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

Mr.Saver

The market has gone down further, and as I had expected, I no longer have enough cash available to roll it over to a lower strike. So, I will proceed as planned - delay the roll over, until either one of the following three events:

• I have got enough cash to roll it
• The market has recovered
• The option is about to expire

My feeling is the first two are more likely than the 3rd. But we will see.

Sorcerer2018

So three weeks in and you have wiped out. Ouch.

Malthusian

(it's far too early to say I told you so, but, well)

Thrugelmir

Mr.Saver said:

The market has gone down further, and as I had expected, I no longer have enough cash available to roll it over to a lower strike. So, I will proceed as planned - delay the roll over, until either one of the following three events:

• I have got enough cash to roll it
• The market has recovered
• The option is about to expire

My feeling is the first two are more likely than the 3rd. But we will see.

Hence the saying " The market can remain irrational longer than you can stay solvent".

Alexland

Can I also echo Malthusian's restraint in not reminding you that I also said this was a bad idea in message 3 of your previous sanity check thread. Still if you have enjoyed yourself... but hope it wasn't too expensive.

Alexland said:
"So the S&P went up 30% last year, analysts are flagging increased valuations mean lower future return expectations, global growth seems to be slowing... and you want to take out a new leveraged position using complicated financial engineering?

I don't see the attraction of investing anything more than a normal monthly pension or isa contribution right now."

Mr.Saver

Oops, an unplanned event just happened.

Today I saw an opportunity to rebalance when the price difference between the 155 and 145 strikes were very small. I placed a spread order, but it didn't get filled after nearly an hour, and the price gap between them was widened. In a rush, I decided to cancel the spread order, and submit two separate orders - one to sell the 155 strike, and another to buy the 145. The sell order got filled quick enough, but the buy order didn't, and then the S&P 500 went up. Now I'm sitting on a bit over $12,800 of cash, and thinking of my next move.

Lesson learned: when rolling the options, never use separate orders.

Username999

Sell to Open 145 PUT ?
Walk away?

Malthusian

So if I'm following correctly, you started with $18,926 on 13-Feb and now have $12,800 in cash, a 32% loss. The strategy is therefore working perfectly so far as I believe you were targeting 200% exposure and you have made almost exactly twice as big a loss as the S&P 500.

However you are now stuck because you don't have enough cash to afford a single option of the kind your strategy dictates.

Is a 16% fall in the S&P 500 really all that was needed to derail your strategy due to leaving you with insufficient cash to afford the options required? Did you not check beforehand how much a single S&P 500 option cost? (Genuine questions out of genuine interest, not hectoring.)

bowlhead99

Malthusian said:

So if I'm following correctly, you started with $18,926 on 13-Feb and now have $12,800 in cash, a 32% loss. The strategy is therefore working perfectly so far as I believe you were targeting 200% exposure and you have made almost exactly twice as big a loss as the S&P 500.

However you are now stuck because you don't have enough cash to afford a single option of the kind your strategy dictates.

Is a 16% fall in the S&P 500 really all that was needed to derail your strategy due to leaving you with insufficient cash to afford the options required? Did you not check beforehand how much a single S&P 500 option cost? (Genuine questions out of genuine interest, not hectoring.)

If you had been hectoring you might have gone back to the 'sanity check' thread from before he started and quoted this bit:

Mr.Saver said:

under_western_skies wrote: »

But really, you need to be modelling how your trade plan would have performed with historic data (as well as attempting to make some allowances for how the future won't exactly resemble the past).

I could do the modelling, but I didn't do it, because I don't have much faith in financial modelling. Changing a few parameters can make a completely different outcome, and many of them (future inflation rate, interest rate, etc.) are predictions and expectations rather than facts. I'm pretty sure most fund managers have done their modelling, but did this prevent them from losing money? I don't think so.

Malthusian

Well I could, but I don't classify checking the minimum stake for the options required for the strategy, and whether I can afford it, including after the kind of short-term loss that is not just possible but deliberately invited through the use of leverage, as "modelling". Modelling to me is the process of running simulations of the strategy using past performance data (which is no guide etc etc, but it's all we've got) using various starting points and time periods.

Checking that it is actually possible to implement the strategy at all comes before that.

As an analogy, let's say I posted that I'd bet a friend $20,000 that I can drive from Bristol to Newcastle in four hours. People would say "have you tried driving to Newcastle before, or have you checked Google Maps to see whether it's feasible" and I would reply "No, I can't be bothered".

Then I post a thread where I say "hay guys, I just realised I don't actually own a car".