[jj90]

@TheFinalEpic: Unless you actually really want the stock by selling puts, in which case you could just avg in instead, it's almost universally better to sell spreads. There are edge cases(trading vol or skew) that you would sell naked, but 95% of traders and trades selling spreads is just better.

[TheFinalEpic]

(01-09-2017 11:27 PM)jj90 Wrote:  

@TheFinalEpic: Unless you actually really want the stock by selling puts, in which case you could just avg in instead, it's almost universally better to sell spreads. There are edge cases(trading vol or skew) that you would sell naked, but 95% of traders and trades selling spreads is just better.

jj90, that's what I was thinking, thanks man. Although I do see that you could better "adjust" a position with one naked option, but it doesn't make sense for the margin requirement I would be putting up.

[tapthatass]

Selling spreads: Low risk, low reward.

Not for me. It's just way too low.

[TheFinalEpic]

(01-10-2017 01:51 AM)tapthatass Wrote:  

Selling spreads: Low risk, low reward.

Not for me. It's just way too low.

Yes but if you do the math on the margin required, you can make far more by selling spreads (at least in lower value accounts, I can't comment on margin requirements once account value is much higher).

[edlefou]

I want to use a collar to hedge downside risk on a long position.

The net debit is $0.15 for July 2017, so with commissions that's about $630 for 35 contracts.

That's going to be around $1260 for insurance on a mid-five figure investment for one year. I'd like to pay less (zero net cost would be ideal).

Question for the experts: Is that an acceptable net debit or can I find lower? If so, how? If not, what's a better hedging strategy?

I've got a decent theoretical understanding of derivatives, but no practical knowledge (I've lost mid-four figure sums a couple times over the years, so I have't touched them for over a decade).

Thanks gents!

[TheFinalEpic]

Took off my CAT spread today, made 10% return on capital. Looking into some poor man's covered call LEAPs.

[TheFinalEpic]

(01-11-2017 04:05 AM)edlefou Wrote:  

I want to use a collar to hedge downside risk on a long position.

The net debit is $0.15 for July 2017, so with commissions that's about $630 for 35 contracts.

That's going to be around $1260 for insurance on a mid-five figure investment for one year. I'd like to pay less (zero net cost would be ideal).

Question for the experts: Is that an acceptable net debit or can I find lower? If so, how? If not, what's a better hedging strategy?

I've got a decent theoretical understanding of derivatives, but no practical knowledge (I've lost mid-four figure sums a couple times over the years, so I have't touched them for over a decade).

Thanks gents!

You could look at selling a closer to ATM call, however this would cap your upside even more. If not, that's not a bad debit to insure an already winning position.

[jj90]

(01-11-2017 04:05 AM)edlefou Wrote:  

I want to use a collar to hedge downside risk on a long position.

The net debit is $0.15 for July 2017, so with commissions that's about $630 for 35 contracts.

That's going to be around $1260 for insurance on a mid-five figure investment for one year. I'd like to pay less (zero net cost would be ideal).

Question for the experts: Is that an acceptable net debit or can I find lower? If so, how? If not, what's a better hedging strategy?

I've got a decent theoretical understanding of derivatives, but no practical knowledge (I've lost mid-four figure sums a couple times over the years, so I have't touched them for over a decade).

Thanks gents!

Let's take a step back and understand what you are trying to do: You want to hedge a long position. If you are hedging a long position that means you think the market may go down or you wouldn't be hedging.

My question then is: what is your expected return on your position vs the cost of insurance(the collar)? If you expect the stock to appreciate say 10% this year, and the cost to hedge the position is 5% of the market value, then you would obviously only receive 5%. The cost of the collar needs to make sense in order for you to put it on vs the expected return.

Do you receive dividends on that position? If so, factor the dividend yield as a cashflow to buy the hedge. If for example you have a dividend yield of 5% annually, and you can buy puts for 5% for the year, you essentially have a free hedge while keeping the upside open.

Can you get free collars? Sure, but you trade off something in order to layoff risk as TheFinalEpic pointed out. It would be stock upside in this case.

