stock replacement

[scriabinop23]

reading mcmillan now.

Any downside (besides taxes and lost dividends) to selling atm naked puts and buying same strike calls with the proceeds on three month terms instead of buying stocks, and using remaining cash (collateral requirement) for bonds/etc ?

Looks like a great strategy for growth stocks, and a way to get a lot more income out of a portfolio (from all of the cash income). It even makes it more plausible to buy further out of the money puts as a hedge, since this is almost close to a credit spread for so many stocks.

better suggestion for length of time (instead of 3 months) on options?

 

[damon_achey]

If you are going buy a further out put you're synthetically getting a call. Just buy the call.

And if you think this somehow equals better than a call, then you have an arb oportunity (which you probably don't have). But you should try and understand all this before doing anything.

 

[scriabinop23]

Quote from damon_achey:

If you are going buy a further out put you're synthetically getting a call. Just buy the call.

And if you think this somehow equals better than a call, then you have an arb oportunity (which you probably don't have). But you should try and understand all this before doing anything.

Arb opportunity was never an intention here. Going retail, it never went into my mind. In fact, my latest analysis has been with doing this instead of with individual stocks with a small number of SPX options to replace an entire S&P portfolio.

Actually I'm going to paper trade the concept for a few months before I do anything, but here's my gist.

The point of selling the put is to of course offset the cost of purchasing the call. This reduces quite a bit of my cost and lets the strategy put much less of a dent on the required upward movement I'd have to see to break even or profit. Of course it adds a downside risk, equivilent to owning the S&P portolio outright in cash (which I do practically already). So now with this, I can on a discretionary basis with some of those put proceeds buy an out of the money put so I'm hedged as well. With this strategy you could use 1 SPX option set (1 put sold, 1 call bought, and perhaps 2 otm puts bought) at the net debit cost of $2k to replace $125k of money that would otherwise be tied up and fully risked in a S&P portfolio, and instead result in a fully hedged portfolio and use some of the interest from keeping the bulk of the portfolio liquid cash to additionally offset some of the monthly or quarterly hedge cost.

It looks like with the hedge, that doing this monthly instead of quarterly is more attractive. I can buy closer to original strike puts for a lot cheaper, raising my odds of profiting on the downside.

Has anyone done this before with more success than owning a portfolio outright?

 

[jj90]

If your doing the synthetic long as a buy and hold approach, be sure to go long term. Reconstructing month to month can be costly. Hedging the gamma to the downside you are describing a call ratio backspread, add another put you get a straddle-ish risk profile. Best I can give you without looking at a modeler.

 

[scriabinop23]

Quote from jj90:

If your doing the synthetic long as a buy and hold approach, be sure to go long term. Reconstructing month to month can be costly. Hedging the gamma to the downside you are describing a call ratio backspread, add another put you get a straddle-ish risk profile. Best I can give you without looking at a modeler.

I've been running the numbers, and 3 months per contract period seems to be the happy medium, especially for buying calls solo. One thing I don't like about going too far out is such reduced delta, in case I decide not to hold to expiration (and cash in on some of the remaining premium).

but for a risky growth stock that I like, I like the sell 1 atm put, buy 1 atm call, and buy 3 10% otm. That way I can make money on a drastic drop the other way (not only hedge), but lower my holding cost (reducing theta and IV exposure) selling the atm put. It is somewhat a straddle risk profile, but with a slightly better downside at stand still. 3 months should compensate for that.