Most Intriguing Investment Idea of the Day Thread

[ChpBstrd]

@ChpBstrd, what is the difference between TRTN-A vs TRTN-C, TRTN-D, TRTN-E?

I can see on Google Finance that C, D, E have lower prices. Charting year to date instead just today, they fell below $25 earlier than A did.

See https://www.quantumonline.com/ for more information and a link to the prospectuses (prospecti?).

[ChpBstrd]

Asset: Options in general, but to be specific SPY put options at the 415 strike expiring in 429 days, June 21, 2024
Price:$27.75
Rationale:
Because markets are crazy and unpredictable, the VIX has fallen to 16.4 amid a deeply negative yield curve, the fastest set of rate hikes since the Paul Volker era, an S&P500 earnings recession, regional lenders with negative equity, a major land war in Europe, OPEC constraining oil supply, the NFCI near zero, and a few other reasons. Volatility is a major component of options prices, and so a low VIX suggests that options are cheap right now. Of course, a glance at a VIX chart reveals it goes up and down, so even if you bet wrong there will still be a tailwind of higher volatility to prop up your option bet, especially if you buy a very long-duration option.

The put option I highlighted is not the only good deal around, but I'm using it to illustrate how cheap it is to buy downside protection or speculate on a downside. If we use today's SPY closing price of 414.21, we can calculate that at this price you'd be purchasing 27.75-(415-414.21)= $26.96 worth of time value (as opposed to intrinsic value). Thus the price of the option's time value is 26.96/415= 6.5% of the value of the strike price, which is the amount of money insured by the option. This is the amount of the insured amount that will decay to zero over time, sort of like how your premium paid for car insurance is lost the longer you go without an accident.

Stated another way, for the price of 6.5% you can guarantee you won't have capital losses any bigger than 6.5% on your option-hedged investment in SPY. That may seem like a lot to pay, but remember the put's duration is 429 days or 1.175 years. On an annualized basis, the cost of the put with all things being equal is only 6.5/1.175= 5.53%. That's a very low cost to hedge SPY. I've been watching this "price of insurance" for years and usually it's more like 7%. This is what it means to say a low VIX reveals that options are on sale.

Two further considerations make put options an even bigger bargain:

1) The math above assumes the time value decays in a linear fashion, but that's not how time decay works. The option's time value decays faster as the expiration date approaches, so as long as there's lots of time left on the option time decay is very slow. The same 415 strike put option with only 58 days remaining, at today's low prices, is still worth $9.48. So if you were to hold this put for 371 days before selling it, and all other things remained equal (i.e. volatility, SPY price, interest rates) you'd only lose about $17.48 in time value. That brings the annualized expected cost of hedging down to (17.48/415)/(371/365)= 4.14% if you sell the put when it has about 58 days remaining. You could experience even lower time decay by buying even further-out options.

2) If you held a protective put position in SPY for a year, as in the example above, you can expect about 1.5% in dividends. Let's be pessimists and assume dividends get cut due to a sudden recession, and SPY only pays 1.25% in the next 12 months. That brings your maximum loss on the position below 3%.

So with a protective put bought at these low VIX levels, you get all the upside of the stock market minus ~3% for a year, and with a potential downside of only ~3%.

Of course, due to put-call parity, when long puts are a bargain long calls must be a bargain too. You could replace your stock exposure with long call options, pay for minimal time decay for a year or more, and have a *lot* less money at risk. You'd miss out on dividends, but that's priced in - it's why the puts cost slightly more than the calls. The long calls idea also allows for a lot more leverage than the protective put strategy, so if any of you are in the no-recession, everything's-fine camp you should really be buying the longest-duration call options you can afford right now.

[ChpBstrd]

Asset: Put options on BBBY, specifically the 1/19/2024 $0.50 strike
Price: $0.43
Rationale:
BBBY announced on Friday they will file for chapter 11 bankruptcy. Considering that they aren't able to pay suppliers, are operating as a consignment shop, and have no way to execute a plan to earn money it's hard to see how they will generate cash to pay back their creditors, much less avoid a wipeout of all equity. I don't see creditors allowing BBBY to reinvest in the business.

From a creditors' point of view, the company is likely to continue losing money the longer it is in business, so I'd expect them to push for a rapid liquidation.

I think the equity becomes a penny stock (literally bid=0.01 ask=0.02) by January, so I'm holding some put options that will return over 15% in that contingency. I'm trying to buy more puts, but have yet to succeed. Options may have already changed over to close-only.

Risks to this outlook include an unexpected turnaround in performance, a short squeeze like AMC, GME, and HTZ experienced, a debt-for-equity swap that leaves BBBY with >8 cents in equity value, a buyout by Elon Musk, etc.

[Michael in ABQ]

Asset: Put options on BBBY, specifically the 1/19/2024 $0.50 strike
Price: $0.43
Rationale:
BBBY announced on Friday they will file for chapter 11 bankruptcy. Considering that they aren't able to pay suppliers, are operating as a consignment shop, and have no way to execute a plan to earn money it's hard to see how they will generate cash to pay back their creditors, much less avoid a wipeout of all equity. I don't see creditors allowing BBBY to reinvest in the business.

From a creditors' point of view, the company is likely to continue losing money the longer it is in business, so I'd expect them to push for a rapid liquidation.

I think the equity becomes a penny stock (literally bid=0.01 ask=0.02) by January, so I'm holding some put options that will return over 15% in that contingency. I'm trying to buy more puts, but have yet to succeed. Options may have already changed over to close-only.

Risks to this outlook include an unexpected turnaround in performance, a short squeeze like AMC, GME, and HTZ experienced, a debt-for-equity swap that leaves BBBY with >8 cents in equity value, a buyout by Elon Musk, etc.

I remember several years ago appraising shopping centers with BBY as a tenant. At the time I would include an analysis that showed how they were a "credit tenant" that was less risky than some local or regional soft goods retailer and therefore more valuable as a tenant. Obviously, that would not be the case now. Just goes to show that a 10-15-year lease from a supposedly solid company can quickly become a liability rather than an asset. I'm sure there are a lot of landlords worrying if they're going to be collecting any rent in a month or two. It's a double whammy for some centers because other national retailers may have a clause that allows them to break their lease or pay reduced rent if an anchor tenant like BBY closes down.

[MustacheAndaHalf]

Asset: Put options on BBBY, specifically the 1/19/2024 $0.50 strike
Price: $0.43
...
I think the equity becomes a penny stock (literally bid=0.01 ask=0.02) by January, so I'm holding some put options that will return over 15% in that contingency.

"A penny stock typically refers to the stock of a small company that trades for less than $5 per share"
https://www.investopedia.com/terms/p/pennystock.asp

It looks like BBBY has been on a slow glide to near zero since February (2023).  The bankruptcy risk was mostly priced in before it became official.  For bankrupt "meme" stocks, I'd short the post-bankruptcy plateau.

The stock opened at $0.19, spiked to $0.24 by 10am, then stayed around $0.22 to $0.23 for a half hour.  I'd have shorted at $0.22 or $0.23, and waited.  In the afternoon the stock was trading at $0.18 to $0.19, which might have been a time to sell.  In this 20/20 hindsight scenario, that's a 14% to 22% profit in a few hours.

Talking about a past investment idea isn't much use - but I've seen this post-bankruptcy spike play out more than once.  And a meme stock like BBBY made a post bankruptcy spike more likely.  Keep in mind that shorting BBBY stock right now probably costs 100%/year, or 2%/week.  Any short position needs to be exited quickly.

[chasesfish]

Curious if the thread wants to dig into BDN.

Office centric REIT, trading at half of book value.

The scary:
- They are still paying dividends when I'd rather see them reduce debt.  GAAP is negative so they don't have to pay dividends, FFO is positive. 
- 13% Net Operating Income to Debt
- High occupancy (90% or so), but lower rental rates (50% vs. 65% normal)
- Appear to have a few projects under development

It's not a zero, but not sure how much I trust management with the dividend decision.

[ChpBstrd]

Curious if the thread wants to dig into BDN.

Office centric REIT, trading at half of book value.

