Mr.Saver's Long-term Leveraged Investment Strategy Using LEAPS

Mr.Saver

This week marks the start of my investment strategy described here. The strategy in short: buy and hold index tracking ETFs' 2+ years call options where the strike is roughly half of the underlying price. Check the portfolio monthly and re-balance if the leverage is more than 10% off from the target 2:1 ratio, or the option has less than 1 year left before expiry.

This thread is for entertaining the criticisers of my strategy. I'm sure you'd enjoy seeing me losing everything in a market crash. I will track my trading activities and accumulated losses/gains.

Note: due to the EU's PRIIPs regulation, I had to choose an offshore broker for implementing the strategy. One of the downside of using such a broker is transferring funds to the broker account will incur an expensive international bank transfer cost. Therefore, I'd be keeping a lot of cash in the broker account for the options' rollovers to avoid frequent international bank transfers. For the purpose of tracking the portfolio's performance, I will ignore the cash reserve, and calculate base on only the money invested.

Some discussions about similar strategies often referenced as "Mortgage Your Retirement". Like buying a house with borrowed money, the investor buys their retirement savings with borrowed money.
There's also a "Lifecycle Investing" theory. It suggests that we often have too little to invest when we are young to let compounding work over a long time frame, therefore we should borrow to invest in 200% equities when we are young, and gradually reduce equity exposures while we are getting older. We all know diversifying over different asset classes would reduce investment risk, but we often don't know we can also diversifying over time. The theory suggests that diversifying over time can be achieved by using leverage, and it would also reduce investment risk. It sounds contradictory, but does make sense.

A reference to post A different approach to asset allocation on the Bogleheads forum, the poster "market timer" did similar thing. Quote from the post with italic words added:

Econ grad student applies Mortgage Your Retirement theory at the top of the last bull market in 2007, starting around 2x leverage, increasing to more than 10x while the market continuously going down, loses $210K of borrowed money, and is forced is to sell what's left of his portfolio at S&P 821 in November 2008

Lessons learned from this:
    If you've made a plan, you need to stick to it.
    Emotion is not investor's friend.
    Increasing leverage in a bear market is gambling, not investing.
    Over-leverage can wipe you out of the market.

Mr.Saver

This post is reserved for my trading log and some related comments. All prices are in USD and including fees and commissions. The starting cash is approximately $18,926.

13 Feb 2020

• Bought 1 contract of SPY 2022 JAN 170 CALL for $16,900.14
• Bought 6 shares of SPY for $2,026.15

Price data on this day:
S&P 500: 3370 points
ETF SPY: $337
ETF VOO: $309

18 Feb 2020

• Sold 6 shares of SPY for $2,018.52 (realized loss $7.63, 0.4%)
• Bought 6 shares of VOO for $1,853.34

For the purpose of tax optimisation, I sold SPY (non-reporting fund) and bought VOO (UK reporting fund).
Market was down a bit since I bought SPY, so this process realized a negligible loss.

27 Feb 2020

• Sold 6 shares of VOO for $1,682.19 (realized loss $171.15, 9.2%)
• Sold 1 contract of SPY 2022 JAN 170 CALL for $13,332.56 (realized loss $3,567.58, 21.1%)
• Bought 1 contract of SPY 2022 MAR 155 CALL for $15,067.14

S&P 500 has gone down for 10% since I first bought the option contract, and reached my rebalancing point. I've sold the 170 call and bought the 155 call to reduce my leverage ratio.

10 Mar 2020

• Sold 1 contract of SPY 2022 MAR 155 CALL for $12,732.76 (realized loss $2,334.38, 15.5%)

Rebalance gone wrong due to an avoidable mistake, sold it but didn't have a chance to buy anything else on the same day. Fixed that on the next day.

11 Mar 2020

• Bought 1 contract of SPY 2022 MAR 150 CALL for $12,701.14

The SPY was trading at ~276, but I didn't have enough cash to buy the 135 or 140 call, so bought the 150 call instead.

