Tell me if this setup is stupid

K

kj5159

Had a random thought about a portfolio allocation setup. Say you have $100 in fixed income (we'll just say govt bonds) that pays you 5% per year in interest, $5. You use the interest payments only for pure risk trades with high payoffs, taking large relative risks to the $5 allocation on trades that pretty much always have negative EV, just gambling, like buying options 1-3 days before expiration on stocks that have earnings when the options are trading for a few pennies, every so many you'll make a gigantic percentage return on the $5 risk allocation.

So the thing here is knowing that the risk allocation has negative EV, but building gambler's ruin into the setup by using only the interest payments to fund the risk allocation, and any time there is a big profitable trade wiring the profits out of the risk account not to be touched, so the risk account's capital never grows beyond the amount that gets paid in in interest and to protect any winnings. The idea being to get one or maybe a few big winners before it goes broke every year/semiannual interest payment period and then when it does inevitably go broke, wait for the next coupon payment and rinse and repeat.

I'm not sure if the fact that the risk allocation has negative EV means you'd just be slowly investing into a setup that will lose money over the long run and nothing else matters, or if the potential for huge payouts with the max drawdown being ending the year/coupon payment increment flat makes it something like free (aside from opportunity cost and the interest received, but I'm not concerned about that right now) lotto tickets?

EDIT - I'm assuming trading options like that would have a negative EV, I'm not certain but I'd think it most likely does.
 
I like it honestly. The trade I wanted to get right is double my money 10x starting with $100 using options. There are plenty of options out there that double each month. So theoretically, its possible, if you can find those 10 IN A ROW to take $100 and turn it into $100k. And if you only risk $100 per month, then BOOM.!. So honestly, I like it.
P.S. the best I did was take the $100 up to $4,500, then hit that loser.
 
kj5159 said:
Had a random thought about a portfolio allocation setup. Say you have $100 in fixed income (we'll just say govt bonds) that pays you 5% per year in interest, $5. You use the interest payments only for pure risk trades with high payoffs, taking large relative risks to the $5 allocation on trades that pretty much always have negative EV, just gambling, like buying options 1-3 days before expiration on stocks that have earnings when the options are trading for a few pennies, every so many you'll make a gigantic percentage return on the $5 risk allocation.

So the thing here is knowing that the risk allocation has negative EV, but building gambler's ruin into the setup by using only the interest payments to fund the risk allocation, and any time there is a big profitable trade wiring the profits out of the risk account not to be touched, so the risk account's capital never grows beyond the amount that gets paid in in interest and to protect any winnings. The idea being to get one or maybe a few big winners before it goes broke every year/semiannual interest payment period and then when it does inevitably go broke, wait for the next coupon payment and rinse and repeat.

I'm not sure if the fact that the risk allocation has negative EV means you'd just be slowly investing into a setup that will lose money over the long run and nothing else matters, or if the potential for huge payouts with the max drawdown being ending the year/coupon payment increment flat makes it something like free (aside from opportunity cost and the interest received, but I'm not concerned about that right now) lotto tickets?

EDIT - I'm assuming trading options like that would have a negative EV, I'm not certain but I'd think it most likely does.
More...

-EV is -EV regardless of how much or little you invest, and it's irrelevant whether the capital invested came from savings, or bond coupons, or somewhere else.

So it's definitely stupid as a trading or investment strategy, but if you just want to gamble...
 
Specterx said:
-EV is -EV regardless of how much or little you invest, and it's irrelevant whether the capital invested came from savings, or bond coupons, or somewhere else.

So it's definitely stupid as a trading or investment strategy, but if you just want to gamble...
More...

That's pretty much what i figured...just trying to pretty much hit more than one big winner against the odds within a low enough number of transactions, though that could very likely take a long enough time period/number of transactions to reduce the IRR to like 2% annually anyway.

I used to know a guy who did this, except he'd just buy the options with no strategy otherwise. He parlayed two in a row one time and turned like $10k into half a million and then put the half mil on the third bet and gave it all back .

I was like what if you could just play that game forever, what would happen?
 
kj5159 said:
Had a random thought about a portfolio allocation setup. Say you have $100 in fixed income (we'll just say govt bonds) that pays you 5% per year in interest, $5. You use the interest payments only for pure risk trades with high payoffs, taking large relative risks to the $5 allocation on trades that pretty much always have negative EV, just gambling, like buying options 1-3 days before expiration on stocks that have earnings when the options are trading for a few pennies, every so many you'll make a gigantic percentage return on the $5 risk allocation.

So the thing here is knowing that the risk allocation has negative EV, but building gambler's ruin into the setup by using only the interest payments to fund the risk allocation, and any time there is a big profitable trade wiring the profits out of the risk account not to be touched, so the risk account's capital never grows beyond the amount that gets paid in in interest and to protect any winnings. The idea being to get one or maybe a few big winners before it goes broke every year/semiannual interest payment period and then when it does inevitably go broke, wait for the next coupon payment and rinse and repeat.

I'm not sure if the fact that the risk allocation has negative EV means you'd just be slowly investing into a setup that will lose money over the long run and nothing else matters, or if the potential for huge payouts with the max drawdown being ending the year/coupon payment increment flat makes it something like free (aside from opportunity cost and the interest received, but I'm not concerned about that right now) lotto tickets?

EDIT - I'm assuming trading options like that would have a negative EV, I'm not certain but I'd think it most likely does.
More...

I believe you need a whole lot more then 100 $ to dip into bonds... Unless you go Junk ETF, they pay 5-6 %. Not a good time to dip in them tho!
 
kj5159 said:
Had a random thought about a portfolio allocation setup. Say you have $100 in fixed income (we'll just say govt bonds) that pays you 5% per year in interest, $5. You use the interest payments only for pure risk trades with high payoffs, taking large relative risks to the $5 allocation on trades that pretty much always have negative EV, just gambling, like buying options 1-3 days before expiration on stocks that have earnings when the options are trading for a few pennies, every so many you'll make a gigantic percentage return on the $5 risk allocation.

So the thing here is knowing that the risk allocation has negative EV, but building gambler's ruin into the setup by using only the interest payments to fund the risk allocation, and any time there is a big profitable trade wiring the profits out of the risk account not to be touched, so the risk account's capital never grows beyond the amount that gets paid in in interest and to protect any winnings. The idea being to get one or maybe a few big winners before it goes broke every year/semiannual interest payment period and then when it does inevitably go broke, wait for the next coupon payment and rinse and repeat.

I'm not sure if the fact that the risk allocation has negative EV means you'd just be slowly investing into a setup that will lose money over the long run and nothing else matters, or if the potential for huge payouts with the max drawdown being ending the year/coupon payment increment flat makes it something like free (aside from opportunity cost and the interest received, but I'm not concerned about that right now) lotto tickets?

EDIT - I'm assuming trading options like that would have a negative EV, I'm not certain but I'd think it most likely does.
More...

-EV = You Lose

No two ways around it.

A better set up would be to do a high risk/high reward trade with your coupon and get one with +EV
 
You will lose to inflation, and lose any compounded interest were you to invest it in other bonds.

Of course, if you hit a long shot, this will probably make up for it.
 
You must log in or register to reply here.
Back
Top