Liquid options with low spread

[statist]

LOL, where is Overnight? ... the Stranger said that one should be opening both legs... in Panama... "The Dude abides"

For the contemplated 2 weeks' short options the"flat" stuff happens (equally in ITM or OTM)
in a relatively "narrow" range, practically unusable for the purpose (Δ immaterial over the relatively small range where the "diagonals" add up to a constant).

Beyond that, one is FKeD big time, whatever direction


View attachment 300268

(I understand the intention may be to keep "rolling" that continuously. But there are probably better ways to use time and $$$.)

PANAMA

Selling Call Option SPX Strike 2000
Selling PUT Option SPX Strike 6000

Market moves 2% Down

BUY/CLOSE SPX PUT (Profit realised)
2 secs later OPEN SELL SPX PUT

Market moves 2% UP

BUY/CLOSE SPX CALL (Profit realised)
2 sec later OPEN SELL SPX CALL

TAX JURISDICTION

BUY CLOSE Put and CALL

No rolling over needed if options run long enough (2weeks to 4 months)

Now back to my original question what underlying should I use? I could use Apple or SPX or something else I really do not care about the underlying as long as it is not something like AMC where you can get burnt either war by market swings of 200%. I must not be exercised or everything goes up in smoke (tax and risk wise) so that is paramount is selection the underlying.

Am I missing something trading related? Trust me the tax side is covered.

I am aware that I have a huge problem if SPX goes over 6000 or under 2000. Maybe I go even lower with 1000 strike in case of nuclear war in Ukraine. Gap risk when realizing the profit and not having the opposing trade in place (2secs). Any other risks?

Much obliged!

Thanks!

 

[newwurldmn]

What if the market keeps selling off while you are hanging out in Panama?

You know have substantial gains in panama and a massive unrealized loss.

PANAMA

Selling Call Option SPX Strike 2000
Selling PUT Option SPX Strike 6000

Market moves 2% Down

BUY/CLOSE SPX PUT (Profit realised)
2 secs later OPEN SELL SPX PUT

Market moves 2% UP

BUY/CLOSE SPX CALL (Profit realised)
2 sec later OPEN SELL SPX CALL

TAX JURISDICTION

BUY CLOSE Put and CALL

No rolling over needed if options run long enough (2weeks to 4 months)

Now back to my original question what underlying should I use? I could use Apple or SPX or something else I really do not care about the underlying as long as it is not something like AMC where you can get burnt either war by market swings of 200%. I must not be exercised or everything goes up in smoke (tax and risk wise) so that is paramount is selection the underlying.

Am I missing something trading related? Trust me the tax side is covered.

I am aware that I have a huge problem if SPX goes over 6000 or under 2000. Maybe I go even lower with 1000 strike in case of nuclear war in Ukraine. Gap risk when realizing the profit and not having the opposing trade in place (2secs). Any other risks?

Much obliged!

Thanks!

 

[statist]

What if the market keeps selling off while you are hanging out in Panama?

You know have substantial gains in panama and a massive unrealized loss.

If I am not mistaken my sold call option increases in value the same amount my sold put option decreases whereever I am. Portfolio value stays flat IMHO pls correct if I am wrong here (Time value should be in my favour and should be low anyway as options are deep in the money). The value of the single legs will change but that is what I want to achieve.

My original question was what underlying is recommendable? I am looking for an option where I will not be exercised either because it is an european option or where the time value of the option is so high that I will not exercised (if I will, so be it as I have made a nice profit then) Thanks!

 

[newwurldmn]

If I am not mistaken my sold call option increases in value the same amount my sold put option decreases whereever I am. Portfolio value stays flat IMHO pls correct if I am wrong here (Time value should be in my favour and should be low anyway as options are deep in the money). The value of the single legs will change but that is what I want to achieve.

My original question was what underlying is recommendable? I am looking for an option where I will not be exercised either because it is an european option or where the time value of the option is so high that I will not exercised (if I will, so be it as I have made a nice profit then) Thanks!