The scary:
- They are still paying dividends when I'd rather see them reduce debt.  GAAP is negative so they don't have to pay dividends, FFO is positive. 
- 13% Net Operating Income to Debt
- High occupancy (90% or so), but lower rental rates (50% vs. 65% normal)
- Appear to have a few projects under development

It's not a zero, but not sure how much I trust management with the dividend decision.

Agree. Dividends are dangerous because when companies run into a rough patch - even a foreseeable one - they are reluctant to fix their balance sheets by cutting dividends. It is believed dividend cuts would send the wrong message to investors. Things continue to get worse and worse until the dividend is finally cut - typically at the point the company has less than a year of cash to burn. Things are allowed to get bad because cutting dividends is a cultural taboo. I have no better explanation, but it's a real phenomenon. REITs are even more vulnerable because of the requirement to pay dividends.

A simple pre-recession strategy is to seek out such companies, especially the ones borrowing at high rates or increasing leverage to fund their dividends, and short them. The world is full of "dividend aristocrats" borrowing at 5-6% to pay a 4-5% dividend, and they are sinking funds. They sink even faster in recessions.

Brandywine's BBB- bonds (e.g. CUSIP 105340AQ6) are now yielding 9.8%. This is probably a case where the market has categorized these as junk before the ratings agencies could get around to it.

[Financial.Velociraptor]

Bonds don't meet most people's definition of "intriguing investment" but I think now is a good time to add bond exposure (US Market, other markets may vary).  With the Fed certain to be at least near done raising interest rates, if not done, the main interest rate risk is behind us and now we have interest rate upside, as according to the futures markets, there is a 80% or better chance of falling US rates by year end.

I happen to like Closed End Funds for my bond exposure, as I can get a diversified basket that is intended to be held to maturity and cannot be forced to liquidate to meet redemptions prior to expiry.  My favorite is PDI (current yield 14.3% all "income"), which is a PIMCO fund.   It is a global go-anywhere fund that is known for effective currency exposure hedging.  They are the biggest and best in the business and this particular fund has paid $0.2205 per share monthly for about as long as the market cares to remember such things. Before that, it paid less.  There have been a number of distribution increases in its history and zero reductions.  Plus every couple years there is one-off year end "big" distribution. 

My #2 taxable account at Wells Trade (where I hold CEFs of various income flavors) has been in 99%+ CASH (I kept 1 share to keep the account open) since shortly after COVID hit.  I'm going to deploy $25,000 at about 18.50 per share tomorrow.  That's good for a little shy of $300/mo in passive income.  I expect NAV to improve when/if interest rates resume their long decline but this is a long term income play and not a growth opportunity.

[MustacheAndaHalf]

In a recent interview, Elon Musk claimed Teslas will be self-driving later this year.  The interviewer, David Faber, pointed out similar claims in the past have been overly optimistic, but I'm going off the overall idea that a self-driving car can become a "robo Uber".  You buy a Tesla Model 3 ($43k) now, and later the car starts to earn money as a robo Uber.  The unknowns are huge and uncertain, just like this list:

- not self-driving yet, and probably several years until it's available
- regulation of self-driving cars could add additional delays (years?)
- Tesla will take an unknown percent of earnings (per car buyer's contract)
- required to use Tesla's network (also buyer's contract), which doesn't exist yet

So that's the highly speculative investment idea, where the existence of the market and payments will both be decided by Tesla.  If it even happens.

[ChpBstrd]

Asset: Long straddle or strangle on SPY
Price: $21.50/share for an August 18 SPY strangle at 412 and 422 strikes.
Rationale:
VIX is down to 16.4 again, but a look at the next 30 days reveals a couple of reasons to think this reflects an under-pricing of volatility risk. So I bought the strangle described above, investing a few grand of play money.

First, expect volatility to spike as time runs out on negotiations to raise the US's debt ceiling, as the politicians use brinkmanship to extract concessions until the very last moment. Another ratings downgrade could accompany this debt ceiling game of political chicken. Standard and Poor's was humbled by the political retaliation and investigations they received last time they downgraded the US, so this is far from certain. If a downgrade did happen, we'd have extreme volatility. Just the risk of a default or downgrade will drive volatility.

Second, the tide is quickly turning on assumptions that May was the Fed's last rate hike. Employment reports are still coming in hot, and a few Fed officials have essentially provided advance warning that they'll be voting for a rate hike. The CME fedtracker tool implies that the odds of a rate hike have increased from 10.7% on May 11 to 40.25% today. Yet somehow the VIX and stock market have not yet applied this information. Expect volatility to rise as we approach June 14, because this time it's going to be a split vote with an uncertain outcome.

As it was in April, today is an good day to buy hedges for your stock exposure. Volatility could get even lower, but we're definitely in a zone where any spike in volatility is likely to outrun the time decay of sufficiently long-duration options. VIX will go to 18 and above at some point in the next few weeks and when that happens I'll sell for a 10-20% gain. 

Follow-up: On April 28, I bought $30k worth of S&P500 index put options at the 4100 strike expiring 12/2024 per my 4/17 post below. VIX had fallen to 15.8 and I just couldn't stand it anymore. I opted to take almost $2,000 in gains on that position just 3 days later on 5/2 when the VIX rebounded to about 18. One could say I should have held because VIX went to 20 and the S&P500 was lower two days later. Nonetheless, let's keep in mind those puts are now cheaper than when I bought them. I sold the moment my thesis played out and the trade was profitable for that reason. I'll do the same this time rather than swinging for the fences.

[ChpBstrd]

Asset: SGOV
Price: $100.34
Rationale:

• 5% SEC 30 day yield which could rise if rates keep going up
• Very safe short-duration treasury investments, at the top of the current yield curve, with no interest rate risk
• 0.05% net expense ratio - cheaper than Vanguard money market funds like VUSXX or VMFXX
• Buying SGOV counts as a free ETF trade on most popular brokerages
• No need to purchase / sell individual treasuries through your brokerage.
• Monthly dividends simplify living expense planning for retirees
• Strategy: Suppose your goal for the next 6-24 months is to not lose money, to earn a better return than money market funds, and to be in a highly liquid position ready to pounce if opportunities arise. If the FOMC keeps raising the Fed Funds Rate, this asset will not lose money like a bond fund due to its short duration, and will only pay bigger dividends. When the FOMC starts cutting rates, this asset will likewise not lose money but will simply pay a lower dividend. The idea is to use SGOV as a temporary hideout and to pivot into stocks at a point when valuations are more attractive. Reasons you might want to do so include a Shiller PE ratio of 30.11, a level which has historically predicted -1% real returns in the stock market over the next 10 years.
• No need to purchase / sell individual treasuries through your brokerage.
• Monthly dividends simplify living expense planning for retirees

[ChpBstrd]

Asset: SPY puts expiring Dec. 19, 2025 (910 days from now) at the 430 strike
Price: $35 mid price
Rationale:
Despite all the overlapping recession warning signs, volatility has plummeted amid a very narrow breadth stock market rally. The CNN fear/greed index is at "extreme greed" and the VIX has fallen to under 13. Put options are selling for cheap. These can provide one with insurance against a stock going down, because you have bought a contract from someone else who is obligated to buy the stock at a given future price. With a stock plus a put option, you have an investment that can go up to infinity but can only go down to a certain level. The longer an option's duration, the lower the time decay, so I always keep an eye on the longest duration broad index option one can buy, which is on SPY. My preferred hand-calculated metric is ((OptionPrice / StrikePrice) / YearsTillMaturity). This translates the cost of insurance into an easily understandable percentage, which can then be compared to the maximum downside of the investment and the expected upside. Plugging in the numbers for the deal described here, one obtains:

((35/430)/2.49)= 3.26% annualized cost of insurance as a percentage of the value insured

The maximum downside of a protective put at today's price of $433.22 is:

(430.00 - 433.22 - 35)= $-38.22

...which divided by the total cost of the protective put position is a (-38.22 / (433.22 + 35))= -8.16% maximum downside over 2.5 years.

