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

bowlhead99

Malthusian said:

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.

Point taken on the car analogy but really it's all still 'modelling' the outcome of your strategy. He (and/or commenters on the threads) had already flagged up that there would be inefficiencies in trying to follow the strategy due to minimum order size / pricing, and some delay and/or reluctance to move regular investment cash or top-up money from his current account due to costs of fx and wire transfers etc. 

Thus he ended up with spare money in the brokerage account "a few thousands dollars of extra cash if the market didn't move up too much", which was to be able to handle rollover costs, although he invested it in the (ungeared) index because it was better than 'keeping in cash and earn nothing'. Obviously with hindsight keeping in cash would have been better than earning negative, because free cash available at the drop of a hat  can ultimately be returns enhancing with a strategy that needs to be able to rollover at good prices, grabbing those opportunities when they arise rather than waiting for maturity of the existing option. However, his view was "The cash is not for taking opportunities, but for the planned rollover costs."  It was not to be an 'active' trading strategy, more some sort of index-following strategy using gearing from options.

A full-on model would have highlighted (albeit with historic numbers which might not be predictive of future events, but would give an idea) not just the percentage value changes of the financial instruments to be used but the potential commitment in £ or $ terms and the amount of cash that will actually be invested or uninvested at a point in time. 

Order sizes and actual cash deployed from time to time is important in any model - because for example it's great if projected returns show a doubling of value but if the opportunity is only available in $2000 increments and you only had $1999 available on that day, you only make 0% from those market conditions instead of 100%; likewise if you are able to deploy as little as $1 into the opportunity and succesfully double it, but literally only have $1 available at short notice to take advantage, you can technically  get that 100% but if it's only $1 of new money that benefits from the return it may only be a 100% return on 0.001% of your portfolio which adds basically nothing to the bottom line.

The translation of theoretical % results to cold hard cash returns (as I mentioned upthread, taking into account the drag factor of idle cash) is just one of the reasons why you would build a model. If you are not going to build a model of potential results you are missing a trick, given you can already see the actual returns of e.g. a 2x leveraged S&P 500 tracker which exist as ETFs to buy off the shelf. To create your own bespoke 'investment product' out of option contracts assuming it to have better results and/or volatility, requires more work. 

This is not to say he won't have long term success from it if he has virtually unlimited new money coming available from employment over the coming decades and it was not all invested at the top of the market like his first slug of cash. But if he does it could arguably be 'more luck than judgement'.

Username999

Mr.Saver said:

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.

 
Kudos for continuing!

MichaelFinance1987

I like this strategy, I would like to set up something similar. I would like to do it with the least possible hassle, may I ask which brokerage account you use?
thanks

coyrls

Even after it's demonstrably failed?

Mr.Saver

MichaelFinance1987 said:

I like this strategy, I would like to set up something similar. I would like to do it with the least possible hassle, may I ask which brokerage account you use?
thanks

My suggestion is, think thoroughly and do your own research before put your money into anything more complicate than an easy access savings account. Think hard, think twice, do your research, and do your research twice, if the investment is leveraged. Because in some cases, you may loss more than the amount you initially invested.

It isn't hard to find brokers outside the EU and also allows EU residents to open an account. But it's a lot harder to sleep on a 60% loss. When S&P 500 went down to 2300, I was sleeping on nearly 60% loss. Will you be able to sleep at night if you were in my position?

Please allow me to repeat the above in £, just in case you haven't made the connection between the number "60%" and the actual money. I invested nearly £15,000 in early February, and only had a bit over £6,000 left in 6 weeks time. I lost nearly £9,000 when the market nosedived. If this was your money, will you panic? Can you still sleep?

coyrls said:

Even after it's demonstrably failed?

Honestly, I don't consider it has failed. I'm still following the plan, I didn't top it up, and I'm not out of the market. I still have own the March 2022 150 CALL, and the market recovery have brought S&P 500 back to 2,900 points. So, for now, no action is needed. All I'm doing is just waiting for further market movements.

MichaelFinance1987

Hi,
I actually have a PhD in Economics and I work in financial services. I am well aware of the risks, I am simply looking for the best brokerage account that lets me trade LEAPS in the UK. Interactive Brokers seems a bit "too pro"
I am wondering if there is an alternative

coyrls

Mr.Saver said:

Honestly, I don't consider it has failed. I'm still following the plan, I didn't top it up, and I'm not out of the market. I still have own the March 2022 150 CALL, and the market recovery have brought S&P 500 back to 2,900 points. So, for now, no action is needed. All I'm doing is just waiting for further market movements.

I thought you weren't able to follow your plan and so in that sense it's already failed.

Mr.Saver

MichaelFinance1987 said:

Hi,
I actually have a PhD in Economics and I work in financial services. I am well aware of the risks, I am simply looking for the best brokerage account that lets me trade LEAPS in the UK. Interactive Brokers seems a bit "too pro"
I am wondering if there is an alternative

Honestly, if the EU regulations don't apply, I'd use Interactive Brokers. But the IB group has a registered company in the UK, and unfortunately all UK residents applying for an account will be directed to the IB UK, where the EU regulation applies, so I, a retail investor, can't trade options on IB.

Most brokers accept UK retail investors and not regulated by the EU regulations are based in US or Canada, but almost all of them will charge international cash deposits and/or withdraws. To find the lowest cost broker, you'd have to take the following into consideration:

• How are you going to fund your brokerage account and exchange the currencies (if applicable)?
  
• How often do you deposit cash?
• How often do you withdraw cash?
• How often do you trade?
• How many shares/contracts do you trade on average?
• What's the estimated value for each trading transaction?

So you really need to do your own research to find the best broker for your situation. I started from a few broker comparison websites, and I'd suggest you to do the same if you need to find one suits you.

coyrls said:

Mr.Saver said:

Honestly, I don't consider it has failed. I'm still following the plan, I didn't top it up, and I'm not out of the market. I still have own the March 2022 150 CALL, and the market recovery have brought S&P 500 back to 2,900 points. So, for now, no action is needed. All I'm doing is just waiting for further market movements.

I thought you weren't able to follow your plan and so in that sense it's already failed.

The plan (in the old post) includes the handling of "not enough cash" situation, which is by either adding cash, delaying the roll, or rolling over to the lowest affordable strike price. I delayed the roll, because I didn't have more cash.

Alexland

Someone wants to use your strategy - does that mean markets are about to crash again?

Mr.Saver

Alexland said:

Someone wants to use your strategy - does that mean markets are about to crash again?

If the past performance is a reliable indicator for the future, then the answer probably is yes. "market timer" did it in 2007, and the market crashed right after that. I did it in February, and the market crashed again right after me. It can't be a coincident.