I think a viable solution has been given.

how have you structured these for other clients?

i read a bit about perpetual travelers. There’s little on capital gains treatment.

 

[fullautotrading]

PANAMA

Selling Call Option SPX Strike 2000
Selling PUT Option SPX Strike 6000

Market moves 2% Down

BUY/CLOSE SPX PUT (Profit realised)
2 secs later OPEN SELL SPX PUT

Market moves 2% UP

BUY/CLOSE SPX CALL (Profit realised)
2 sec later OPEN SELL SPX CALL

TAX JURISDICTION

BUY CLOSE Put and CALL

No rolling over needed if options run long enough (2weeks to 4 months)

Now back to my original question what underlying should I use? I could use Apple or SPX or something else I really do not care about the underlying as long as it is not something like AMC where you can get burnt either war by market swings of 200%. I must not be exercised or everything goes up in smoke (tax and risk wise) so that is paramount is selection the underlying.

Am I missing something trading related? Trust me the tax side is covered.

I am aware that I have a huge problem if SPX goes over 6000 or under 2000. Maybe I go even lower with 1000 strike in case of nuclear war in Ukraine. Gap risk when realizing the profit and not having the opposing trade in place (2secs). Any other risks?

Much obliged!

Thanks!

Well, frankly, I have difficulty making sense of what I read.

It may be in part related to the fact that this is not my native language.

I will answer only a few things that I understood (about 40% of the post, and nothing of the "logic"), while for the rest, I collect below what I have not grasped.

So far I have understood you are working on some (legal) trading scheme for tax reduction which involves 2 accounting places. One "tax jurisdiction" (where you need to pay taxes) and, say, "Panama".

The general idea should be that there will be "created" apparent losses in the "tax jurisdiction", while they are compensated (for the same individual) by corresponding profits in another place, say "Panama".

So - ideally - the trading activity should give zero PnL overall, while the "losses" which will appear in the "tax jurisdiction" are, then, used to reduce the taxes paid by the individual, on profits coming from other activities.

right so far?

> I must not be exercised or everything goes up in smoke (tax and risk wise)
SPX is cash-settled. No early exercise:
https://www.tastytrade.com/definitions/cash-settled#:~:text=The SPX index is cash,this index expires to cash.

[It would also be good to know why it is necessary, for the scheme to work, the use of the short options alone (which seems mandatory from what I read above), and not other instruments. How are the trades accounted for: are you using only the realized? What is the "lot-matching" method, are you using fifo, specific lot ?
https://guides.interactivebrokers.com/ibto/ibto/lotmatchingmethods.htm]

> Any other risks?
The overall "cost" of the options structure (the max final payoff of each strangle is going to be negative of a few Ks, like around -5K). Spread. Liquidity issues, scattered quotes, difficulty of execution in case of deep ITM (may resort to using futures + OTM option for remaining delta 100, using put-call parity, but it becomes a mess).

[In practice, not viable at all IMHO with ITM options: in case, if it makes sense, might consider OTM for easier execution, lower margins, and smaller spread. In any case, it may be often difficult to sell at extreme distances from the current underlying price: you will need to reduce the "flat" range of your payoff.]

Possibly flawed "logic": I have not clearly understood the idea so far.

Also, $$$ is tied in high margins (which are also continuously varying with the underlying price and, possibly, broker policy changes). Almost $70-80K just to maintain the strangle.
https://sensainvestments.com/options-margin-requirements/

_________________________________

what I did not understand:

Are we talking about 1 or 2 accounts? Are the 2 options both in 1 account? Or 1 leg in each of 2 distinct accounts, or 2 legs replicated in 2 accounts? Are the trades separated in time or space? What is the timing and place of the trades? Is the trading individual stationary in one place, or moving from one jurisdiction to another in time during the trading activity? What is the accounting method and order matching criterion?
(In general, I am not getting the "logic" and mechanism and why it should work)

>Market moves 2% Down
>BUY/CLOSE SPX PUT (Profit realised)

What profit? If the underlying price goes down you get a loss on the short put. Also, in any case, why are you talking of "realised profits"? Was it not the goal to realize losses in the "tax jurisdiction"?