This is an overstatement, because time decay will not be spread evenly across the next 2.49 years. Most time decay will occur close to the expiration date and that put option's time value is not going to zero in a year, so let's pencil in $8 as the estimated potential loss in Year 1,  which is the current difference between the same options expiring on 12/24 as opposed to 12/25.

A loss of $-8 in time value amounts to a whopping -1.7% of the protective put position, all other things being equal. Is the stock market likely to be up more than that next year? Statistically / historically speaking, yes. Is volatility likely to be higher than it is now? Also yes. The overall position will probably gain if either are true. And if stocks fall, volatility will rise and gains to the put will offset much of the stock losses.

I'm quite bearish on the stock market right now. Nonetheless, I try to entertain more than one idea at a time. When hedging gets cheap enough, it's hard not to place a bet on one's instincts being wrong, because it's lots of upside against a small downside. Who wouldn't pay a couple percent to own the upside of the stock market for a year, without the downside? Besides, I think QT rather than interest rates is doing much of the work pushing inflation down, lots of leading indicators look good, and the new bank lending program may have "foreclosed" on the possibility of more bank runs or asset mismatches.

These are much more dangerous times than the VIX would suggest, but the price of insuring one's assets is scraping the bottom!

[blue_green_sparks]

In a recent interview, Elon Musk claimed Teslas will be self-driving later this year.  The interviewer, David Faber, pointed out similar claims in the past have been overly optimistic, but I'm going off the overall idea that a self-driving car can become a "robo Uber".  You buy a Tesla Model 3 ($43k) now, and later the car starts to earn money as a robo Uber.  The unknowns are huge and uncertain, just like this list:

- not self-driving yet, and probably several years until it's available
- regulation of self-driving cars could add additional delays (years?)
- Tesla will take an unknown percent of earnings (per car buyer's contract)
- required to use Tesla's network (also buyer's contract), which doesn't exist yet

So that's the highly speculative investment idea, where the existence of the market and payments will both be decided by Tesla.  If it even happens.

If it turns out robocabs can soon earn more than they are worth or cost initially...who knows where the demand/prices/wait times could go?

[ChpBstrd]

In a recent interview, Elon Musk claimed Teslas will be self-driving later this year.  The interviewer, David Faber, pointed out similar claims in the past have been overly optimistic, but I'm going off the overall idea that a self-driving car can become a "robo Uber".  You buy a Tesla Model 3 ($43k) now, and later the car starts to earn money as a robo Uber.  The unknowns are huge and uncertain, just like this list:

- not self-driving yet, and probably several years until it's available
- regulation of self-driving cars could add additional delays (years?)
- Tesla will take an unknown percent of earnings (per car buyer's contract)
- required to use Tesla's network (also buyer's contract), which doesn't exist yet

So that's the highly speculative investment idea, where the existence of the market and payments will both be decided by Tesla.  If it even happens.

If it turns out robocabs can soon earn more than they are worth or cost initially...who knows where the demand/prices/wait times could go?

Why would Tesla give such software to current owners for free when it could use the new Robotaxi function as an incentive to get people to buy new Tesla products? Source: Have 3 iphones and an iPad laying around the house that work fine, but are bricks due to software end of life, i.e. the decisions by Apple and app developers to make the things no longer work.

[MustacheAndaHalf]

blue_green_sparks, ChpBstrd : When people buy a new Tesla, they sign a contract that covers the case of a robo taxi service (according to Mr Musk in his interview with CNBC's David Faber).  The rate is decided by Tesla, and the car owner can't use a service other than Tesla's - they're locked in.  The car would drive itself around, and pay its owner some amount for the customers it delivered.  Damages to the car... well, that could make it more interesting.

[MustacheAndaHalf]

Personally my portfolio is only cash and puts, but I think ChpBstrd's situation is more common - people want S&P 500 exposure with downside protection.  In my view, Power Buffer ETFs may offer this.  One of the CNBC Halftime contributors vouched for it last year, saying the approach is simple and transparent.  There are limits and restrictions, which give it a much better chance of working.  But "Power Buffer" is a relatively new idea, so buyer beware.  Do your own diligence.

Since I'm pessimistic, I'll pick the Power Buffer ETF with the lowest upside but maximum loss buffer.

OUTCOME DETAILS
Series: July
Outcome Period: 7/1/2022-6/30/2023
Rebalance Frequency: Annual
Starting Cap: 14.40%
Starting Buffer: 30.00% (5.00% - 35.00%)
Exposure: SPDR S&P 500 ETF Trust

https://www.innovatoretfs.com/etf/default.aspx?ticker=ujul

It has limited upside: 13.5% including expense ratio.  It will never gain more than this, so any large S&P 500 gains turn into 13.5% for UJUL.

But it has a "buffer" on the downside, which kicks in after a 5% loss.  This only applies to holding the full 12 month period, but it means if the S&P 500 ends down 1/3rd, people holding UJUL are only down 5%.  This probably varies based on the cost of options, as in July 2022 the buffer was much smaller.

[ChpBstrd]

Personally my portfolio is only cash and puts, but I think ChpBstrd's situation is more common - people want S&P 500 exposure with downside protection.  In my view, Power Buffer ETFs may offer this.  One of the CNBC Halftime contributors vouched for it last year, saying the approach is simple and transparent.  There are limits and restrictions, which give it a much better chance of working.  But "Power Buffer" is a relatively new idea, so buyer beware.  Do your own diligence.

Since I'm pessimistic, I'll pick the Power Buffer ETF with the lowest upside but maximum loss buffer.

OUTCOME DETAILS
Series: July
Outcome Period: 7/1/2022-6/30/2023
Rebalance Frequency: Annual
Starting Cap: 14.40%
Starting Buffer: 30.00% (5.00% - 35.00%)
Exposure: SPDR S&P 500 ETF Trust

https://www.innovatoretfs.com/etf/default.aspx?ticker=ujul

It has limited upside: 13.5% including expense ratio.  It will never gain more than this, so any large S&P 500 gains turn into 13.5% for UJUL.

But it has a "buffer" on the downside, which kicks in after a 5% loss.  This only applies to holding the full 12 month period, but it means if the S&P 500 ends down 1/3rd, people holding UJUL are only down 5%.  This probably varies based on the cost of options, as in July 2022 the buffer was much smaller.

That definitely counts as an intriguing investment!

Innovator ETFs offers dozens of option-based ETFs with various payoff profiles and a typical one year option holding period. However, they all seem to offer unlimited downside, even if the downside is "buffered", and they cap the upside. They typically charge a 0.79% ER and underperform their unhedged benchmarks, with some exceptions.

My points of dissatisfaction with these ETFs are:

• Their expense ratios
• Their unlimited downside risk profiles
• I wish their one-year timeframes were longer. What do you do if a financial crisis is evolving and your fund has 30 days until the options reset at the new, lower upside and downside? That said, I've never seen a fund that uses >1 year duration options.

I'd compare these products with collar ETFs, which offer much firmer downside protection.

XCLR and QCLR offer S&P500 and Nasdaq100 collar strategies with 3-month periods. For those 3 months, investors have about 5% downside and about 10% upside. With ERs of 0.6%, both are significantly cheaper than the Innovator ETFs. However, the shorter option period means you can lose 5% per quarter (roughly 20%, non-compounded) in a year-long SORR event, so all you're really hedging against is a flash crash or late 2008 scenario.

NSPI's and NUSI's point is to earn a credit on the sale of a collar and to pay a 7% dividend. NUSI (Nasdaq 100) has a 19.5% YTD price performance, which illustrates how these funds can experience capital gains and losses. The ERs are 0.68%. Options are rolled monthly. With such a short option period, these funds don't effectively hedge any typical bear market. Additionally, their volatility prevents them from being bond substitutes. So the dividend is the point for people who don't mind volatility and only want income. I've seen ETFs play this game, and it's a sneaky way to return capital to shareholders masked as a sustainable dividend. E.g. NSPI is down -20% since early 2022 versus -5.2% for the S&P500.

ACIO has a 0.79% ER and offers 65% upside and 50% downside on a basket of 50 stocks, with monthly trades of puts and calls. It has actually outperformed the S&P500 since early 2022, probably due to more mega cap concentration. Yet I see no point in upsides and downsides that large. Just own the stock at that point, and save the ER!