6 Aug 2020

• Sold 1 contract of SPY 2022 MAR 150 CALL for $18,264.45
• Bought 1 contract of SPY 2022 DEC 165 CALL for $16,826.14
• Bought 5 shares of VOO for $1,525.10
  

11 Mar 2020
Sold everything, because I'm planning to buy a home in next year or so. But to proof this strategy works, I'll use quotes from online sources and update this post with virtual trading. I had $126.40 cash balance in the brokerage account before I sold everything. From now on, cash position will be included in the updates too.

1 Dec 2020

• Sold 1 contract of SPY 2022 DEC 165 CALL and bought 1 contract of SPY 2023 JAN 180 CALL, net credit $1,479.27
  
• Bought 4 shares of VOO for $1,345.52

Holdings after transaction:

• $260.15 cash
• 9 VOO ETF
• 1 SPY 2023 JAN 180 CALL

Price reference: https://forums.moneysavingexpert.com/discussion/comment/77830454/#Comment_77830454

5 Apr 2021

• Sold 1 contract of SPY 2023 JAN 180 CALL and bought 1 contract of SPY 2023 DEC 200 CALL, net credit $1,952.20
• Bought 5 shares of VOO for $1,867.35

Holdings after transaction:

• $345.00 cash
• 14 VOO ETF
• 1 SPY 2023 DEC 200 CALL

Price reference: https://forums.moneysavingexpert.com/discussion/comment/78222083#Comment_78222083
The portfolio value as of today is about $26,024, this represents a 37.5% gain since 13 February 2020.

12 Aug 2021

• Sold 1 contract of SPY 2023 DEC 200 CALL and bought 1 contract of SPY 2023 DEC 220 CALL, net credit $1,995.20
• Bought 5 shares of VOO for $2,042.55

Holdings after transaction:

• $297.65 cash
• 19 VOO ETF
• 1 SPY 2023 DEC 220 CALL

Price reference:  https://forums.moneysavingexpert.com/discussion/comment/78535688#Comment_78535688
The portfolio value as of today is about $30,259, this represents ~59.9% gain since 13 February 2020. During the same period of time, the S&P 500 index has gone up from 3374 points to 4443 points, or ~31.7%. The leveraged portfolio so far has been able to deliver ~1.89x return.

9 May 2022

• Sold 1 contract of SPY 2023 DEC 220 CALL and bought 1 contract of SPY 2024 DEC 200 CALL, net debit $2,161.56
• Sold 6 shares of VOO for $2,207.10

Holdings after transaction:

• $337.59 cash
• 13 VOO ETF
• 1 SPY 2024 DEC 200 CALL

Price reference: https://forums.moneysavingexpert.com/discussion/comment/79191282#Comment_79191282
Estimated portfolio value: $25,919

17 Jun 2022

• Sold 1 contract of SPY 2024 DEC 200 CALL and bought 1 contract of SPY 2024 DEC 180 CALL, net debit $1,653.66
• Sold 4 shares of VOO for $1,346.88

Holdings after transaction:

• $30.81 cash
• 9 VOO ETF
• 1 SPY 2024 DEC 180 CALL

Estimated portfolio value: $22,157

22 Jul 2022

• Sold 1 contract of SPY 2024 DEC 180 CALL and bought 1 contract of SPY 2024 DEC 200 CALL, net credit $1,734.20
• Bought 4 shares of VOO for $1,467.40

Holdings after transaction:

• $297.61 cash
• 13 VOO ETF
• 1 SPY 2024 DEC 200 CALL

Estimated portfolio value: $25,496

27 Sep 2022

• Sold 1 contract of SPY 2024 DEC 200 CALL and bought 1 contract of SPY 2025 JAN 185 CALL, net debit $1,260.67
• Sold 3 shares of VOO for $1,007.04

Holdings after transaction:

• $43.98 cash
• 10 VOO ETF
• 1 SPY 2025 JAN 185 CALL

Estimated portfolio value: $22,200

1 Feb 2023

• Sold 1 contract of SPY 2025 JAN 185 CALL and bought 1 contract of SPY 2025 DEC 205 CALL, net credit $1,526.20
• Bought 4 shares of VOO for $1,512.16

Holdings after transaction:

• $58.02 cash
• 14 VOO ETF
• 1 SPY 2025 DEC 205 CALL

Estimated portfolio value: $26,742

Mr.Saver

I don't have enough cash to buy SPY and EFA options at the moment. By start trading with only SPY, I'm taking a greater geographic risk. However, the total amount is small comparing to my portfolio in tax wrappers, so I've decided to proceed rather than keep waiting.

