Last year the Dow closed pretty much at breakeven. Thus all your long options during the year were lost. With my plain even if I lose the 36 ES points I am still ahead by 1 % by the end of the year. I told you I was lazy so please provide a SIMPLE plan with using options in a similar way, the goal is again: to outperform the market by a few % with the simplest, less risky way.
Fundmanagers should not beat the market, they should make money. If a fund is down 30% for the year, I doubt there is any thing worth bragging about just because the market was down 35% and you beat it....
That's the point, you use only the portion that allows you to b/e at the end of the year. So even if you lose the total premium you would still b/e. I'm too lazy to go into the numbers. Anyway, if you're really lazy then you would just buy the calls and make sure you get your capital back at the end of the year. That way you don't have to do anything at all, no rolling, no stop losses, no nothing.
Finally a good question, so let's do the math, correct me if I am wrong: Supposing I am using a broker that allows me $3000 overnight margin per contract. Having 16 ctrs, that is 48K as initial margin. Every 1% drop in the S&P would give a loss of 12.5 x $50 x 16 ctrs= 10K dollars. Since I have 100K (10% of AUM) on my futures account, the market can fall as much as 5% before I would get a margin call. That is only negative for the year fall, thus if I already have built in profit, like this year, after the big May drop, that wouldn't be a problem. Maybe the dream should use a stop loss that kicks in at 3%? The point is here, that the fund wouldn't get a margin call that quickly...
If you DID get a margin call, where would you get the money? The rest of the capital is invested in CDs, right? You cannot touch that without getting penalized.
Sure, it is your plan, but you can't present it... The problem with options that the time depreciation is much bigger than with futures. It also depends not just on the move of the market, but also the SPEED of the move. It is quite possible, that the market goes up 5%, but because it went up slowly, you actually didn't make anything or even lost on your long term options. So your outperforming of the market is not guaranteed... Again, if you actually have a plan, please feel free to present. I don't think you will.
I didn't say you would definitely outperform the market, but can have a capital guarantee. Anyway, the plan is very simple. To have 100% capital guarantee, assuming you can get 5% on a CD, is simply investing 95.5% of the money into a CD and then using the other 4.5% to load up on the options. Granted, it's not exactly the same as your plan, but similar. By the way, if outperforming the market was that easy don't you think everybody would be doing this!? There's no free lunch.
I see 3 ways to solve the problem: 1. Use of stop loss, thus after a certain % loss, I have to get out of the position. of course the problem is that 2-3-4 losses can happen in a row. 2. To use a bigger portion for the futures account and smaller portion for the CD. If I put only 80% in CDs, that would give me a flexibility of 15% loss, before I get a margincall, and the returns would be still S&P + 3.6%. 3. To get money out of the CDs, even if I get penalized...
The June 07(almost a year) 125 call on the SPY is trading at 9.50. You could buy 100 of those. That's a hundred thousand shares point for point over 125.