Now let's compare these funds with a DIY approach to collaring. I'll pick strikes at 14.9% maximum downside, 22% upside:

SPY: 434.72
SPY Dec 19, 2025 long put at 370 strike: 19.75
SPY Dec 19, 2025 short call at 530 strike: 32.75

Net credit per share: 32.75-19.75= 13 (+3% the cost of SPY or +1.2% per year)
SPY annual dividend yield for 2.48 years: 1.5%*2.48=3.72% total

So with three trades I've engineered a long-term upside equal to 22% price action, plus 3.72% dividends, plus 3% net options credit = 28.72%. The long-term downside is -14.9% price action, plus 3.72% dividends assuming they aren't cut, plus 3% net options credit = -8.18%. This would be over the entire 2.48 years, so the annualized expected upside/downside is closer to 11.58% and -3.3%. Best of all, the shit could hit the fan for a couple of years, like after 1999 or 2007, and I could sit in my position fully invested, with no more downside to worry about, and with the opportunity to jump in unhedged. None of the above funds offer that contingency. Plus, it's all long-term capital gains - even the options trades.

Of course, it's overly simplistic to convert options strategies into one-year timeframes with simple division because we're ignoring the influence of interest rates, volatility, vega, and a number of other factors such as dividend changes or widening bid-ask spreads. Additionally, after one year I would roll to another extreme-duration option, and how do you model that?

Thus, ChpBstrd's collared ETF (ticker symbol CHPB is available!) could not write up a fact sheet telling investors their exact maximum upside and downside on a one-year timeframe. Maybe this is why there are several collar/buffer funds trading on a 1 month to 1 year timeframe, but apparently NONE locking in protection beyond one year. Also, as the numbers above illustrate, I can DIY a more appealing return function right now in a low VIX environment than these funds can do, while hedging against multi-year events (the kind you need protection against), at a net credit on the options and while receiving dividends.

I tend to think aloud as I write, and as I calculated the above collar it looked more and more appealing. Volatility is at low levels not seen since before the pandemic, and these low prices may not last. There is a case to be made that federal interventions in the banking sector over the past 3 months have effectively eliminated the risk of more collapses. The NFCI is moving away from zero which is evidence contraindicating a credit crunch or imminent recession.

Finally, even if we assume a recession we must keep in mind how stocks sometimes rise during recession start years. The S&P500 price has increased in 6 of the last 13 recession start years. The odds of an up year are close to the odds of a positive recession year plus the odds of a no recession year. The odds of this particular collar being in the black are that plus the dividend and option credit. Part of me says "why not drop some of your SGOV and its 5.2% yield and enter a collar with an 11.58% expected possible upside and -3.3% expected possible downside over the next 12 months?" The best reason not to do so is the spread between the upside and the risk-free rate is lower than the spread between the risk-free rate and the downside.

[MustacheAndaHalf]

According to Yahoo Finance, in 2021 XCLR had -39% performance in one day (Sept 2 2021), which rules it out for me.

https://finance.yahoo.com/quote/XCLR/history?period1=1629849600&period2=1631145600&interval=1d&filter=history&frequency=1d&includeAdjustedClose=true

I bought UJUL yesterday.  To use it properly, I will need to wait for July 1 2024 before selling.  Before then, UJUL may have a greater than -5.75% loss (-5% before buffer, and 0.79% expense ratio: 0.9921 x 0.95).

It is limited to +13.5% gains after expenses.  Given 2019 (+31%) and 2021 (+29%) that might seem risky, but a pair of years like that hasn't happened since the late 1990s dot-com bubble.  I don't expect those years to repeat - but I'll really miss out if that happens.

I really want the -5% to -35% buffer this ETF provides, which I why I went with the annual "ultra" buffer ETF.  If the S&P 500 falls by 33%, I'll incur a 5.75% loss (assuming I wait for July 2024).  And if I'm wrong, I can get +13.5% upside before expenses.

I don't think I can set this up correctly and cheaper myself, so I went with their product.

[blue_green_sparks]

According to Yahoo Finance, in 2021 XCLR had -39% performance in one day (Sept 2 2021), which rules it out for me.

https://finance.yahoo.com/quote/XCLR/history?period1=1629849600&period2=1631145600&interval=1d&filter=history&frequency=1d&includeAdjustedClose=true

I bought UJUL yesterday.  To use it properly, I will need to wait for July 1 2024 before selling.  Before then, UJUL may have a greater than -5.75% loss (-5% before buffer, and 0.79% expense ratio: 0.9921 x 0.95).

It is limited to +13.5% gains after expenses.  Given 2019 (+31%) and 2021 (+29%) that might seem risky, but a pair of years like that hasn't happened since the late 1990s dot-com bubble.  I don't expect those years to repeat - but I'll really miss out if that happens.

I really want the -5% to -35% buffer this ETF provides, which I why I went with the annual "ultra" buffer ETF.  If the S&P 500 falls by 33%, I'll incur a 5.75% loss (assuming I wait for July 2024).  And if I'm wrong, I can get +13.5% upside before expenses.

I don't think I can set this up correctly and cheaper myself, so I went with their product.

I was using those Innovator buffered ETFs to as a safer place to stow funds that are to be sold off within a year or so (until core cash started earning 4 or 5%.)  They tracked reasonably well and if the price approached the cap, I sold them quickly, so they are fairly liquid. I bought a little more recently as a hedge.

[ChpBstrd]

According to Yahoo Finance, in 2021 XCLR had -39% performance in one day (Sept 2 2021), which rules it out for me.

https://finance.yahoo.com/quote/XCLR/history?period1=1629849600&period2=1631145600&interval=1d&filter=history&frequency=1d&includeAdjustedClose=true

That has to be some kind of chart error. The fund's inception date according to their website was 8/25/2021, but Yahoo's charts show trading started on 3/25/21.

The chart on my brokerage account shows trading started 8/26/21 and Google finance starts tracking on 8/27/21. Neither of these show a massive drop on 9/2/21 like Yahoo does.

 

[MustacheAndaHalf]

According to Yahoo Finance, in 2021 XCLR had -39% performance in one day (Sept 2 2021), which rules it out for me.

https://finance.yahoo.com/quote/XCLR/history?period1=1629849600&period2=1631145600&interval=1d&filter=history&frequency=1d&includeAdjustedClose=true

That has to be some kind of chart error. The fund's inception date according to their website was 8/25/2021, but Yahoo's charts show trading started on 3/25/21.

The chart on my brokerage account shows trading started 8/26/21 and Google finance starts tracking on 8/27/21. Neither of these show a massive drop on 9/2/21 like Yahoo does.

New ETFs incubate before being offered to the public.  That gives them some months of performance before their official launch date, which is what I think Yahoo Finance is showing.  Set that aside.

Over the past 12 months, the S&P 500 went up +16.53%.  XCLR went up +6.51%, which you might think is a typo missing +10.00%.  It is not - all of the following sources cite XCLR performance as +6.50% or +6.51%.

https://finance.yahoo.com/quote/XCLR/performance?p=XCLR
https://www.morningstar.com/etfs/arcx/xclr/performance
https://etfdb.com/etf/XCLR/#performance

UJUL gained +13.30% (Morningstar + Yahoo Finance) or +13.60% (Innovator ETFs) over the past 12 months.  It has a "cap" or maximum gain, which it reached (and a similar cap for the next 12 months).

XCLR returned 2/5ths of the S&P 500 return, where UJUL returned 4/5ths of the return.  Maybe you can figure out what happened by looking at quarterly performance of the S&P 500.  If you find a good source of quarterly performance for ETFs & stocks, I'd like to learn about it - I've been doing those by hand.

[Financial.Velociraptor]

LEAST INTRIGUING INVESTMENT

Thought I'd do one where I was dead wrong as it might be instructional.

On 10APR2023, I was looking at the market environment, and especially the interest rate futures.  The "smart money" widely expected rate CUTS by the end of the year.  I bought a bull call spread in TLT on the 19JAN2024 expiry and 110/115 strikes.  I took a net debit of 1.93.   The underlying was around 107 and it looked like an easy way to make about 1.5 times my money in a short period of time.

