A strategy I read about

DayamiMoon said:
Here's an example to illustrate how this strategy might work in practice: Suppose the SPY is currently trading at $400. According to the strategy, you'd look for a DITM call option with a delta close to one and a target strike price at about 60% of SPY's price, which would be around $240 in this case. Let's say you find a one-year DITM call option meeting these criteria, with a premium of $165. This puts your total cost (strike price plus premium) at $405, which is just above SPY's current trading price, fitting within the strategy's guidelines. If SPY's price increases to $450, the value of your call option would also rise, closely mirroring the stock's price movement thanks to its delta of one. Before the option nears its expiration, you would ""roll up"" to lock in gains and ""roll out"" to extend the duration by purchasing a new one-year DITM call option, continuing to ride the upward trend of SPY. In contrast, if the market turns bearish and SPY drops significantly, you'd switch gears and apply the strategy using DITM put options to profit from the downturn, following the specified indicators and moving averages for entry and exit points.
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The OP said he read this in a book.
Anybody know in which book this is written about?
 
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DayamiMoon said:
Here's an example to illustrate how this strategy might work in practice: Suppose the SPY is currently trading at $400. According to the strategy, you'd look for a DITM call option with a delta close to one and a target strike price at about 60% of SPY's price, which would be around $240 in this case. Let's say you find a one-year DITM call option meeting these criteria, with a premium of $165. This puts your total cost (strike price plus premium) at $405, which is just above SPY's current trading price, fitting within the strategy's guidelines. If SPY's price increases to $450, the value of your call option would also rise, closely mirroring the stock's price movement thanks to its delta of one. Before the option nears its expiration, you would ""roll up"" to lock in gains and ""roll out"" to extend the duration by purchasing a new one-year DITM call option, continuing to ride the upward trend of SPY. In contrast, if the market turns bearish and SPY drops significantly, you'd switch gears and apply the strategy using DITM put options to profit from the downturn, following the specified indicators and moving averages for entry and exit points.
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But are you aware of the fact that the $165 premium for strike 240 would mean a Delta of about 0.9361, not 1 ? And it has an IV of 38.3747. You better should check your numbers in an options calculator like this:
https://optioncreator.com/options-calculator

Here are the historical ATM statistics of SPY (site requires registration).
So, maybe strike 165 can have an IV of 38 (due to VolatilitySmile), but as shown it's not Delta 1.
For Delta 1 SPY would need to have an IV > 600 :), which is very very unrealistic.
But OTOH if such a Delta of "only" 0.93 is sufficient, then the strategy is maybe not bad :)
I haven't tested this scenario yet, but it indeed could be interesting.

SPY_HV_and_HIV.png
 
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The above analysis was done with a risk-free rate 0%.

Using a risk-free rate of 2.1% for the said strike 240 makes its Delta almost 1 (0.993), and this then means an IV of 17.0.
The calculators I tried give an error when entering a risk-free rate > 2.1% as then IV becomes negative :).
So, this new analysis by also recognising the risk-free rate indicates that the strategy is indeed realistic and can function... :)

It invalidates also my old analysis which too was done with only a risk-free rate of 0%.
So we see how much the risk-free interest rate can have an impact on the results... :)
 
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Leverage: Leveraging Up and In Options for Enhanced Returns' - That's the book name. I found it online from the quotes the OP shared. I dunno who is the author, but I think you can download it online.
 
shMark said:
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.
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Do you remember what the title of the book was, or any link that describes/analyses the strategy in some more detail?
 
I think it's just an article or a piece of a book that has never been published.
As I see from your discussion and the calculator you've shared here, those sources can't be counted as trustworthy.
Well, the saddest thing is that even when you sign up for a class, tutors share papers like this, where you never know the title or the author's name. Besides, they usually support it by saying, 'I just printed it out for you. The most important part is you don't need to read the whole BOOK.'
I found this link just by taking a quote from the OP's post, leading me to this link.
 
Quanto said:
Do you remember what the title of the book was, or any link that describes/analyses the strategy in some more detail?
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Sure. There were two. I am reading another book with a similar strategy, but here are the two. One of them is free.



 
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