Is it possible to make >=20% expected geometric mean returns per year with options? Why?

[Timetwister]

2. Participants who develop an intelligent understanding of the conventional market practices like above, and seek to optimize them to enhance their returns. Seems like you've done or started to do this with value investing vs. just holding an index, for example. Other low-hanging fruit to enhance returns without much complexity or advanced study is the strategic use of very slight leverage to increase returns over time while still keeping a near 0% risk of ruin using basic past market statistics, or basic hedging techniques using long-term options in certain ways to slightly elevate the r:r over time of a portfolio.

I have been thinking more about this. The problem that I find is that put options on the kind of value stocks that I buy are both expensive and much less liquid (bid/ask spreads are enormous). In some cases, options don't even exist. So I'm faced with either:

1. Buying value stocks without leverage.
2. "Hedge" with index options.
3. Invest leveraged in indexes.

I don't like the second option because I don't feel safe enough buying let's say ES/SPY puts to hedge an individual stocks portfolio. They are correlated, but not enough to make me feel safe. I don't want to see my stocks plummeting, while being leveraged, while the main index doesn't fall that much. This is even more problematic when investing in non US markets, where I hold less different stocks per country, and therefore the variability in returns between the index and my portfolio is even bigger.

And about the third possibility, I'd be sacrificing expected returns, so unless I use lots of leverage, I don't think it's worth it (being just 2:1 leveraged expected returns aren't that different from simply buying value stocks without leverage). And if I'm using a lot of leverage, I have to be very accurate when valuing put options, so I don't end paying more than the expected return of the underlying until expiration. So for the moment I'm just sticking with 1...

 

[jk90029]

As your capital keeps increasing, then your expected returns diminish, and you finally can't get more than just buying and holding.

I have objection to your opinion "As your capital keeps increasing, then your expected returns diminish".
Please note that if you buy national bond as much as 1K or 100K, then one shall SAME ANNUAL RATE.
NEVER see small amount of 1K to make better profit rate.

 

[Timetwister]

I have objection to your opinion "As your capital keeps increasing, then your expected returns diminish".
Please note that if you buy national bond as much as 1K or 100K, then one shall SAME ANNUAL RATE.
NEVER see small amount of 1K to make better profit rate.

What about investing 1 trillion? How much you can invest without noticeably hurting your expected returns depends on the market you are talking about.

 

[Windlesham1]

To the OP- the answer is yes I do it every year-wanna know how? It'll cost you $1,000,000 but you will of course make it back in a few years.

 

[Timetwister]

To the OP- the answer is yes I do it every year-wanna know how? It'll cost you $1,000,000 but you will of course make it back in a few years.

How much in percentage do you expect to make per year?

I'll try to find a cheaper way to learn, but thanks for your offer.

 

[OptionsMocha]

I think a good stock picker could do 20% a year just buying and holding a handful of stocks listed in the S&P 500. Sure not every year will be 20% due to bear markets, but I think it's possible for a good stock picker to beat the index every year. Be flat in a down market, make 10 or 20% when the market is flat, make 40% when the index makes 30%.

All the talk about expected return, back tests over years of data and thousands of trades, all that is useless noise and will fool you in my opinion.

With respect to back testing, a strategy that can't be verified over the same number of trades it is expected to make in a reasonable amount of time isn't useful. If I need a sample size of 10,000, but make only 200 trades a year, then the 10,000 sample size means nothing. I need a system that is proven to work in a sample size of 200! Not 10,000. what if I get a bad streak of 200 in any given year and run out of capital before I reach 10,000 trades?

With the OPs poker example, he was placing thousands of hands, but for him to do that with options isn't possible, commissions and the spread will be too much to overcome.

I've been studying options for a while, and one thing I do agree with another poster here said was there is a huge lack of good information regarding options on the internet. Too much general info and not enough depth. But given thought, it must be this way, no one is going to share what works, and if they do, it will cease working, so its safe to assume that whatever is easily available, isn't likely to be any better than average index returns.

 

[lawrence-lugar]

I've been studying options for a while, and one thing I do agree with another poster here said was there is a huge lack of good information regarding options on the internet. Too much general info and not enough depth. But given thought, it must be this way, no one is going to share what works,

That's the great thing with options...you control the lever or gear shifter...on where on the Risk vs Reward spectrum you want to lie. think of it...as a plethora of colors.
...with stock, you don't have that luxury, you're just betting up or down -- kind of like gambling.

and you're right...if there is something out there that's working for somebody (well)...of course it won't be public info ops:

 

[Sig]

I think a good stock picker could do 20% a year just buying and holding a handful of stocks listed in the S&P 500. Sure not every year will be 20% due to bear markets, but I think it's possible for a good stock picker to beat the index every year. Be flat in a down market, make 10 or 20% when the market is flat, make 40% when the index makes 30%.

In fact among professional money managers whose records are audited (as opposed to those who post here) there are only a handful, like less than a dozen, who beat the S&P 500 over a 20 year plus time period. From 1976 to 2012, Buffet returned 19% over the risk free rate. These are people who do this for a living all day every day. So if you're better than Buffet then sure, you can do 20% Otherwise not so much.

 

[OptionsMocha]

In fact among professional money managers whose records are audited (as opposed to those who post here) there are only a handful, like less than a dozen, who beat the S&P 500 over a 20 year plus time period. From 1976 to 2012, Buffet returned 19% over the risk free rate. These are people who do this for a living all day every day. So if you're better than Buffet then sure, you can do 20% Otherwise not so much.

Let's add some resolution to my remarks, if one is not managing hundreds of millions, billions and trillions of dollars, it's a lot easier to beat the indexes.

One can spread tens of millions across some good stocks and beat the index. Buffet and other large funds can't do that with billions and trillions of dollars because he must invest in many companies with huge market caps. Any moves he makes will move the markets up and down so it's a lot harder.

Money managers have a lot of other things driving their investment decisions than do individual account owners. Professional fund managers have to get outside investors, maintain and manage ratios produced by academics, stick to a specific fund strategy (value fund, growth fund, emerging markets fund, etc), etc.

Individuals don't have the above restrictions and have a lot more freedom and flexibility.

 

[jk90029]

What about investing 1 trillion? How much you can invest without noticeably hurting your expected returns depends on the market you are talking about.

Of course, your opinion is true for rich man with 1 Trillion and I am sure you are not.

Most person (most ETers) usually begin with a seed of personal cash saving of 10K to 1000K. Also he have roughly 40 years of investing over life.

Let us talk about our average cases, not Gates and Rothschild.
I agree that big fish like Rothschild makes ONLY roughly 5% (annually compounded) to 10% happily, usually in bond market, since there is no other place to invest such big money.