Since that time, the Fed has consistently messaged, NOPE, smart money has it wrong and we plan on "higher for longer" and more rate raises through the end of the year.  Futures market now believes that messaging.  Decided over the weekend with TLT down to 99 and still following to get out and preserve capital.  I capitulated today at 77 cents. 

I took a loss of 60.1% (65% was my stop loss but I wised up before then) over 92 days (-238% annualized). 

The futures market is usually pretty spot on about interest rate policy 6-12 months out but they got it dead wrong this time.  I paid for my faith.

[Financial.Velociraptor]

LEAST INTRIGUING INVESTMENT

[snip]
Since that time, the Fed has consistently messaged, NOPE, smart money has it wrong and we plan on "higher for longer" and more rate raises through the end of the year.  Futures market now believes that messaging. 
[snip]

Lesson learned.  Don't fight the Fed, ride the wave!  I didn't go long dated or well out of the money this time but I've flipped the trade on its head and gone short.  18AUG2023 expiry 98/103 bear put spread.  I got 2.92 pricing. 

I need TLT to fall 1.2% over 40 days (and the Fed should have raised rates by then or at least signaled one next time).  To make 71% return.  This is enough to push back into the green across both trades.

[ChpBstrd]

LEAST INTRIGUING INVESTMENT

Thought I'd do one where I was dead wrong as it might be instructional.

On 10APR2023, I was looking at the market environment, and especially the interest rate futures.  The "smart money" widely expected rate CUTS by the end of the year.  I bought a bull call spread in TLT on the 19JAN2024 expiry and 110/115 strikes.  I took a net debit of 1.93.   The underlying was around 107 and it looked like an easy way to make about 1.5 times my money in a short period of time.

Since that time, the Fed has consistently messaged, NOPE, smart money has it wrong and we plan on "higher for longer" and more rate raises through the end of the year.  Futures market now believes that messaging.  Decided over the weekend with TLT down to 99 and still following to get out and preserve capital.  I capitulated today at 77 cents. 

I took a loss of 60.1% (65% was my stop loss but I wised up before then) over 92 days (-238% annualized). 

The futures market is usually pretty spot on about interest rate policy 6-12 months out but they got it dead wrong this time.  I paid for my faith.

Ouch! That was an intriguing game of chicken earlier this year. Markets said recession and rate cuts by November. The Fed said soft landing and higher for longer. Somehow the Fed won the argument, despite the self-contradictory nature of its claim, and the market changed its mind. Maybe not for long though!

The smart money also failed to foresee the extent of rate hikes in 2022, and failed to predict inflation in early 2021. Now I think the smart money is failing to appreciate the odds of deflation or near-deflation in 2023. Inflation is going to keep falling and if we’re still talking about rate hikes here in July 2023 then the Fed is 6-12 months away from a change in mindset, and perhaps even farther from a change in policy. Problem is, we’re 8-10 months from 0% inflation if the current one-year trend line holds.

I’m not placing a bet on this specific outcome because of some fuzziness in the picture of my crystal ball, but my overall AA is adequately positioned for this contingency. I’ll move further in this direction as the rate hikes and QT pile up amid continued disinflation.

[MustacheAndaHalf]

LEAST INTRIGUING INVESTMENT
...
I took a loss of 60.1% (65% was my stop loss but I wised up before then) over 92 days (-238% annualized). 

The futures market is usually pretty spot on about interest rate policy 6-12 months out but they got it dead wrong this time.  I paid for my faith.

I calculate a 97.5% loss if compounded quarterly.

I'm curious how you decided position size for this investment, and what you would change (if anything).

[Financial.Velociraptor]

I'm curious how you decided position size for this investment, and what you would change (if anything).

My positions size was 2,509, which was roughly my profit my last iteration of VXX short.  New position size is 2,920, which was 10 spreads; picked for a round number.

If I had it to do over, I'd bail out as soon as the futures showed rates flipping from cuts to raises.  I suffered from some 'anchoring bias'.

[chasesfish]

I want to also share the worst trade I've made:

I decided to open hobby short positions on six companies that are talked about a lot and likely zeros.   No profitability, limited viability in their business model, borderline ponzi schemes that are only good at selling their stock while insiders take options and unload.  Opened most of the positions the last week of May.

COIN
CVNA
LMND
UPST
OPEN
SOFI

Every one of these positions is down (ie stock up) anywhere between 7% and 71% since inception.

[MustacheAndaHalf]

Do you know about "Roundhill MEME ETF" ($MEME)?  Half of those stocks (CVNA, COIN, UPST) are $MEME holdings.  If you ever want to find similar stocks in the future, that might be the place to look.
https://etfdb.com/etf/MEME/#holdings

Can you vent about Opendoor Technologies a bit?  I'm curious why it made the list, and want to hear negative views on stocks I owned before (not now).

[Financial.Velociraptor]

I want to also share the worst trade I've made:

I decided to open hobby short positions on six companies that are talked about a lot and likely zeros.   No profitability, limited viability in their business model, borderline ponzi schemes that are only good at selling their stock while insiders take options and unload.  Opened most of the positions the last week of May.

COIN
CVNA
LMND
UPST
OPEN
SOFI

Every one of these positions is down (ie stock up) anywhere between 7% and 71% since inception.

I once lost a ton shorting TSLA back before they were even turning a profit and were falling short of deliveries every quarter.  Even today, I think it is STUPID overvalued with even the forward P/E in the stratosphere.  I was bemoaning my luck at an alumni event and a professor of Finance gave me good advice.  While he agreed TSLA's valuation was absurb, "Never bet against a 'cult' stock".  I ignored that advice at my own peril twice to bet against GME (but with net debit put spreads and small position sizes).  So do as the professor says and not as I do...

[chasesfish]

Do you know about "Roundhill MEME ETF" ($MEME)?  Half of those stocks (CVNA, COIN, UPST) are $MEME holdings.  If you ever want to find similar stocks in the future, that might be the place to look.
https://etfdb.com/etf/MEME/#holdings

Can you vent about Opendoor Technologies a bit?  I'm curious why it made the list, and want to hear negative views on stocks I owned before (not now).

What OPEN has going for it?   A $3.2bil market cap and $1bil in book equity.

What is has going against it?  $100mil to $200mil a quarter cash burn with no end in sight.

They operate in a market that can't be operated at scale (house flipping).   

Invitation homes is trying the same thing in buy and hold single family rentals, but at least they own the assets long term and can liquidate them.  I just don't know what Open's end game is, other than they have a bunch of currency available in a stock price 3x book to try something. 

[chasesfish]

I once lost a ton shorting TSLA back before they were even turning a profit and were falling short of deliveries every quarter.  Even today, I think it is STUPID overvalued with even the forward P/E in the stratosphere.  I was bemoaning my luck at an alumni event and a professor of Finance gave me good advice.  While he agreed TSLA's valuation was absurb, "Never bet against a 'cult' stock".  I ignored that advice at my own peril twice to bet against GME (but with net debit put spreads and small position sizes).  So do as the professor says and not as I do...
[/quote]

My in house compliance manager (spouse) effectively points out that shorting is gambling vs. investing.   The expected outcome is less than 50% if you short the market.   

This is a good exercise, only having $100 in lets me watch something potentially get more absurd and I might size the bet up to a thousand or two, but still insane to see the cult stock.

Agree with you on TSLA, but there's no easy way to play that between the margin cost of carrying it and it being culted up.

[ChpBstrd]

I once lost a ton shorting TSLA back before they were even turning a profit and were falling short of deliveries every quarter.  Even today, I think it is STUPID overvalued with even the forward P/E in the stratosphere.  I was bemoaning my luck at an alumni event and a professor of Finance gave me good advice.  While he agreed TSLA's valuation was absurb, "Never bet against a 'cult' stock".  I ignored that advice at my own peril twice to bet against GME (but with net debit put spreads and small position sizes).  So do as the professor says and not as I do...

My in house compliance manager (spouse) effectively points out that shorting is gambling vs. investing.   The expected outcome is less than 50% if you short the market.   