> BUY CLOSE Put and CALL
When/where? are we talking of the same time? Same account?

> No rolling over needed if options run long enough (2 weeks to 4 months)
?

You need to provide a practical example with all details (with timestamps and places of executions and detailed accounting methods and order matching), or else it remains not really understandable. (In any case, as trading is concerned, IMHO it is not going to be practically viable with those far-away ITM options.)


This is what the, temporally closest (expiry: 20230316), SPX CALL 2000 (50% itm) looks like at this time of the day (9.42ET): around $250-280 (or more) spread, and about $39.8K margins for 1 short (double for the short strangle):

SPX OPT 20230316 2000 C CBOE S&P 500 Stock Index [SPX 230317C02000000, 531885043, mult: 100]

Venturing to work with this "monster", is probably asking for it

(Especially while there are other more comfortable ways to print $$$, and pay as little tax as possible, with negligible risk.)

 

[newwurldmn]

It’s clear what he’s trying to do economically. He’s going to trade the legs to creat realized losses and realized gains at specific points in time.

This stuff is quoted 30 points wide but he will trade within a point of fair value (since he’s in the industry I assume he knows how to calculate fair value).

It’s not clear how this will work. I think his client is himself.
I couldn’t find any white papers from any accounting firms on this scheme.

Well, frankly, I have difficulty making sense of what I read.

It may be in part related to the fact that this is not my native language.

I will answer only a few things that I understood (about 40% of the post, and nothing of the "logic"), while for the rest, I collect below what I have not grasped.

So far I have understood you are working on some (legal) trading scheme for tax reduction which involves 2 accounting places. One "tax jurisdiction" (where you need to pay taxes) and, say, "Panama".

The general idea should be that there will be "created" apparent losses in the "tax jurisdiction", while they are compensated (for the same individual) by corresponding profits in another place, say "Panama".

So - ideally - the trading activity should give zero PnL overall, while the "losses" which will appear in the "tax jurisdiction" are, then, used to reduce the taxes paid by the individual, on profits coming from other activities.

right so far?

> I must not be exercised or everything goes up in smoke (tax and risk wise)
SPX is cash-settled. No early exercise:
https://www.tastytrade.com/definitions/cash-settled#:~:text=The SPX index is cash,this index expires to cash.

[It would also be good to know why it is necessary, for the scheme to work, the use of the short options alone (which seems mandatory from what I read above), and not other instruments. How are the trades accounted for: are you using only the realized? What is the "lot-matching" method, are you using fifo, specific lot ?
https://guides.interactivebrokers.com/ibto/ibto/lotmatchingmethods.htm]

> Any other risks?
The overall "cost" of the options structure (the max final payoff of each strangle is going to be negative of a few Ks, like around -5K). Spread. Liquidity issues, scattered quotes, difficulty of execution in case of deep ITM (may resort to using futures + OTM option for remaining delta 100 - delta, using put-call parity, but it becomes a mess).

[In practice, not viable at all IMHO with ITM options: in case, if it makes sense, might consider OTM for easier execution, lower margins, and smaller spread. In any case, it may be often difficult to sell at extreme distances from the current underlying price: you will need to reduce the "flat" range of your payoff.]

Possibly flawed "logic": I have not clearly understood the idea so far.

