Sanity check for a long-term leveraged investment strategy

bostonerimus

By learning all his mistakes, I can better avoid them. Thanks for providing the link to that interesting read.

You're all set then, even thought all the comments to your original question have been skeptical and have advised caution. Good luck!

seacaitch

Mr Saver, out of interest, do you happen to have a mathematical science background?

Mr.Saver

seacaitch wrote: »

Mr Saver, out of interest, do you happen to have a mathematical science background?

No, but close enough. Computer science.

Username999

Good luck if you do it, keep us updated.

Worse thing that could happen is, it works for a time, you get over confident, then it stops working.

Mr.Saver

Username999 wrote: »

Good luck if you do it, keep us updated.

Worse thing that could happen is, it works for a time, you get over confident, then it stops working.

I intend to start this in a few months, this is to allow me to spend more time on small details around the plan.

I recently noticed that LEAPS can be as far as 3 years in the future, so roll at 1 year before expiry means roll it every 2 years, not every 1 year. Buying LEAPS with longer expiration would be able to reduce the frequency of rolls. So this works in my favour.

The thing doesn't work in my favour is, a dramatic market movement would result in under/over leverage for extended period of time (e.g. market went down 25% right after the roll, result in a 3:1 leverage, it will last until the market moves or the next roll). This would increase the risk and may get out of control very fast in a bad market condition. I think the best way to deal with this risk is to review it monthly and rebalance whenever the leverage ratio is too far off. I'd be happy to keep it in the range of 1.8:1 to 2.2:1, which means the market has to move 10% before I need to rebalance. The reason for choosing 10% is that the rebalance comes with a cost (mainly from the bid-ask spread), so I'd keep the frequency as low as possible.

I will also need to come up with a plan for rebalancing between SPY and EAFE.

under_western_skies

Mr.Saver wrote: »

I intend to start this in a few months, this is to allow me to spend more time on small details around the plan.

Small details, such as admittedly having no idea what are the chances of your options strategy outperforming the underlying (unleveraged) instrument. I've changed my mind: just lose your money already.

Mr.Saver

under_western_skies wrote: »

Small details, such as admittedly having no idea what are the chances of your options strategy outperforming the underlying (unleveraged) instrument. I've changed my mind: just lose your money already.

I think I'll need to repeat this again. My goal isn't to outperform the market, but to have a higher exposure (aiming at 200%). Because I'm optimistic about the general direction of the market movements over the next decades.

In the short term, I will undoubtedly suffer a bigger loss if the market moves lower. But that's only paper losses, because I don't need to spend that money right now. As long as the market gradually moves higher in the next decades, the temporary losses are not something that'd concern me.

Alexland

So the point of this thread was to 'sanity check' your idea and several of the forum regulars have commented but nobody came out in support of it. So either you haven't had the right people reply, you have asked in the wrong place (we are investors, not experts in options), the explanation wasn't good enough, or the idea lacks clear merit?

Malthusian

Mr.Saver wrote: »

In the short term, I will undoubtedly suffer a bigger loss if the market moves lower. But that's only paper losses, because I don't need to spend that money right now. As long as the market gradually moves higher in the next decades, the temporary losses are not something that'd concern me.

Except this is incorrect, because unlike with unleveraged investment you can't be certain that (barring apocalypse scenarios) you can always ride out the downturn. In a sufficiently prolonged downturn your LEAPS all expire without value and you lose your shirt. In a less prolonged downturn, even one in which you continue to buy LEAPS at the bottom of the market, you could still have enough LEAPS expire that it creates a permanent loss that the leveraged upside cannot recover.

I am talking in vague general terms, but so are you because you haven't done any modelling.

Alexland wrote: »

So the point of this thread was to 'sanity check' your idea and several of the forum regulars have commented but nobody came out in support of it. So either you haven't had the right people reply, you have asked in the wrong place (we are investors, not experts in options), the explanation wasn't good enough, or the idea lacks clear merit?

What the OP meant by sanity check is that we were meant to tell him that we've checked and he's totally sane.

He is still putting all his mental energy into looking for reasons it will go right rather than ways it could go wrong.

His above statement "As long as the market gradually moves higher in the next decades, the temporary losses are not something that'd concern me" is verging on "la la la I'm not listening" because the fundamental risk of leveraged investment is that the market remains irrational longer than you can remain solvent. There is no way around this and the OP has not found one.

Mr.Saver

Alexland wrote: »

So the point of this thread was to 'sanity check' your idea and several of the forum regulars have commented but nobody came out in support of it. So either you haven't had the right people reply, you have asked in the wrong place (we are investors, not experts in options), the explanation wasn't good enough, or the idea lacks clear merit?

I'm sure the subject was clear, it was to sanity check the strategy itself, not the idea.

I wasn't looking for supporters. TBH, I didn't even expect anyone would agree with the idea that investing with leverage in the early years is actually less riskier than only investing what I have. Not until I've read the "market timer"'s post on another forum. His idea was more or less what I had in my mind, arguably has a significant different level of aggressiveness. Sadly, I've only found his post after someone posted a link here, and I couldn't find many other discussions around this idea, and how do other people implement it.

Anyway, I've got the answers (in the form of questions) I needed. I'll post updates on this when it begins.