I guess I'm misunderstanding then. I'm going off the concept that a 5% return means that if you invested $100 you'd get $5 a year. No matter if that investment was in a $100 bond or an option spread that cost $100? In either case, you tie up $100 in capital and get $5 in return.
SPX Put Spreads - Question
- Thread starter Palindrome
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It is pointless to put a return number on a derivative strategy, indeed, and nobody does. In finance the general convention is to talk about return on capital, which supposedly takes into account whatever leverage is used and assuming reasonable risk management given some amount of capital committed. In general, absolute notional and return on notional are useless metrics that are only used by journalists ("oh my god, interest rate derivatives have trillions of dollars outstanding!") and retailers ("can you generate 10%?" like in this thread).
The OP did put a return number on a derivative strategy, hence the confusion!
Back to the original point, I'm not sure you can effectively get any leverage on a spread like the OP posted, when I ran it just now it I was quoted a $17,192 margin requirement for 1 spread contract. This is in line with a return on capital amount of 5% given the parameters quoted by the OP. Perhaps if you were running PM and you had some offsetting positions elsewhere in your portfolio that would get that margin down you could see better numbers, but otherwise leverage is already baked in here.
So again, I'd say if look at high yield bond rates you're seeing higher numbers for what you'd get if you tied up $17K, with what I think is a lower risk given current implied default rates.
Back to the original point, I'm not sure you can effectively get any leverage on a spread like the OP posted, when I ran it just now it I was quoted a $17,192 margin requirement for 1 spread contract. This is in line with a return on capital amount of 5% given the parameters quoted by the OP. Perhaps if you were running PM and you had some offsetting positions elsewhere in your portfolio that would get that margin down you could see better numbers, but otherwise leverage is already baked in here.
So again, I'd say if look at high yield bond rates you're seeing higher numbers for what you'd get if you tied up $17K, with what I think is a lower risk given current implied default rates.
I never said it was that easy... I just pointed out that on a single trade/strategy you need to look at the capital used for setting that up. If you have portfolio margin, which I assume everyone has who trades actively with 100k in account, and use leverage... you should look at risk-adjusted return on used capital... basically the margin used.
So, if you use the full margin/leverage capability of your account... you can buy about 2mln worth of S&P500 and when you get your 7% return, its actually 7%x20=140% ... which is ridiculous, because no-one in their right mind would use that full leverage...
Same goes with OP's strategy, which is a credit spread and you hold margin for that... which is actually very low on a portfolio margin. If you have 100k in account and would do what OP wants to do but on a bigger scal... use the leverage you can, you can actually get to 50%. But the risk would be big...
Do you think option market makers only get 7% on their capital?? No... they tend to go for at least 20%.
There is no point in looking at a benchmark like S&P500 average return over the past 20 years when you leverage. And when you trade actively it's no point either...
I bet that most experience traders here who actively trade... (not 'invest') take a lot more then your 7%... because why bother otherwise.
So yes... I do understand... I'm just making a point that we're talking actively trading, usually with leverage and on margin. Not buy-hold over 20 years to get 7% on avg.
ps. why not use risk-free rate of returns as your benchmark... that's what now? 0.25%?? You're benchmarking apples with coconuts...
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Personally I would have done the 1700/1690 bull put credit spread with the same expiration date. That way you know your absolute max loss. It also gives you good protection in case something nasty happens (flash crash, long term market correction, etc.).
That kind of makes sense, so same expiration for both contracts.
Looked like roughly $2500/spread is a rough worst case scenario per my original post and feedback given.
Let's say, I only want a max loss of 7.5k (3 spreads). I could then instead just trade 7 spreads.
but collect a much smaller amount credit, lets say $35 bucks per spread.
Old Method: Net win $100 bucks per spread X 3 = $300 bucks
New same exp spread: $245 bucks
One con, to using the Same Exp you need to hold the spread to expiration. The other method, I often took my 100 bucks within 4 weeks.. per spread.
Anyone have any thoughts on this per Happy Traders recommendation.
Looked like roughly $2500/spread is a rough worst case scenario per my original post and feedback given.
Let's say, I only want a max loss of 7.5k (3 spreads). I could then instead just trade 7 spreads.
but collect a much smaller amount credit, lets say $35 bucks per spread.
Old Method: Net win $100 bucks per spread X 3 = $300 bucks
New same exp spread: $245 bucks
One con, to using the Same Exp you need to hold the spread to expiration. The other method, I often took my 100 bucks within 4 weeks.. per spread.
Anyone have any thoughts on this per Happy Traders recommendation.