This is a good exercise, only having $100 in lets me watch something potentially get more absurd and I might size the bet up to a thousand or two, but still insane to see the cult stock.

Agree with you on TSLA, but there's no easy way to play that between the margin cost of carrying it and it being culted up.

I trash talk TSLA on another thread, but what TSLA has going for it is that it's one of the few corporations spending a decent amount of money on Research and Development. The future outcomes of $3 billion per year in R&D spending are what you are buying when you buy Tesla stock at a market cap of $865B. R&D spending is what brought Tesla to the top of the EV market in the first place, and bought them a leadership position in self-driving tech. Tesla will likely lead the way in post-lithium-ion batteries because they're spending the money and putting in the work.

Tesla's R&D spending more than doubled since 2019. However their spending as a percentage of revenue has declined. In 2019, Tesla spent 5.46% of revenue on R&D, but by 2022 that was down to 3.77%. Now that Tesla vehicles no longer command the premium/margins people were paying in 2021 or 2022, we'll have to see whether management continues to double down on R&D or if they will cut spending to preserve profits and start to resemble established automakers.

A large and diversified R&D spending program is likely to yield technological breakthroughs wherever it occurs, but it is largely a factor of investor optimism whether the stocks of such companies command PE ratios like TSLA's 82. You can't always multiply the value of a company by diverting much of its revenue to R&D, but it sometimes works! This suggests a stock screener for R&D expenditures as a percentage of revenue or R&D spending growth, but guess what you'll get...

Amazon, Apple, Alphabet, Microsoft, Meta, Samsung, and Huawai all spent much more than Tesla in absolute terms and as a percent of revenue, but not even one of those companies sells for half the PE ratio of Tesla. That's because billions are being spent to deliver incremental smartphone or social media improvements to keep up in a saturated market, while Tesla is converting its R&D spending into rapid earnings growth. Similarly, legacy automakers like F and GM spent a larger percentage of their revenue on R&D in 2018, but perhaps they were also directing their spending toward non-breakthrough areas like cup holders or aesthetics. The value of an R&D program is thus demonstrated by its transformative results.

Tesla got ahead of the technical curve and is taking market share from the automakers more focused on disposing their money through dividends. Investors have bid TSLA to the moon on hopes of robo-taxis and AI. Their rationale is that TSLA's R&D program has already done the unthinkable and produced a profitable electric car with generous range, so why can't they produce something else? This pattern of investor thought could repeat in other smokestack industries. After all, one of the examples in Clayton Christensen's The Innovator's Dilemma is the steel mill industry. A stock with a moderate valuation and high or rising R&D spending would be intriguing to me if it was outside the usual IT/pharma/auto/aerospace set of industries.

[Financial.Velociraptor]

My in house compliance manager (spouse) effectively points out that shorting is gambling vs. investing.   The expected outcome is less than 50% if you short the market.   

You can totally make more than 100% on a short.  Either use options, or set a percentage of portfolio position size, top up as it falls.  I've had short position multibaggers both ways. 

And it is easier to find stocks that are overvalued and have weak prospects than stocks with good prospects that are undervalued.  Bear investing is all that remains of Graham-Dodd for the retail investor...

[MustacheAndaHalf]

I took away the impression Opendoor Technology was trying to streamline home buying/selling, which is needed.  That burn rate doesn't look good - they could run out of cash before they recover.

I visited their website for the first time to check on the claim they are house flippers [1].  The website says they charge 5-8% of the home value (on average).  That's enough to make a profit without flipping.  But in a situation with falling home prices, they could get burned badly (seems like the current situation).

I assume they are truthful in saying they aim to streamline the home selling/buying process... too bad that doesn't include the traditional 6% realtor fee for selling a house.

[1]

Misconception 2: Opendoor is a home flipper

https://www.opendoor.com/articles/most-common-misconceptions-about-opendoor

[MustacheAndaHalf]

I sold my $UJUL shares today owing to tracking error and inflexibility.  In years past I've argued against ChpBstrd using portfolio insurance, but not anymore.  Today I implemented a 94% SPY / 6% S&P 500 put option portfolio.

I don't want puts that only last half a recession, so I went with 2 year expiration.  Over time, I'll sell old puts and buy new ones to keep the expiration near 2 years.

I'll "chase" market gains, buying new puts close to the market price (and selling my old puts to help pay for it).  This can significantly eat into my returns, but the protection is superb - any market drop quickly runs into my put options.

Finally, no cap on gains.  In some years, UJUL had a really lousy 7% (2020) or 6% (2021) max gain: it could not return more, and that's before the 0.79% expense ratio.  I'd like to avoid those low caps on gains when markets are volatile.

[ChpBstrd]

I sold my $UJUL shares today owing to tracking error and inflexibility.  In years past I've argued against ChpBstrd using portfolio insurance, but not anymore.  Today I implemented a 94% SPY / 6% S&P 500 put option portfolio.

I don't want puts that only last half a recession, so I went with 2 year expiration.  Over time, I'll sell old puts and buy new ones to keep the expiration near 2 years.

I'll "chase" market gains, buying new puts close to the market price (and selling my old puts to help pay for it).  This can significantly eat into my returns, but the protection is superb - any market drop quickly runs into my put options.

Finally, no cap on gains.  In some years, UJUL had a really lousy 7% (2020) or 6% (2021) max gain: it could not return more, and that's before the 0.79% expense ratio.  I'd like to avoid those low caps on gains when markets are volatile.

You’ll get no argument from me, obviously! A protective put entered when VIX is in the 13.5 range is probably a good deal. The hard part, in my experience, is the psychological experience of watching either the puts or the shares going down, down, down day after day. One or the other is going to happen. Seeing all that red on the screen will torment you and make you think about how in hindsight you would have gone short/long (whichever side is up) and maybe you should switch to a one or the other now.

[MustacheAndaHalf]

I sold my $UJUL shares today owing to tracking error and inflexibility.  In years past I've argued against ChpBstrd using portfolio insurance, but not anymore.  Today I implemented a 94% SPY / 6% S&P 500 put option portfolio.

I don't want puts that only last half a recession, so I went with 2 year expiration.  Over time, I'll sell old puts and buy new ones to keep the expiration near 2 years.

I'll "chase" market gains, buying new puts close to the market price (and selling my old puts to help pay for it).  This can significantly eat into my returns, but the protection is superb - any market drop quickly runs into my put options.

Finally, no cap on gains.  In some years, UJUL had a really lousy 7% (2020) or 6% (2021) max gain: it could not return more, and that's before the 0.79% expense ratio.  I'd like to avoid those low caps on gains when markets are volatile.

You’ll get no argument from me, obviously! A protective put entered when VIX is in the 13.5 range is probably a good deal. The hard part, in my experience, is the psychological experience of watching either the puts or the shares going down, down, down day after day. One or the other is going to happen. Seeing all that red on the screen will torment you and make you think about how in hindsight you would have gone short/long (whichever side is up) and maybe you should switch to a one or the other now.

In theory, losses in the SPY should be offset by gains on the put options.  I'll be checking on that each week to confirm it.  That's also how I plan to avoid torment.

I also plan to get insurance on my insurance, which gets into the weeds a bit.  Options can rise or fall from two sources: the underlying, like the S&P 500 ... but also volatility - the chance prices rise or fall quickly.  The VIX is relatively low right now, but historically it can go lower.  Falling volatility on the VIX means lower "time value" in my put options... and they're all time value.

Next week, I plan to buy VIX put options in proportion to my S&P 500 put options.  So my puts use leverage to insure against drops in the S&P 500, and my VIX puts will use leverage to insure against a "volatility drop" in the put options.

Looking far out to March 2024, VIX calls cost about 50% of the underlying.  VIX puts cost about 0.5%, or 100x less in time value.  I understand the VIX is especially low, and fears of recession are still ahead.  But my VIX puts aren't aimed to make a profit - they guard against volatility (VIX) falling lower and hurting my protective puts.

[MustacheAndaHalf]

Seeing all that red on the screen will torment you and make you think about how in hindsight you would have gone short/long (whichever side is up) and maybe you should switch to a one or the other now.

