Lifecycle Investing - Leveraging when young

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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

bling wrote: Thu Aug 27, 2020 7:56 pm what are the requirements for being able to trade a synthetic stock option? does the put count as a "naked put" since you don't own the underlying stock, and thus be required to meet strict margin requirements?
You’d need to be cleared to sell naked puts. Yes, the put is naked.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

zhuyz05 wrote: Thu Aug 27, 2020 5:48 pm
Steve Reading wrote: Thu Aug 27, 2020 2:29 pm
ScubaHogg wrote: Thu Aug 27, 2020 12:11 pm OP,

This thread has grown to 21 pages, so I apologize if this is answered elsewhere. Would you mind posting a rough snapshot of how you are currently executing your leverage (Options at IB, Futures at IB, maybe mixed with the Excellent Adventure?) and how much leverage you are currently holding?

Thanks!
My retirement accounts are not leveraged. They're all stock ETFs.
My taxable account is leveraged 2:1 at the moment. It's all invested in stock ETFs as well. No futures.
I achieved this leverage via margin at IB*. I don't use bonds/gold/etc at all. I don't use leveraged ETFs and I don't use the Excellent Adventure.

*I also sold a few SPX option box spreads short as a way to get a more favorable borrowing rate than IB's margin rate. This doesn't change the above mechanics, it just makes it so instead of paying 1.2-1.6% on my cash debit, I pay closer to 0.5%. That's all.
I was very lucky to come across your posts at the right time before the recent drop in long-term bond -- I was previously mostly invested in the Excellent Adventure strategy until I saw your threads and switch to life-cycle investing. So, thank you!
Glad to hear this thread has been helpful.

Cheers mate.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
Semantics
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Re: Lifecycle Investing - Leveraging when young

Post by Semantics »

Steve Reading wrote: Thu Aug 27, 2020 4:59 pm
zhuyz05 wrote: Thu Aug 27, 2020 4:14 pm
Steve Reading wrote: Thu Aug 27, 2020 2:29 pm
ScubaHogg wrote: Thu Aug 27, 2020 12:11 pm OP,

This thread has grown to 21 pages, so I apologize if this is answered elsewhere. Would you mind posting a rough snapshot of how you are currently executing your leverage (Options at IB, Futures at IB, maybe mixed with the Excellent Adventure?) and how much leverage you are currently holding?

Thanks!
My retirement accounts are not leveraged. They're all stock ETFs.
My taxable account is leveraged 2:1 at the moment. It's all invested in stock ETFs as well. No futures.
I achieved this leverage via margin at IB*. I don't use bonds/gold/etc at all. I don't use leveraged ETFs and I don't use the Excellent Adventure.

*I also sold a few SPX option box spreads short as a way to get a more favorable borrowing rate than IB's margin rate. This doesn't change the above mechanics, it just makes it so instead of paying 1.2-1.6% on my cash debit, I pay closer to 0.5%. That's all.
Do you mind sharing how to do the box spreads? Thanks!
I would say you first read this page (in there, there's a PDF explaining box spreads as well):
https://www.reddit.com/r/options/commen ... 85_margin/

Once I get a chance, I'll make a post detailing the box spreads I did, how I came chose the strike prices, etc. Let me know if the above is unclear. It probably is complicated if you're not too familiar with options.

I wonder if BHs would appreciate a small tutorial :confused
I'd be interested in hearing if you had to do anything special to get them to fill. I tried opening a relatively small box spread on SPX a couple weeks ago as an experiment, and couldn't get them to fill even at around 0.7% which was higher than the 10 year rate. And that was for 4 months out. Broker is Schwab. Maybe I should just try again at IBKR, I also have an account there.
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

Semantics wrote: Fri Aug 28, 2020 1:19 am
Steve Reading wrote: Thu Aug 27, 2020 4:59 pm
zhuyz05 wrote: Thu Aug 27, 2020 4:14 pm
Steve Reading wrote: Thu Aug 27, 2020 2:29 pm
ScubaHogg wrote: Thu Aug 27, 2020 12:11 pm OP,

This thread has grown to 21 pages, so I apologize if this is answered elsewhere. Would you mind posting a rough snapshot of how you are currently executing your leverage (Options at IB, Futures at IB, maybe mixed with the Excellent Adventure?) and how much leverage you are currently holding?