Edit:
EFA options have pretty bad liquidity, so I'm not going to buy the EFA LEAPS. Instead, I'll seek to balance the geographic exposures by holding more ex-US/Asia/Europe passive funds instead.

bowlhead99

Mr.Saver said:

The first transaction took place on 13 Feb, I bought 1 contract of SPY 2022 JAN 170 CALL for $16,900.14. I've also bought 6 shares of SPY for $2,026.15.

All numbers are in USD and including fees and commissions.

A downside of investing outside a tax wrapper in a US-listed ETF that hasn't succesfully applied for status as a Reporting Fund within HMRC's offshore funds regime  (https://www.gov.uk/government/publications/offshore-funds-list-of-reporting-funds) is that when you make a gain on the fund it is presumed to be taxable under income tax rather than capital gains tax. The regime exists to stop people stashing their money in foreign funds which don't provide information about undistributed income, rolling up income inside them without reporting it, and then cashing out at a higher price.

So by deciding to buy those 6 shares of SPY via your offshore broker, rather than  instead (e.g.) spending the £2k on SPDR S&P 500 UCITS ETF (Irish domiciled and London-listed https://www.morningstar.co.uk/uk/etf/snapshot/snapshot.aspx?id=0P0000VSUZ) which does have UK reporting status, you may be paying 40 or 45% income tax on your gains from that £2k of shares, instead of the more palatable CGT rates. If you use the US vehicle instead of the Irish UCITS vehicle (ticker SPY5 for the dollar share class on the London stock exchange) you are bonkers IMHO.  

Also your deliberate ignoring of the cash drag effect on your performance seems a bit delusional. If I put £10k into a broking account on 1 Jan 2020 and keep it there idle so that I can opportunistically make a £1000 investment in November 2021 which doubles in value over the next month to 31 December 2021, I have succesfully turned £10,000 into £11,000 over two years which is a 4.9% annualised return. You would probably call it a 100% return in one month (or perhaps annualise it to 400,000% per year if feeling aggressive about how to report it), either of which is well off the reality.

Mr.Saver

bowlhead99 said:

Mr.Saver said:

The first transaction took place on 13 Feb, I bought 1 contract of SPY 2022 JAN 170 CALL for $16,900.14. I've also bought 6 shares of SPY for $2,026.15.

All numbers are in USD and including fees and commissions.

A downside of investing outside a tax wrapper in a US-listed ETF that hasn't succesfully applied for status as a Reporting Fund within HMRC's offshore funds regime  (https://www.gov.uk/government/publications/offshore-funds-list-of-reporting-funds) is that when you make a gain on the fund it is presumed to be taxable under income tax rather than capital gains tax. The regime exists to stop people stashing their money in foreign funds which don't provide information about undistributed income, rolling up income inside them without reporting it, and then cashing out at a higher price.

So by deciding to buy those 6 shares of SPY via your offshore broker, rather than  instead (e.g.) spending the £2k on SPDR S&P 500 UCITS ETF (Irish domiciled and London-listed https://www.morningstar.co.uk/uk/etf/snapshot/snapshot.aspx?id=0P0000VSUZ) which does have UK reporting status, you may be paying 40 or 45% income tax on your gains from that £2k of shares, instead of the more palatable CGT rates. If you use the US vehicle instead of the Irish UCITS vehicle (ticker SPY5 for the dollar share class on the London stock exchange) you are bonkers IMHO.  

I can only trade US listed ETFs with this broker, and the cost of FX exchange and international bank transfer outweighs the 40% or 45% tax on gains for a couple of thousand pounds.

Also your deliberate ignoring of the cash drag effect on your performance seems a bit delusional. If I put £10k into a broking account on 1 Jan 2020 and keep it there idle so that I can opportunistically make a £1000 investment in November 2021 which doubles in value over the next month to 31 December 2021, I have succesfully turned £10,000 into £11,000 over two years which is a 4.9% annualised return. You would probably call it a 100% return in one month (or perhaps annualise it to 400,000% per year if feeling aggressive about how to report it), either of which is well off the reality.