I think a lot of retail investors do this.  They check the price (why?) and suddenly they need to do something - the price dropped, and they must sell.  What if they didn't check prices so often?  I think it can help.  It's what I'm trying now.

It's possile my SPY shares and SPY puts are so balanced, that my gains and losses are always equal.  I might be on a volatile road to nowhere...  which will become clear slowly, as I check those investments less frequently.

[Financial.Velociraptor]

LEAST INTRIGUING INVESTMENT

[snip]
Since that time, the Fed has consistently messaged, NOPE, smart money has it wrong and we plan on "higher for longer" and more rate raises through the end of the year.  Futures market now believes that messaging. 
[snip]

Lesson learned.  Don't fight the Fed, ride the wave!  I didn't go long dated or well out of the money this time but I've flipped the trade on its head and gone short.  18AUG2023 expiry 98/103 bear put spread.  I got 2.92 pricing. 

I need TLT to fall 1.2% over 40 days (and the Fed should have raised rates by then or at least signaled one next time).  To make 71% return.  This is enough to push back into the green across both trades.

Closed half of these spreads at 3.02 pricing, booking 54 in profit.  I'm up in the trade finally but have less conviction in the final outcome.

edit - fixed quote formatting

[ChpBstrd]

I also plan to get insurance on my insurance, which gets into the weeds a bit.  Options can rise or fall from two sources: the underlying, like the S&P 500 ... but also volatility - the chance prices rise or fall quickly.  The VIX is relatively low right now, but historically it can go lower.  Falling volatility on the VIX means lower "time value" in my put options... and they're all time value.

Next week, I plan to buy VIX put options in proportion to my S&P 500 put options.  So my puts use leverage to insure against drops in the S&P 500, and my VIX puts will use leverage to insure against a "volatility drop" in the put options.

Looking far out to March 2024, VIX calls cost about 50% of the underlying.  VIX puts cost about 0.5%, or 100x less in time value.  I understand the VIX is especially low, and fears of recession are still ahead.  But my VIX puts aren't aimed to make a profit - they guard against volatility (VIX) falling lower and hurting my protective puts.

I’m not sure if this will work or not. Options change in value due to delta, theta, vega, rho, and gamma. Your use of long VIX puts only hedges the vega (volatility) source of change in your SPY put. If you check your SPY put option’s Greeks, I bet vega is a relatively small influence compared to delta and theta in particular. Thus I think the effect of this hedge will be drowned out by other factors.

[MustacheAndaHalf]

I also plan to get insurance on my insurance, which gets into the weeds a bit.  Options can rise or fall from two sources: the underlying, like the S&P 500 ... but also volatility - the chance prices rise or fall quickly.  The VIX is relatively low right now, but historically it can go lower.  Falling volatility on the VIX means lower "time value" in my put options... and they're all time value.

Next week, I plan to buy VIX put options in proportion to my S&P 500 put options.  So my puts use leverage to insure against drops in the S&P 500, and my VIX puts will use leverage to insure against a "volatility drop" in the put options.

Looking far out to March 2024, VIX calls cost about 50% of the underlying.  VIX puts cost about 0.5%, or 100x less in time value.  I understand the VIX is especially low, and fears of recession are still ahead.  But my VIX puts aren't aimed to make a profit - they guard against volatility (VIX) falling lower and hurting my protective puts.

I’m not sure if this will work or not. Options change in value due to delta, theta, vega, rho, and gamma. Your use of long VIX puts only hedges the vega (volatility) source of change in your SPY put. If you check your SPY put option’s Greeks, I bet vega is a relatively small influence compared to delta and theta in particular. Thus I think the effect of this hedge will be drowned out by other factors.

On this forum, I don't expect to find people well versed with options - including me.  I'm not sure how far we can dig without uncovering mostly what we don't know.

I tried to track down what caused my puts to change prices.  What I found is mostly delta, with some vega.  My estimate of VIX puts needed was off by a factor of 2, which also happens to be the vega of my put option.  If that is right, then my option change value solely from delta and vega.

Theta doesn't matter much for options 700+ days to expiration.  I can't find an ideal comparison, because SPY long-dated options don't trade much (*).

---
(*) Some expirations traded hours apart, others days apart.  I only found one 5 min apart, near end of trading:

SPY241220P00400000   2023-07-28 3:53PM EDT   400.00   13.47   13.50   14.88
SPY250117P00400000   2023-07-28 3:58PM EDT   400.00   13.90   13.20   14.96

SPY moved up $0.64 from 3:50pm to 3:55pm, which ruins the comparison of last trade prices.  The last trade of $13.47 is outside the bid-ask range of $13.50 to $14.88, so the market moved noticably in those last 7 minutes of trading.  A trade could occur anywhere in the bid-ask spread, so a wide bid-ask spread makes the current price hard to predict as well.

[Financial.Velociraptor]

CUSIP: 00507VAQ2

This is the Activision Blizzard 2.500% bond with maturity of 15SEP2050.  The interest rate sucks in this environment so it is selling at a steep discount of 64.500 cents on the dollar.  That brings the notional yield up to 3.88% while you wait for the thesis to play out.

The thesis: Microsoft is gung-ho to acquire ATVI and recently cleared some regulatory hurdles that mostly make it a done deal in the US and the Eurozone (a major hurdle remains in the UK.)  If the deal goes through, as is increasingly likely, the bond must be repaid at par.  So you get paid almost 4% to wait in a 'money good' bond that has a high probability of delivering a 55% capital gain in less than a year.    Should the deal not go through, you have capital upside as soon as the next Fed easing cycle. 

[Financial.Velociraptor]

LEAST INTRIGUING INVESTMENT

[snip]
Since that time, the Fed has consistently messaged, NOPE, smart money has it wrong and we plan on "higher for longer" and more rate raises through the end of the year.  Futures market now believes that messaging. 
[snip]

Lesson learned.  Don't fight the Fed, ride the wave!  I didn't go long dated or well out of the money this time but I've flipped the trade on its head and gone short.  18AUG2023 expiry 98/103 bear put spread.  I got 2.92 pricing. 

I need TLT to fall 1.2% over 40 days (and the Fed should have raised rates by then or at least signaled one next time).  To make 71% return.  This is enough to push back into the green across both trades.

Underlying is at 98.14 and lower strike is approaching the money.  Should this finish in the money, my loss in TLT will fall to 411 dollars (after forgoing the half the opportunity to derisk the trade). 

[ChpBstrd]

CUSIP: 00507VAQ2

This is the Activision Blizzard 2.500% bond with maturity of 15SEP2050.  The interest rate sucks in this environment so it is selling at a steep discount of 64.500 cents on the dollar.  That brings the notional yield up to 3.88% while you wait for the thesis to play out.

The thesis: Microsoft is gung-ho to acquire ATVI and recently cleared some regulatory hurdles that mostly make it a done deal in the US and the Eurozone (a major hurdle remains in the UK.)  If the deal goes through, as is increasingly likely, the bond must be repaid at par.  So you get paid almost 4% to wait in a 'money good' bond that has a high probability of delivering a 55% capital gain in less than a year.    Should the deal not go through, you have capital upside as soon as the next Fed easing cycle.

Very intriguing investment idea!

I suppose there is some risk built into the price, but if the deal fails to go through Moody's says: "If Microsoft cannot clear the regulatory hurdles in the court and the transaction does not close, it is likely that the Baa1 ratings would be confirmed." so it's not like failure of the deal in itself would lead to a downgrade. About all that could stop AB is mismanagement, which is exactly Moody's concern, but Moody's also notes their misogyny problem appears to be being addressed.

Plus I like the prospects for either of these companies, and foresee rate cuts ahead. And have you seen kids these days? Gaming is all they do. So a 27 year duration in a high-confidence company is exactly what I'm looking for. Order submitted for 15 bonds.