[edlefou]

In this case the strike price is as close to ATM as you can get. The next strike price would be in the money.

$0.15 seems like a decent debit, although I'm wondering if there's an automated way to identify low or zero cost collars instead of manually looking at the option chains.

(01-12-2017 09:32 PM)TheFinalEpic Wrote:  

(01-11-2017 04:05 AM)edlefou Wrote:  

I want to use a collar to hedge downside risk on a long position.

The net debit is $0.15 for July 2017, so with commissions that's about $630 for 35 contracts.

That's going to be around $1260 for insurance on a mid-five figure investment for one year. I'd like to pay less (zero net cost would be ideal).

Question for the experts: Is that an acceptable net debit or can I find lower? If so, how? If not, what's a better hedging strategy?

I've got a decent theoretical understanding of derivatives, but no practical knowledge (I've lost mid-four figure sums a couple times over the years, so I have't touched them for over a decade).

Thanks gents!

You could look at selling a closer to ATM call, however this would cap your upside even more. If not, that's not a bad debit to insure an already winning position.

[edlefou]

(01-12-2017 09:52 PM)jj90 Wrote:  

Let's take a step back and understand what you are trying to do: You want to hedge a long position. If you are hedging a long position that means you think the market may go down or you wouldn't be hedging.

The return comes in the form of a 9-10% dividend yield.

The position is something similar to what iknowexactly is talking about here: a carry trade play to go long on high yield REITs.

The assumption is that in the short-term there won't be big movements up or down, but what if there's a black swan event?

In the long term, prices go up and the strike price on the collar can be adjusted when it's rolled over twice a year.

(01-12-2017 09:52 PM)jj90 Wrote:  

My question then is: what is your expected return on your position vs the cost of insurance(the collar)? If you expect the stock to appreciate say 10% this year, and the cost to hedge the position is 5% of the market value, then you would obviously only receive 5%. The cost of the collar needs to make sense in order for you to put it on vs the expected return.

Net annual yield is 6-7% and the collar reduces that by about 2%.

I'd like to get 6-7% annually, but I'd take 4-5% to sleep easy at night.

(01-12-2017 09:52 PM)jj90 Wrote:  

Can you get free collars? Sure, but you trade off something in order to layoff risk as TheFinalEpic pointed out. It would be stock upside in this case.

The point of interest here is how to systematically identify the best collar spreads for high dividend equities.

For example, I write a script that sifts through all the equities to pick the top 100 highest dividend yielding equities that have option chains. Then I sift all the option chains and pick the top 10 lowest cost or free collars. Then I can calculate the net dividend yield taking into account the cost of the collar and decide whether the yield is worth it.

Is there something out there already that does this?

[Hypno]

thread title is misleading - should really be options trading, not derivatives.

[jj90]

@edlefou: I do what iknowexactly is doing. I have posted about it on the forum if you want to know my thoughts.

There are no free products that I know of, I have used paid products before. If you are interested you can google Optionetics. Not pushing it, just my feedback. You may be able to get a free demo.

Now my 2 cents, is it worth it? If you could find free collars everyday on a REIT that only yielded 2%, would that be worth it? Probably not, throw that money in a 1 yr term deposit. If a collar cost 5% over a yr on a REIT yielding 10%, possibly.

[Omad]

(01-09-2017 03:23 PM)TheFinalEpic Wrote:  

(01-08-2017 11:56 AM)A.S Wrote:  

(01-08-2017 08:07 AM)Chengiz88 Wrote:  

I use to trade CL back in the day 2008-10 was tricky heard now its v tough as the algo's moved into CL and destroyed the human element. Ended up taking a bath on it and had to leave for a while to regroup and attack again

I am a complete newb in trading. What is CL?

Thanks.

Crude Oil.

I've heard mixed advice about selling naked options virus selling a defined risk vertical spread. When I look at margin requirements (at least in my account), it would make more sense to trade multiple spreads instead of selling one naked put for example:

CAT Feb24 90 Put: I'd receive $2.40 credit while putting up $2700 in margin

CAT Feb24 90/89 Bull Put Spread: $0.32 credit with $100 margin, therefore, I could trade 27 contracts to get to the same margin requirement of the single naked option, at a max profit $864 versus $240 for the single option.

