Bull Put Spreads for Beginners

Quote from OptionsOops:

I need to rethink this idea then ;) Next idea is to model purchasing the underlying stock using portfolio margin vs purchasing options (I only recently discovered portfolio margin). I`d be paying margin costs on a portion of the stock position, but this would be offset by the dividends received. Instead of increasing my positions over time by buying stock, selling closer to the money puts might get me the stock I want at a better price plus reduce my margin costs.
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One note of caution here. Whatever seemingly clever way you come up with exploiting option pricing is not exploitable cause it is already priced in the options. In other words, if it seems too good to be true it is. Otherwise, there's nothing wrong with using options to supplement you buy and hold strategy.
 
That's what I thought, it was really bugging me that I couldn't see a flaw in my idea.

Moving on, this portfolio margin system is really interesting.

For example:
Start with $500,000
Buy 400 DIA 120 puts.
Buy 40000 shares of DIA

Pay 6.5% interest on only $444355 margin requirement: $28883
Earn 2% dividend on $5,155,799: $103115

Sounds pretty darn good. The time value decay of the puts would eat most of the dividend income, but I think that could be minimized by buying 2009 puts, and rolling them each year. I could also sell covered calls on say 30-50% of the portfolio like the covered call CEFs do to bring in more income. I wonder if I could buy SPY puts but shares in a covered call CEF. Lots to play with here..
 
What you have is a synthetic call which also accounts for interest.

Let me visualize what you are trying to do.

Imagine a small park that has been in your area for 100 years and is used daily by thousands of people. Today you show up and claim you found a new trail that no one has ever used and is the best way to get through the park which no one has thought of or used....


Quote from OptionsOops:

That's what I thought, it was really bugging me that I couldn't see a flaw in my idea.

Moving on, this portfolio margin system is really interesting.

For example:
Start with $500,000
Buy 400 DIA 120 puts.
Buy 40000 shares of DIA

Pay 6.5% interest on only $444355 margin requirement: $28883
Earn 2% dividend on $5,155,799: $103115

Sounds pretty darn good. The time value decay of the puts would eat most of the dividend income, but I think that could be minimized by buying 2009 puts, and rolling them each year. I could also sell covered calls on say 30-50% of the portfolio like the covered call CEFs do to bring in more income. I wonder if I could buy SPY puts but shares in a covered call CEF. Lots to play with here..
More...
 
Quote from OptionsOops:

That's what I thought, it was really bugging me that I couldn't see a flaw in my idea.

Moving on, this portfolio margin system is really interesting.

For example:
Start with $500,000
Buy 400 DIA 120 puts.
Buy 40000 shares of DIA

Pay 6.5% interest on only $444355 margin requirement: $28883
Earn 2% dividend on $5,155,799: $103115

Sounds pretty darn good. The time value decay of the puts would eat most of the dividend income, but I think that could be minimized by buying 2009 puts, and rolling them each year. I could also sell covered calls on say 30-50% of the portfolio like the covered call CEFs do to bring in more income. I wonder if I could buy SPY puts but shares in a covered call CEF. Lots to play with here..
More...

As I have mentioned above, whatever you can think of is already priced in, as per coach's analogy. The only way to make money trading options, or any other instrument for that matter, is to correctly predict the direction of the price move and/or volatility (in the case of options, as obviously stocks, futures, bonds and etc. don't have a volatility component). Options are also complicated by timing.
 
Serious question, not trying to be rude, but do you have an actual real life analysis of the differences? With portfolio margin being so new, I was not able to come up with much, I figured I`d have to do the calculations myself. My concern with a portfolio that consists solely of calls is being wiped out by a flat or declining market. A put+stock using portfolio margin seems at first glance like it might help with this concern. I would greatly value your ideas on the best way to approach what I`m trying to do.
 
Sart with a celar explanation of what it is you are trying to do and then we can certainly help :).

As of now appears you are trying to gain some sort of advantae of interest on option pricing which is tantamount to saying you know all the market makers are wrong in the pricing and as a retail trader you can arbitrage it slowly. Not going to happen.

So lay out what yuo want to do and there are plenty of us to offer suggestions and guidance.

Quote from OptionsOops:

Serious question, not trying to be rude, but do you have an actual real life analysis of the differences? With portfolio margin being so new, I was not able to come up with much, I figured I`d have to do the calculations myself. My concern with a portfolio that consists solely of calls is being wiped out by a flat or declining market. A put+stock using portfolio margin seems at first glance like it might help with this concern. I would greatly value your ideas on the best way to approach what I`m trying to do.
More...
 
Quote from OptionsOops:

Serious question, not trying to be rude, but do you have an actual real life analysis of the differences? With portfolio margin being so new, I was not able to come up with much, I figured I`d have to do the calculations myself. My concern with a portfolio that consists solely of calls is being wiped out by a flat or declining market. A put+stock using portfolio margin seems at first glance like it might help with this concern. I would greatly value your ideas on the best way to approach what I`m trying to do.
More...

Market makers have been using portfolio margining forever and they are so far ahead of retail traders in terms of interest they receive/pay and the amount of leverage they can use that there's no way you can outplay them in their own game.
 
I want a long term buy and hold style portfolio that is leveraged as much as possible, with a little risk as possible. Yes, I want my cake, and I want to eat it too :)

Ideas so far for achieving this goal:
- Rolling ITM LEAP calls for minimum interest expense but only around 5x leverage
- Rolling OTM LEAP Calls for maximum leverage/speculation
- Buy ITM Bull Put Spreads (rejected)
- Stock Secured/Hedge Loan
- Stock+Put using Portfolio Margin (researching now)

A neat trick I discovered with the portfolio margin is that you can obtain 3.3x leverage on CEFs that do not have options available such as IGR (international real estate). There are no LEAPs available for the closest ETF equivalent (RWX). You can also buy covered call CEFs such as ETW with 3.3 leverage, I don't know yet if you can increase that leverage to 10x by purchasing puts on SPY. After a quick look it would appear that portfolio margin may have advantages over synthetic stock positions for what I`m trying to achieve.
 
Quote from OptionsOops:

I want a long term buy and hold style portfolio that is leveraged as much as possible, with a little risk as possible. Yes, I want my cake, and I want to eat it too :)

Ideas so far for achieving this goal:
- Rolling ITM LEAP calls for minimum interest expense but only around 5x leverage
- Rolling OTM LEAP Calls for maximum leverage/speculation
- Buy ITM Bull Put Spreads (rejected)
- Stock Secured/Hedge Loan
- Stock+Put using Portfolio Margin (researching now)

A neat trick I discovered with the portfolio margin is that you can obtain 3.3x leverage on CEFs that do not have options available such as IGR (international real estate). There are no LEAPs available for the closest ETF equivalent (RWX). You can also buy covered call CEFs such as ETW with 3.3 leverage, I don't know yet if you can increase that leverage to 10x by purchasing puts on SPY. After a quick look it would appear that portfolio margin may have advantages over synthetic stock positions for what I`m trying to achieve.
More...

You cannot achieve that, higher return means higher risk, there's no way around this! Leverage is a double-edged sword!
 
I understand my risk is going to be higher, but I also know that my risk is going to directly depend on which method I choose, which is why I`m evaluating all the tools at my disposal.
 
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