ETA: I think it would be in Microsoft's interest NOT to pay off these 2.5% bonds and replace them with a higher cost of capital. However there is a good chance the bonds go from their current Baa1/A- to somewhere close to Microsoft's Aaa/AAA rating. Will that be a big deal? Microsoft's 2050 bonds have a YTW of 4.796% compared to AB's 4.987% with both having their next call in 2050. So there might be 19-20 bp of yield to fall on the AB bonds if AB was merged with Microsoft and the bonds survived and were upgraded to AAA. Overall, either the Microsoft or AB 2050 bonds look like a leveraged bet on falling interest rates rather than a merger play. I could not find any documentation that the "bond must be repaid at par" so please point me in the correct direction if you've seen this condition somewhere. I see lots of bonds surviving mergers, such as Mylan's bonds surviving the merger with Viatris.

[daverobev]

Rather than start a new thread, this is more of a couple of questions.

I'm trying to buy fixed income stuff but am getting confused/finding new things.

My main unregistered brokerage is IB. I'm looking for CDs here, and found this one

IBCID642344045 - BMO Corp CD 5.3 Jul21'33

Ask price is ~100.62 but it's telling me the yield is ~4.5%.. that doesn't make sense, right? It must be just ever so slightly below the 5.3% it would be getting at face value!

I'm also trying to buy UK Gilts, eg 2037 - https://www.hl.co.uk/shares/shares-search-results/t/treasury-1.75-07092037-gilt - also available on IB but doesn't seem to fill, I've got orders in at various prices - I guess IB's OTC just isn't hooked in to the right places.. or perhaps partial fills are disabled for the seller/s?

Finally... in my Canadian brokerage I can see CWB bonds, 136765BP8 - price at ~$80, coupon of 5%... it's telling me the yield is 13%?! From my simple maths I would say that 5/80 = 6.25%. Ok so they mature in 2031 so there is obviously some 25% cap gain to be had but that's 8 years, even a poor guess would give me 9.5% or something.

Ehhh. Am I stupid?

[ChpBstrd]

IBCID642344045 - BMO Corp CD 5.3 Jul21'33
Ask price is ~100.62 but it's telling me the yield is ~4.5%.. that doesn't make sense, right? It must be just ever so slightly below the 5.3% it would be getting at face value!

I looked up that CD (CUSIP: 05600XSY7) and it looks like 5.3% was your yield to maturity and 4.5% was your yield to worst. Your return will be the 4.5% YTW if the bank decides to call the CD and pay you back $100. The 0.62% difference between what you originally paid for the CD and what they return to you if it is called away is the difference between the two rates, with rounding. If your CD is never called, perhaps because rates stay high, then 5.3% will be your return.

I'm also trying to buy UK Gilts, eg 2037 - https://www.hl.co.uk/shares/shares-search-results/t/treasury-1.75-07092037-gilt - also available on IB but doesn't seem to fill, I've got orders in at various prices - I guess IB's OTC just isn't hooked in to the right places.. or perhaps partial fills are disabled for the seller/s?

I've never bought a Gilt, but I would guess that your bid prices are not attractive to any sellers. Another possibility is that you're offering to buy "odd lots" or quantities not in multiples of 100. If most deals are for large quantities and no dealers consider your offer to buy a small handful of Gilts to be attractive when they need to sell 100s of Gilts at a time, or need to hedge in ways that involve large quantities. Drop your bid prices by a penny - er... a pence - and see what happens.

Finally... in my Canadian brokerage I can see CWB bonds, 136765BP8 - price at ~$80, coupon of 5%... it's telling me the yield is 13%?! From my simple maths I would say that 5/80 = 6.25%. Ok so they mature in 2031 so there is obviously some 25% cap gain to be had but that's 8 years, even a poor guess would give me 9.5% or something.

Keep in mind that you're paying 80 for a bond that will eventually give you back 100. Those $20 in capital gains plus your $5/year interest together add up to the yield to maturity. This is a discount bond which has lost value since it was issued. It probably lost value due to rising interest rates or reduced confidence in the lender. If you are looking at a bond that is priced above its par value, e.g. 101, that's a premium bond and the YTM is calculated assuming you lose the premium you paid over par during the life of the bond. So in summary, YTM accounts for all the cash flows from the bond and provides a single percentage you can use to compare them.

You should also consider taxes on interest vs. capital gains, and your need for income from the bonds. I.e. a discount bond provides much of its cash flow at the end of its life when it is paid back at par, and a premium bond does the opposite. If a person said "I need 5% for living expenses", and then bought a heavily discounted bond with a YTM of 5%, they would soon discover that the interest payments from the bond weren't covering their expenses and some of their cash flows were years away!

[daverobev]

Thanks - YTW makes sense.

Gilts are sold in minimum £1000 face value chunks, maybe that's the problem that I'm just putting in bids at roughly what HL is telling me the ask price is for single units. Maybe I should bite the bullet and sell some other stuff to buy a chunk.

With the CWB bonds - yeah $80, face value $100, coupon 5% -> 6.25% current yield. Then the 25% in capital gains over ~ 8 years, 25/3 ~= 3% a year, hence 9.25% I guesstimated. Where the hell does the 13% come from?

Taxes - I don't think it makes a difference here. Were I to be in the UK by the time the gilt matures, the cap gain ends up being tax free, which is not impossible (and one reason I'm keen - you don't get that benefit if you're buying an ETF). The CWB bonds would be in a retirement account so tax deferred.

[ChpBstrd]

With the CWB bonds - yeah $80, face value $100, coupon 5% -> 6.25% current yield. Then the 25% in capital gains over ~ 8 years, 25/3 ~= 3% a year, hence 9.25% I guesstimated. Where the hell does the 13% come from?

IDK... I plugged these factors into https://dqydj.com/bond-yield-to-maturity-calculator/ and came up with 9.932%, assuming the coupon is $5 paid out as $2.50 twice a year or 6.25%. Maybe check the assumptions on the coupons.

Also note that in addition to the price of the bond, you also pay the seller the pro-rated interest they earned between payments. I suppose this practice was started to keep the prices of bonds stable and comparable between various interest payment schedules.

[daverobev]

With the CWB bonds - yeah $80, face value $100, coupon 5% -> 6.25% current yield. Then the 25% in capital gains over ~ 8 years, 25/3 ~= 3% a year, hence 9.25% I guesstimated. Where the hell does the 13% come from?

IDK... I plugged these factors into https://dqydj.com/bond-yield-to-maturity-calculator/ and came up with 9.932%, assuming the coupon is $5 paid out as $2.50 twice a year or 6.25%. Maybe check the assumptions on the coupons.

Also note that in addition to the price of the bond, you also pay the seller the pro-rated interest they earned between payments. I suppose this practice was started to keep the prices of bonds stable and comparable between various interest payment schedules.

I misread, they are 2081 not 2031. Gilts are listed xxYY, these bonds are Jul31 so I just brainfarted that the 31 was the year and/or misread the 8 as a 3.

Which makes even less sense in terms of the yield.

[Financial.Velociraptor]

With the CWB bonds - yeah $80, face value $100, coupon 5% -> 6.25% current yield. Then the 25% in capital gains over ~ 8 years, 25/3 ~= 3% a year, hence 9.25% I guesstimated. Where the hell does the 13% come from?

IDK... I plugged these factors into https://dqydj.com/bond-yield-to-maturity-calculator/ and came up with 9.932%, assuming the coupon is $5 paid out as $2.50 twice a year or 6.25%. Maybe check the assumptions on the coupons.

Also note that in addition to the price of the bond, you also pay the seller the pro-rated interest they earned between payments. I suppose this practice was started to keep the prices of bonds stable and comparable between various interest payment schedules.

Also note, that when you buy a bond except at original issue; you pay the accrued interest on the front coupon.  So if the bond is priced at 80 cents on the dollar, you'll pay 800, plus accrued interest, plus commission.  All of those should be considered in your YTM calculation.  I did this approximately 45834905803459034853458904 times (approx) in grad school.  Its a lot of work to get the technically correct answer but unless the coupon is like 20% or the maturity is less than a year away, the difference is not material on a few thousand investment.  Bonds at IB have commisions that range from 1 dollar per to 7 dollars per and I can't figure out what the drivers are.  The usually moves the YTM by as much as the accrued interest or your compounding assumptions.