But I'm not doing that. The cash is not for taking opportunities, but for the planned rollover costs. I'd like to pay that cost from my monthly income, but transferring the money every month is going to cost too much. In fact I've bought 6 shares of SPY using the cash, and the remaining is not enough to buy more shares.

bowlhead99

Mr.Saver said:

But I'm not doing that. The cash is not for taking opportunities, but for the planned rollover costs. I'd like to pay that cost from my monthly income, but transferring the money every month is going to cost too much. In fact I've bought 6 shares of SPY using the cash, and the remaining is not enough to buy more shares.

I can only trade US listed ETFs with this broker, and the cost of FX exchange and international bank transfer outweighs the 40% or 45% tax on gains for a couple of thousand pounds. 

Observation - presumably you don't need the couple of thousand tof SPY shares to be sitting at the broker to cover 'rollover costs' just yet, because you have just bought an option with two years to run and you hope it won't need rolling for a while. If the markets are good (as you hope them to be, which is why you are buying leveraged options) you not be looking to roll for another year or more? And if the markets have been good for a year you will have made $200+ on your $2000, so would need to pay $80+ income tax at 40% which is probably more than the cost of just wiring the cash later when it was actually needed.

Username999

Mr.Saver said:

This week marks the start of my investment strategy described here. The strategy in short: buy and hold index tracking ETFs' 2+ years call options where the strike is roughly half of the underlying price. Check the portfolio monthly and re-balance if the leverage is more than 10% off from the target 2:1 ratio, or the option has less than 1 year left before expiry.

This thread is for entertaining the criticisers of my strategy. I'm sure you'd enjoy seeing me losing everything in a market crash. I will track my trading activities and accumulated losses/gains.

I genuinely wish you all the best
 
(do you know what the IV was when you opened the position)

Mr.Saver

bowlhead99 said:

Mr.Saver said:

But I'm not doing that. The cash is not for taking opportunities, but for the planned rollover costs. I'd like to pay that cost from my monthly income, but transferring the money every month is going to cost too much. In fact I've bought 6 shares of SPY using the cash, and the remaining is not enough to buy more shares.

I can only trade US listed ETFs with this broker, and the cost of FX exchange and international bank transfer outweighs the 40% or 45% tax on gains for a couple of thousand pounds. 

Observation - presumably you don't need the couple of thousand tof SPY shares to be sitting at the broker to cover 'rollover costs' just yet, because you have just bought an option with two years to run and you hope it won't need rolling for a while. If the markets are good (as you hope them to be, which is why you are buying leveraged options) you not be looking to roll for another year or more? And if the markets have been good for a year you will have made $200+ on your $2000, so would need to pay $80+ income tax at 40% which is probably more than the cost of just wiring the cash later when it was actually needed.

It takes a few days for the international bank transfer. I would have to transfer a bit more than the cost of 1 option contract to deal with market movements in those days. This will likely result in a few thousands dollars of extra cash if the market didn't move up too much. Comparing keeping them as cash and earn nothing, I'd say earn something and pay tax on the earnings is a better deal.

Mr.Saver

Username999 said:

Mr.Saver said:

This week marks the start of my investment strategy described here. The strategy in short: buy and hold index tracking ETFs' 2+ years call options where the strike is roughly half of the underlying price. Check the portfolio monthly and re-balance if the leverage is more than 10% off from the target 2:1 ratio, or the option has less than 1 year left before expiry.

This thread is for entertaining the criticisers of my strategy. I'm sure you'd enjoy seeing me losing everything in a market crash. I will track my trading activities and accumulated losses/gains.

I genuinely wish you all the best
 
(do you know what the IV was when you opened the position)

I didn't pay too much attention to the IV. I know the IV was at around 30%, but I don't remember the exact %.

fear_of_fear

What a start: losing on tax already.

You'll need an IV drip by the time this is over.

Username999

fear_of_fear said:

You'll need an IV drip by the time this is over.

Can you explain that?