Also, $$$ is tied in high margins (which are also continuously varying with the underlying price and, possibly, broker policy changes). Almost $70-80K just to maintain the strangle.
https://sensainvestments.com/options-margin-requirements/

_________________________________

what I did not understand:

Are we talking about 1 or 2 accounts? Are the 2 options both in 1 account? Or 1 leg in each of 2 distinct accounts, or 2 legs replicated in 2 accounts? Are the trades separated in time or space? What is the timing and place of the trades? Is the trading individual stationary in one place, or moving from one jurisdiction to another in time during the trading activity? What is the accounting method and order matching criterion?
(In general, I am not getting the "logic" and mechanism and why it should work)

>Market moves 2% Down
>BUY/CLOSE SPX PUT (Profit realised)

What profit? If the underlying price goes down you get a loss on the short put. Also, in any case, why are you talking of "realised profits"? Was it not the goal to realize losses in the "tax jurisdiction"?

> BUY CLOSE Put and CALL
When/where? are we talking of the same time? Same account?

> No rolling over needed if options run long enough (2 weeks to 4 months)
?

You need to provide a practical example with all details (with timestamps and places of executions and detailed accounting methods), or else it remains not really understandable. (In any case, as trading is concerned, IMHO it is not going to be practically viable with those far-away ITM options.)


This is what the SPX CALL 2000 (50% itm) looks like at this time of the day (9.42ET): around $250-280 (or more) spread, and about 39.8K for 1 short (double for the strangle):

View attachment 300346

Venturing to work with this "monster", is probably asking for it

(Especially while there are other more comfortable ways to print $$$, and pay as little tax as possible, with negligible risk.)

 

[destriero]

The guts strangle idea just adds another layer of stupidity. If you're going to steal... steal big. Leverage the roll-arbitrage. C'mon man, critical thinking. You're in the business.

 

[TheDawn]

I like your post and the warning about the high premiums! I have not yet looked at premiums as I am still looking for the right underlying in my case.

Does it make sense to try the paper account with IB or are the "filled" options pricing way off the real prices? Will try anyway but want to make sure if my dry run is realistic.

Regarding your comments on tax, again US Cap Gains Tax rules do not apply.

Example: You open sn overall market neutral position in buying and selling futures for 10 Millions USD notional on each side. 1 december 2022 (Client living in Panama for example)

Markets changes 5% within 2 weeks (again example). You close the winning side and realize 500.000 USD "profit" in 2021. Immediatly you reopen the futures (risk here of an gap I am aware). Now you wait with market neutral position until 5th of January and close ALL positions and book 500.000 USD loss.

It is more or less this is want I need to do with options. I am willing to risk 2% of invested sum but I am not willing to accept a "guaranteed" loss of more then 0,5% of notional if premiums are too high.

This strategy would work perfectly if the tax jurisdiction would accept futures in this way alas it does not, it only accepts options in this way. All this is perfectly legal!

I have more then 20 years experience on the tax side in numerous jurisdictions outside the US.

The exception to this being if I miss out that non us citizens are being taxed on dividends with withholding tax or have to pay cap gains like in the case of limited partnerships as from 2023 onward. To my understanding dividend payments and their tax treatment should be neutral as I hold both sides. Am I right?

Thanks!

Tax loss harvesting can amount to 100% of the notional in some cases. Again not working for anyone based in the US.

Ok first, you need to let your client know that you will be investing in security instruments that does not match his/her low to medium risk tolerance. Options and futures that you are thinking of investing in/trading are not suitable for somebody who has low to medium risk tolerance; these security instruments are extremely risky and carry high possibility of causing high level of financial losses especially if you plan on shorting options. Best to get that disclosure out of the way and make sure your client understands this.

PANAMA

Selling Call Option SPX Strike 2000
Selling PUT Option SPX Strike 6000

Market moves 2% Down

BUY/CLOSE SPX PUT (Profit realised)
2 secs later OPEN SELL SPX PUT

Market moves 2% UP

BUY/CLOSE SPX CALL (Profit realised)
2 sec later OPEN SELL SPX CALL

TAX JURISDICTION

BUY CLOSE Put and CALL

No rolling over needed if options run long enough (2weeks to 4 months)

Now back to my original question what underlying should I use? I could use Apple or SPX or something else I really do not care about the underlying as long as it is not something like AMC where you can get burnt either war by market swings of 200%. I must not be exercised or everything goes up in smoke (tax and risk wise) so that is paramount is selection the underlying.