Thanks!
My retirement accounts are not leveraged. They're all stock ETFs.
My taxable account is leveraged 2:1 at the moment. It's all invested in stock ETFs as well. No futures.
I achieved this leverage via margin at IB*. I don't use bonds/gold/etc at all. I don't use leveraged ETFs and I don't use the Excellent Adventure.

*I also sold a few SPX option box spreads short as a way to get a more favorable borrowing rate than IB's margin rate. This doesn't change the above mechanics, it just makes it so instead of paying 1.2-1.6% on my cash debit, I pay closer to 0.5%. That's all.
Do you mind sharing how to do the box spreads? Thanks!
I would say you first read this page (in there, there's a PDF explaining box spreads as well):
https://www.reddit.com/r/options/commen ... 85_margin/

Once I get a chance, I'll make a post detailing the box spreads I did, how I came chose the strike prices, etc. Let me know if the above is unclear. It probably is complicated if you're not too familiar with options.

I wonder if BHs would appreciate a small tutorial :confused
I'd be interested in hearing if you had to do anything special to get them to fill. I tried opening a relatively small box spread on SPX a couple weeks ago as an experiment, and couldn't get them to fill even at around 0.7% which was higher than the 10 year rate. And that was for 4 months out. Broker is Schwab. Maybe I should just try again at IBKR, I also have an account there.
I didn't do anything particularly special with the orders themselves. Reading your comment, I think we implemented it similarly. We put in limit orders that were very good, and then slowly worsened the price until we got filled or not.

Maybe IBKR was better than Schwab. My only experience with Schwab was setting up some synthetic stock positions a year ago and was happy with the prices. Of course, a box is tougher.

What I would say I did (and you might not have) is the following:
1) I made a spreadsheet where I could plug in the options chain, and, given a box spread size (ex: 1000 points), it would spit out the set of options from the option chain that produced the lowest rate, accounting for spreads of the options as well.
2) I could also filter to ignore any options with Open Interest or Volume lower than a certain value.
I used that spreadsheet with various expirations, over a period of two days, to get a sense for where the best borrowing rates were located. One finding was that the bigger the box, the better the rate. I cannot explain why. I think it's because spreads on the options are somewhat similar, so the more you borrow with one set of options, the better in general.
3) On the day I sold the box, I took the above findings into consideration, found myself a couple of legs that had reasonable open interest, put in the orders and patiently waited. I slowly moved my price.

I was willing to get filled at a 0.7% rate but got filled at 0.5%.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
bling
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Re: Lifecycle Investing - Leveraging when young

Post by bling »

Steve Reading wrote: Thu Aug 27, 2020 8:48 pm
bling wrote: Thu Aug 27, 2020 7:56 pm what are the requirements for being able to trade a synthetic stock option? does the put count as a "naked put" since you don't own the underlying stock, and thus be required to meet strict margin requirements?
You’d need to be cleared to sell naked puts. Yes, the put is naked.
it's probably extremely rare (due to buying LEAPs and rolling way before expiry), but of course with a put there's always the risk of being assigned. when/if this happens, does the call automatically get sold to cover the assigned put or do you need to do it manually?
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

bling wrote: Fri Aug 28, 2020 9:08 am
Steve Reading wrote: Thu Aug 27, 2020 8:48 pm
bling wrote: Thu Aug 27, 2020 7:56 pm what are the requirements for being able to trade a synthetic stock option? does the put count as a "naked put" since you don't own the underlying stock, and thus be required to meet strict margin requirements?
You’d need to be cleared to sell naked puts. Yes, the put is naked.
it's probably extremely rare (due to buying LEAPs and rolling way before expiry), but of course with a put there's always the risk of being assigned. when/if this happens, does the call automatically get sold to cover the assigned put or do you need to do it manually?
Since I think you're talking about SPY options, let's use those. The synthetic position I used was basically at the money. If the put gets assigned, I will be forced to purchase 100 shares of SPY (around $35K). My broker will automatically purchase the shares on margin and will produce a negative cash balance of $35K. I will also get 100 shares of SPY.