Note: this doesn't take into account liquidity/size limits, just an example

Any comments/experiences on this?

A little late but my thoughts on this...

As you mentioned the return on capital is better on the spread but you have a higher probability with the put due to the lower break even, $87.60 v 89.68.

The Theta will come in quicker with the puts which means you can manage the profit sooner and redeploy the capitol. With the longer time spent in spreads compared to naked options a better comparison of the return is to compare the return on capitol per day.

The main reason I prefer naked options is they're easier to manage when the position goes against you, with a spread you've pretty much locked in your loss, properly managing naked options you can usually get them back but it will probably take a few months. I've got a few positions I've been working for close to a year. For me managing losing positions is one of the keys to being profitable.

[TheFinalEpic]

(01-13-2017 01:14 PM)Hypno Wrote:  

thread title is misleading - should really be options trading, not derivatives.

Are options not derivatives? Futures have been mentioned multiple times as well.

[TheFinalEpic]

(01-13-2017 02:03 PM)Omad Wrote:  

(01-09-2017 03:23 PM)TheFinalEpic Wrote:  

(01-08-2017 11:56 AM)A.S Wrote:  

(01-08-2017 08:07 AM)Chengiz88 Wrote:  

I use to trade CL back in the day 2008-10 was tricky heard now its v tough as the algo's moved into CL and destroyed the human element. Ended up taking a bath on it and had to leave for a while to regroup and attack again

I am a complete newb in trading. What is CL?

Thanks.

Crude Oil.

I've heard mixed advice about selling naked options virus selling a defined risk vertical spread. When I look at margin requirements (at least in my account), it would make more sense to trade multiple spreads instead of selling one naked put for example:

CAT Feb24 90 Put: I'd receive $2.40 credit while putting up $2700 in margin

CAT Feb24 90/89 Bull Put Spread: $0.32 credit with $100 margin, therefore, I could trade 27 contracts to get to the same margin requirement of the single naked option, at a max profit $864 versus $240 for the single option.

Note: this doesn't take into account liquidity/size limits, just an example

Any comments/experiences on this?

A little late but my thoughts on this...

As you mentioned the return on capital is better on the spread but you have a higher probability with the put due to the lower break even, $87.60 v 89.68.

The Theta will come in quicker with the puts which means you can manage the profit sooner and redeploy the capitol. With the longer time spent in spreads compared to naked options a better comparison of the return is to compare the return on capitol per day.

The main reason I prefer naked options is they're easier to manage when the position goes against you, with a spread you've pretty much locked in your loss, properly managing naked options you can usually get them back but it will probably take a few months. I've got a few positions I've been working for close to a year. For me managing losing positions is one of the keys to being profitable.

Excellent feedback, the only reason I haven't really traded naked is that I don't have a massive account for the margin (and margin reduction with large accounts). I have however been looking into positions I can manage and alter to mitigate losses (ie. poor man's covered calls/puts)

[Omad]

Yeah smaller accounts create limits.

Ideally you want to be on Portfolio Margin but you need $125k for this.

[Hypno]

(01-13-2017 03:40 PM)TheFinalEpic Wrote:  

(01-13-2017 01:14 PM)Hypno Wrote:  

thread title is misleading - should really be options trading, not derivatives.

Are options not derivatives? Futures have been mentioned multiple times as well.

options are technically derivatives, but only in a technical sense. colloquially they are not derivatives. When the media talks about derivatives, they are not talking about over the counter call options.

The ISDA governs derivatives, which are large contracts generally between sophisticated parties. If you saw the film The Big Short, there was a whole scene about the garage hedge fund "getting their ISDA."

I'm not trying to be the grammar police. Rather, options trading done right is accessible and beneficial to a much broader group of investors than big-contract derivatives.

[TheFinalEpic]

(01-13-2017 04:57 PM)Hypno Wrote:  

(01-13-2017 03:40 PM)TheFinalEpic Wrote:  

(01-13-2017 01:14 PM)Hypno Wrote:  

thread title is misleading - should really be options trading, not derivatives.

