I wanted to share a strategy I read about. Leveraging Options for Enhanced Returns: A Strategic Overview In the realm of investment strategies, a particularly intriguing approach involves the use of options to potentially amplify returns compared to directly investing in the SPDR S&P 500 ETF Trust (SPY). This method, which we might have touched upon briefly, warrants a deeper exploration for its innovative use of Deep In-The-Money (DITM) call options. The Core Strategy with Call Options Rather than purchasing SPY shares outright, this strategy advocates for buying a one-year DITM call option on SPY. Key to this approach is selecting an option with a delta of one, ensuring that for every $1.00 movement in SPY, the option's value also adjusts by approximately $1.00. The target strike price is about 60% of SPY's current share price, with the aggregate cost (strike price plus premium) ideally less than 1% above SPY's trading price, minimizing the time value. Entry and exit points are dictated by moving averages: enter when the 10-day moving average exceeds the 200-day moving average, and exit upon the reverse. As SPY appreciates, the strategy involves "rolling up" the option to capture gains, and "rolling out" to a new one-year option around 30 days before expiration. This maneuver aims to leverage market upswings, potentially tripling the returns of SPY. Adapting to Market Downturns with Put Options The strategy extends to bear markets, triggered when SPY declines by 20% from its peak, reflecting a shift to more defensive trading postures. Here, the focus shifts to DITM six-month put options on SPY, mirroring the call option strategy but inverted for bearish conditions. The entry signal is a MACD histogram below -0.5, with an exit signal above 0.5. Re-entry criteria include the 10-day moving average trailing the 20-day, alongside a MACD histogram below -0.5, the market being 20% or more below its high, and spy being below the 200 day SMA. 10-day moving average trailing the 20-day ensure responsiveness to bear market volatility. Risk Management and Potential Outcomes While the strategy is designed to magnify gains, it's not without risks, including the possibility of being "whipsawed" by rapid market reversals. However, the structured entry and exit signals, combined with strategic rolling of options, aim to mitigate these risks, potentially leading to significant gains over losses, as suggested by the referenced strategy. This dual-faceted approach, integrating both call and put options based on market conditions, embodies a sophisticated strategy to navigate and capitalize on market dynamics. As with all investment strategies, due diligence and a clear understanding of associated risks are paramount. Thoughts appreciated.
say hello to my little friend gpt 4.0 Your outlined strategy for leveraging options to enhance returns is both sophisticated and intriguing. It employs a tactical approach to trading that capitalizes on the inherent leverage of options, both in bull and bear markets. Let's delve into some of the key components and considerations of this strategy. Strategic Use of DITM Call Options The core of this strategy lies in buying Deep In-The-Money (DITM) call options on SPY with a delta close to one. This choice ensures that the option moves almost dollar for dollar with the SPY, but requires less capital upfront compared to buying SPY shares directly. The selection of a 60% strike price of SPY's current share price as a target is a critical aspect, as it seeks to optimize the balance between cost and responsiveness to SPY's price movements. Considerations: Delta Selection: Choosing a delta of one is crucial. It ensures the option's price movement is closely aligned with SPY, maximizing the strategy's effectiveness in capturing gains. Rolling Options: The tactic of rolling up and out helps lock in gains and maintain a favorable position expiration. However, it requires active management and timing precision to maximize benefits. Adaptation to Bear Markets with Put Options Shifting to DITM put options during bear markets is a strategic pivot that mirrors the bullish strategy but for declining markets. This defensive stance is not only about capital preservation but also about capitalizing on downward movements. Considerations: Market Entry and Exit Signals: The use of MACD and moving averages as indicators for entry and exit points is pivotal. It adds a layer of technical analysis to guide decisions amidst market volatility. Risk of Rapid Reversals: Market downturns can be volatile, with sharp reversals. While the strategy aims to capitalize on bear markets, it's vital to be wary of potential rapid changes that could erode gains or exacerbate losses. Risk Management A pivotal aspect of this strategy is its built-in risk management through structured entry and exit points. However, the reliance on technical indicators and the inherent risks of trading options (such as the total loss of premiums paid) necessitate a disciplined approach and continuous monitoring. Considerations: Market Conditions: The strategy's success hinges on accurately reading market conditions and timely execution of trades. Misreading signals or delays in execution can significantly impact performance. Costs and Execution Risks: Regularly rolling options involves transaction costs and slippage risks, which could erode gains over time. Potential Outcomes The strategy's goal of magnifying gains through leveraged positions in both bull and bear markets is ambitious. If executed with precision, it has the potential to outperform direct investments in SPY. However, the complexities and risks associated with options trading, including the potential for significant losses, underscore the importance of experience, risk tolerance, and active management. Conclusion This options strategy presents a nuanced approach to market investment, leveraging the flexibility and leverage inherent in options. While its potential for enhanced returns is compelling, it demands a deep understanding of options trading, strict risk management, and an active engagement with market conditions. As with any investment strategy, individual investors should consider their financial situation, risk tolerance, and investment objectives before embarking on such a strategy. ;}
My feeling is that it has potential. Another way to do it, is just to own ditm calls on brk.b when it's P/B is <= 1.3, and sell the option and buy BRK.B when its p/b is >= to 1.5. At a p/b of 2, perhaps get out of BRK.B.