Am I missing something trading related? Trust me the tax side is covered.

I am aware that I have a huge problem if SPX goes over 6000 or under 2000. Maybe I go even lower with 1000 strike in case of nuclear war in Ukraine. Gap risk when realizing the profit and not having the opposing trade in place (2secs). Any other risks?

Much obliged!

Thanks!

If you are going to be doing this way, then it would be more efficient to buy OTM (out-of-money) options i.e. options with strikes worse than the underlying (higher for call and lower for put) instead of selling. The way you are thinking of doing it, you are trying to make some profit from the market movement by closing the trade while ensuring you won't lose too much and at the same time get some tax savings from some possible losses. So instead of selling options for premiums, why don't you buy both the call and put options instead so that way, if the market moves a certain %, you will close out either trade in profit but if the market doesn't move at all or not to the point of covering the purchase price of options, the most you will lose is the purchase price of both the call and put options. All you have to do is make sure the total purchase price of both options is equal to a certain percentage of the investment capital and that will be the maximum you will lose. And you will definitely be protected against large swings in the market like what happened with the meme stocks. In fact, the large swings like what happened with the meme stocks will actually benefit you in that you will gain so much with one option that it will completely offset the total purchase price of both options.

Try that to see if this strategy works out better for you. You can use the IB paper trading facility. It uses real historical prices so you can get a feel of what your profitability/loss would be like assuming you get filled 100% of the time. In real-life options markets, your orders do not always get filled especially if your order is large even with very liquid options like the SPX. You have to work it a bit to find liquidity sometimes. And that's not something that you will simulate in the paper trading facility.

 

[fullautotrading]

....So instead of selling options for premiums, why don't you buy both the call and put options instead so that way, if the market moves a certain %, you will close out either trade in profit but if the market doesn't move at all or not to the point of covering the purchase price of options, the most you will lose is the purchase price of both the call and put options..

From what I understood so far, he is after "nominal" losses, in order to reduce taxes. Not actually looking to trade for a profit.
He wants, in practice, to make 0 (or close to that), but just show (that is, report for tax purposes) "losses" (based on some unknown accounting system).

There are in practice no (positive) "premiums" in that structure, built selling 2 far-away ITM options. Because of how the options are quoted, the final maximum payoff is going to be anyway negative (-5K or worse), while the minimum can go (with negligible probability) as low as the underlying escapes from the inner range of the "guts strangle" (as destriero calls it) before expiry (this is often called, improperly imho, "limitless" or "unlimited" potential loss).

 

[TheDawn]

From what I understood so far, he is after "nominal" losses, in order to reduce taxes. Not actually looking to trade for a profit.
He wants, in practice, to make 0 (or close to that), but just show (that is, report for tax purposes) "losses" (based on some unknown accounting system).

There are no (positive) "premiums" in that structure, built selling 2 far-away ITM options. Because of how the options are quoted, the final maximum payoff is going to be anyway negative (-5K or worse), while the minimum can go (with negligible probability) as low as the underlying escapes from the inner range of the "guts strangle" (as destriero calls it) before expiry (this is often called, improperly imho, "limitless" or "unlimited" potential loss).

Well if he's not looking to make a profit, then why is he talking about closing the trades for profit then? LOL All he has to do is sell the EDITM strangle and then hold them to expiration. There is very little chance that the underlying will ever touch the two strikes but the premium will never make up for the loss from assignment so he will always be able to show the premiums as profit but report the resulting loss for taxes.

Either way, selling and buying just really resort to the same thing; they are the flipside of each other really. I just find buying would be easier and more cost-effective in terms of commissions if he is going with IB. IB's commission for options is based on the total value of the transaction as well.