Are options not derivatives? Futures have been mentioned multiple times as well.

options are technically derivatives, but only in a technical sense. colloquially they are not derivatives. When the media talks about derivatives, they are not talking about over the counter call options.

The ISDA governs derivatives, which are large contracts generally between sophisticated parties. If you saw the film The Big Short, there was a whole scene about the garage hedge fund "getting their ISDA."

I'm not trying to be the grammar police. Rather, options trading done right is accessible and beneficial to a much broader group of investors than big-contract derivatives.

Here's the thing, most of us are not institutional investors with a billion dollars under control. The derivatives a retail investor can trade are options and futures; if there are other things to trade, I'd love to hear about them!

[edlefou]

(01-13-2017 01:44 PM)jj90 Wrote:  

@edlefou: I do what iknowexactly is doing. I have posted about it on the forum if you want to know my thoughts.

I re-read your posts here and here.

Question: How many different REITs do you hold, or is it all in one? How long have you had them and how much has the price of the underlying changed?

(01-13-2017 01:44 PM)jj90 Wrote:  

If a collar cost 5% over a yr on a REIT yielding 10%, possibly.

It looks like you're not hedging. Now I'm thinking twice about sacrificing 2% of the yield to buy the collar. Did you ever consider a collar to eliminate the downside?

[jj90]

@edlefou: I have 4 REITs in the portfolio. I've had them since March 2016. The price change was usually +- 10% on each REIT.

Yes I had considered hedging but decided against it. For my situation it didn't make sense based on my macro outlook, picks of REITs and portfolio sizing. If you have all your net worth in 1 REIT I'd suggest buying the collar obviously.

[edlefou]

(01-14-2017 01:33 PM)jj90 Wrote:  

@edlefou: I have 4 REITs in the portfolio. I've had them since March 2016. The price change was usually +- 10% on each REIT.

Yes I had considered hedging but decided against it. For my situation it didn't make sense based on my macro outlook, picks of REITs and portfolio sizing. If you have all your net worth in 1 REIT I'd suggest buying the collar obviously.

My REIT carry trade experiment will not be a significant chunk of my net worth and I don't plan to put it all in 1 REIT, although if the sector tanks then diversification won't matter.

If I can find a low or zero cost collar I'll take it, but otherwise I'll just set alerts/stop-losses.

Do you DRIP or take the distributions in cash?

Maybe we should make a separate REIT Carry Trade thread/datasheet instead of derailing this thread?

[TheFinalEpic]

XOM reverse iron condor: Got exercised on the 91 Puts, own 100 shares, and am exercising the 90 puts I own. Calls are trading almost worthless, trade is looking good, will see if I can close it out earlier than Friday for max profit, if not, may just cut the calls today.

Opened a LEAPs MSFT Poor Man's Covered Call today. Bought the 52.5 Jan 18' Calls, sold Feb 17' 62.5 Calls at a debit of $1000. Will manage this trade over the course of the next 6 months, and look to pull in a monthly premium around $1 depending on if the stock gets up to 62.5 (which is likely), and I can close at max profit in a much shorter time.

Markets are trading slightly lower, I opened up bear spreads in TLT, SPY, DIA, IWM, and XOP last week.

I also bought the "1000 page bible on options trading": Options As A Strategic Investment by Macmillan for $7 on Amazon this weekend. Looking forward to having a big ass book on the subject.

[TheFinalEpic]

Went Long VXX today as I see a small contraction coming in the market after Trump takes hold. Sold the 25 Feb 17' Calls, Bought the 22's.

Will sell at 50% gain, as it might not make it all the way to 25.

[jj90]

@edlefou: I take the distributions in cash. Maybe 1 day I or some others will write up a REIT datasheet.

@TheFinalEpic: I'm long the VIX March/July VIX futures spread. I'd like to think it's a pretty cheap hedge against my portfolio.

[Chengiz88]

RE: Raising money to trade -

Am meeting principle partners of a Hedge Fund, hopefully you see your boy C88 on the front cover of the FT soon.

#getrichordietryin