I just buy weekly ATM SPY & QQQ calls and just roll up or down based on the ETF. In the current VIX environment you get 60:1 on SPY and about 30:1 on QQQ. My IRA portfolio is 5% options 35% stocks/ETFs and 60% fixed income (mainly junk bonds, CLOs & floating rate loans).
@shMark, just show me a real strike with delta=1 for DTE=365+. I'll take it immediately (if the price is fair, of course) Is your said/cited/quoted strategy just theoretical or has it been applied in practice at least once? Have you tested it yourself?
Let's say SPY is 500, the strike 60% ITM of it is then 500 * (1 - 0.60) = 200. Let's take the 2025-Jan options (DTE=324) for about the said "1 year". At YahooFinance the IV for strike 200 is about 63 But for Delta=0.999 one needs an IV of at least 625 People should stop talking BS Code: find_IV_for_Delta fCall=1 Delta=0.999 S=500.0000 K=200.00 DTE=324.00 IVstart=10.00 IVend=1000.00 IVstep=5.00 rPct=0.00 qPct=0.00 fFound=1 cSteps=124 IV=625.00 DeltaX=0.999 S=500.0000 DTE=324.00 K=200.00 IV=625.00 rPct=0.00 qPct=0.00 C=498.986702 rawC=498.986702 Delta=0.999032 Vega=0.015396 Gamma=0.000001 Theta=-0.014849 Rho=0.004698 P=198.986702 rawP=198.986702 Delta=-0.000968 Vega=0.015396 Gamma=0.000001 Theta=-0.014849 Rho=-1.770644 p1=0.999032 p2=0.002646 Or if one says K = 500 * 0.6 = 300, then the IV has to be at least 640 (real IV for K=300 is about 48 ) : Code: find_IV_for_Delta fCall=1 Delta=0.999 S=500.0000 K=300.00 DTE=324.00 IVstart=10.00 IVend=1000.00 IVstep=5.00 rPct=0.00 qPct=0.00 fFound=1 cSteps=127 IV=640.00 DeltaX=0.999 S=500.0000 DTE=324.00 K=300.00 IV=640.00 rPct=0.00 qPct=0.00 C=499.007500 rawC=499.007500 Delta=0.999031 Vega=0.015407 Gamma=0.000001 Theta=-0.015216 Rho=0.004510 P=299.007500 rawP=299.007500 Delta=-0.000969 Vega=0.015407 Gamma=0.000001 Theta=-0.015216 Rho=-2.658503 p1=0.999031 p2=0.001694 These IVs are gigantic, ie. not real for SPY, nor for such big DTEs like 1 year. Btw, if you believe the IV for 200 has to be higher than for 300 then you are mistaken, b/c we have fixed the Delta to 0.999
As I stated, I read about it in a book. However, I know 2 people who have used a similar strategy with BRK.B. The one who started the strategy, earned 24.5% a year over 20 years using BRK.B, with an entry price of 1.3 p/b and an exit price of 1.5 p/b. When he sold the call, he would use the money to buy brk.b shares.
That's a fascinating strategy you've stumbled upon, shMark! Leveraging Deep In-The-Money (DITM) call options to potentially enhance returns is indeed an innovative approach. It offers an interesting blend of leveraging the potential upside of the SPDR S&P 500 ETF Trust (SPY) while mitigating some of the risks and capital outlay associated with directly purchasing shares. The focus on options with a delta of one is particularly clever, as it aims to closely mimic the price movement of SPY shares, providing a near 1:1 exposure to price changes.
Can you give an example of SPY strike that has Delta 1 ? The OP said for DTE=1y, but as the above analysis shows, its an unrealistic assumption, b/c practically impossible to find such a Delta=1 trade. IMO. But maybe you have more luck in finding a way. Let's know.