohemouth that can absorb capital losses or have the transaction volume to make this reliable income. What you see as reliable income is a mirage of your risk management strategies and the bull market.

My secondary issue would be that with all the work you put into this, what kind of hourly rate are you getting? I know this doesn’t apply to you specifically since you enjoy getting into it, but you have to admit that there should be some kind of return adjustment for labor cost. But mostly it’s the first part.

Edit: I would just again point out that something can generate returns and make individuals wealthy without being a wealth creator. Wealth is not created with options with the exception of the first case I alluded to earlier in this post (where both parties “win” because they are both happy with the transaction). Wealth is just transferred.

I agree winners and losers adds up to 0 in options. In that regard it is zero sum. But im glad you agree that it’s not 50/50 - because clearly there’s a better long term strategy. All the data clearly shows that premium sellers almost always come out ahead over time. I’m glad you concede that selling premium is not gambling. It is at the end of the day a risk adjusted way of getting positive returns. Now those returns are coming at the expense of someone’s loss - i agree - whether a speculative person buying a put or a hedge fund hedging their bets and buying insurance, or maybe a degenerate/****** off wallstreetbets going all in on something. Who knows who I’m more or less taking money from 🤣 but yeah…my 205k gain last year was 205k of loss for someone. Like a casino, I have a probabilistic edge of winning.

My strategy of selling puts has historical data showing that it’s a fairly decent return, while lower risk. Truly one of the best risk adjusted returns out there.

Now what i do is add risk to a low risk strategy and increase returns.

I add risk in 2 ways:

1) naked leveraged positions. So a big number of positions compared to the amount of cash in my account
2) trade more volatile things - arkk, ewz, mpw etc.

I decrease risk by the following ways:

1) very very far out of the money puts. The leverage actually lets me push the strike price so so so far away that they truly are very unlikely events, but because of leverage i still am able to have a large enough position size to have meaningful return.

2) i do not hesitate to drop strikes, even if it means lower return. I watch my position delta very closely - delta for a position is the premium change if the stock value changed by $1.

See attached:

My ewz position if it drops $1 which is a 3% drop for ewz will result in a $4500 increase in premium aka unrealized loss for me assuming fixed gamma (rate of change of delta) and vega (volatility). Though normally both those increase too usually but regardless a 3% drop in ewz tomorrow will result in my having an unrealized loss of $4500 minus $200 (theta) = $4300. So - 3% drop = 0.6% drop for my account (4300/7000000). This is how i gauge my risk. If this number starts getting decently big, then it’s time to drop strike to decrease the delta of the position.

Similarly, if mpw drops $1 which is a 18-19 percent drop, then my account drops by 2% 14k.

So yes, I’m leveraged, but there’s definitely still a lot of downside protection from being so far out of the money. In fact, mpw did go down 20% in 3 days - it touched 6.4 3 days ago before collapsing down to 5.1 ish. I lost only 1 percent of account value around 8k despite a 20 percent drop in underlying.

So….. that’s my risk right there. If mpw drops 20 percent tomorrow, I’ll lose 2 percent account value even though i have a position that’s worth $450k if it was a cash covered position.

let’s talk about transactions:

Man…. It is so so so much harder having a larger account from a standpoint of transactional efficiency. When you have very large positions, you literally start moving markets. You’d be surprised how much transactional inefficiency is with making larger trades actually. As you said, there needs to be someone else on the other side, often times that means when you have a very large order, you are not getting the best price possible to be able to execute that large order.

My Trade sizes with leverage actually are surprisingly large now that even im starting to see a little bit of inefficiency in pricing. It’s actually very interesting to see that if i sell/buy to close 1 contract, I’ll usually get immediate fill at a certain price. But sometimes if i do the same trade with 100+ contracts immediately for the exact same price, it wouldn’t fill - instead id literally change the entire bid ask spread -_- it is so so much easier to have a smaller account.

Liquidity though i agree, i will never have as much as the big guys. But you actually don’t need new money. You can create liquidity and buying power through trades themselves - you can always close profitable positions. You can drop strike (decreases capital requirements). So there’s usually rarely a desperate need for more capital. For example - i can close my entire ewz position and create 200k buying power that’s fully liquid within 2 minutes. The cost would be about 7-8k less profit. So instead of potentially gaining 30k in 63 days, I’ll drop my potential profit to 22-23k.

And i don’t think i have a mirage of profitability due to a bull run - on the contrary, my positions are often falling knives because those have the best volatility. Here is what I’ve made money on this year:

Yes, mpw has had a bull run that has helped. Agreed. But i currently have a position with 18k of premium. I don’t need a bull run - i just need it to not drop 41% in 63 days 😂😂 given how there’s no earnings between then and now, how the technicals are improving, how the price would have to go through multiple supports and multiple moving averages to get back to all time lows, and that too in 2 months, i feel pretty good about this position - hence 1500 contracts.

My second biggest winner is arkk - it’s down ytd 11%. Im up on it. There’s no bull run there.

My 4th biggest winner is SQ - ytd negative 0.6 percent. No bull run.

5th biggest winner - sofi. Down 22 percent ytd. No bull run.

7th biggest winner - kbe. Just up 3 percent. Mostly flat

8th biggest winner - tan. Down 16 percent yt

9th biggest winner - Save down 76 percent ytd

11th biggest winner is ewz which is down 7 percent ytd

So….am i really riding a bull wave? I did for my biggest winner this year. But man i made money on a lot of ‘losers’ too.

Here are my losers this year:

Mostly positions that were started and i didn’t follow through with and were closed pretty quickly. Upwk was the only real loss where price kept coming down and i didn’t have maneuverability due to limited strike prices ( $10 then $7.5 ) and it had terrible bid ask spreads that were painful as hell. So i eventually folded.

A lot of the trades were hard earned money - no bull run.

Lastly your point about time - yeah i spend a lot of it. Here’s my hourly so far:

I think i average about 2.5 hours of market watching/trading a day. There’s been 80 trading days so far year to date. I have 90k ytd gain after 200 hours of active trading. About 450/hr. This wouldn’t include times reading articles etc - this is time purely spent making trades and watching price movement. But realistically so far this year, I’m beating spy by only 1.5 percent. So $10000 extra return vs a spy only portfolio. So i guess technically speaking, if you subtract the performance of spy from my return, it comes to $50/hr (10000/200). This also doesn’t take into account the net extra 17 percent tax I’ll pay for short term capital gains - 37 percent marginal tax rate vs 20 percent long term capital gains tax rate. So probably just barely breaking even right now if you account for the added taxes.

But…it’s actually incredibly hard to beat spy when there’s a huge bull run. As a put seller, my upside is capped, my downside is protected. The biggest downside to selling puts is underperformance in a bull run. I do this however because of bear markets, i know i will outperform during a bear market. For example - i ended 2022 (or was it 2021?) positive 7-8 percent when spy was negative 20 percent. I’m happy keeping up with spy when it has one of the biggest bull run starts in history because chances are I’ll be outperforming when the market is flat or underperforming.

And that’s why i do puts.