This might or might not lead to a margin call. My account liquidation value is basically the same as before (I now have -35K cash, but also +35K in shares). However, shares don't serve as collateral dollar-for-dollar so to speak. But a margin call isn't a big deal. It will just force me to sell positions to cover my negative cash until I'm margin compliant. So that would be selling SPY shares to cover the negative cash. No big deal.

There are two caveats:
1) Margin liquidation order is broker-specific. IBKR will liquidate immediately and in an order they choose. So they might liquidate my call options to cover the cash debit instead of the SPY shares. This isn't a huge deal, later that day I can buy-sell as needed to get back to my desired position. The only bad thing is that forced liquidation some times happens at illiquid hours, crossing hefty spreads. Other brokers will give you a couple of days to figure out what you want to do.
2) Chances are, if you were margin compliant with your naked puts, you probably will be after the assignment.

Finally, getting assigned the put would be a GREAT THING. Your short put has intrinsic AND time value. Assigning it is like letting you buy back the put for the intrinsic value, getting the time premium for free. With ATM puts, they are basically mostly time premium. So getting assigned would be a surprise, to be sure, but a welcome one!
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Lifecycle Investing - Leveraging when young

Post by whodidntante »

Steve Reading wrote: Fri Aug 28, 2020 8:02 am
Semantics wrote: Fri Aug 28, 2020 1:19 am
Steve Reading wrote: Thu Aug 27, 2020 4:59 pm
zhuyz05 wrote: Thu Aug 27, 2020 4:14 pm
Steve Reading wrote: Thu Aug 27, 2020 2:29 pm

My retirement accounts are not leveraged. They're all stock ETFs.
My taxable account is leveraged 2:1 at the moment. It's all invested in stock ETFs as well. No futures.
I achieved this leverage via margin at IB*. I don't use bonds/gold/etc at all. I don't use leveraged ETFs and I don't use the Excellent Adventure.

*I also sold a few SPX option box spreads short as a way to get a more favorable borrowing rate than IB's margin rate. This doesn't change the above mechanics, it just makes it so instead of paying 1.2-1.6% on my cash debit, I pay closer to 0.5%. That's all.
Do you mind sharing how to do the box spreads? Thanks!
I would say you first read this page (in there, there's a PDF explaining box spreads as well):
https://www.reddit.com/r/options/commen ... 85_margin/

Once I get a chance, I'll make a post detailing the box spreads I did, how I came chose the strike prices, etc. Let me know if the above is unclear. It probably is complicated if you're not too familiar with options.

I wonder if BHs would appreciate a small tutorial :confused
I'd be interested in hearing if you had to do anything special to get them to fill. I tried opening a relatively small box spread on SPX a couple weeks ago as an experiment, and couldn't get them to fill even at around 0.7% which was higher than the 10 year rate. And that was for 4 months out. Broker is Schwab. Maybe I should just try again at IBKR, I also have an account there.
I didn't do anything particularly special with the orders themselves. Reading your comment, I think we implemented it similarly. We put in limit orders that were very good, and then slowly worsened the price until we got filled or not.

Maybe IBKR was better than Schwab. My only experience with Schwab was setting up some synthetic stock positions a year ago and was happy with the prices. Of course, a box is tougher.

What I would say I did (and you might not have) is the following:
1) I made a spreadsheet where I could plug in the options chain, and, given a box spread size (ex: 1000 points), it would spit out the set of options from the option chain that produced the lowest rate, accounting for spreads of the options as well.
2) I could also filter to ignore any options with Open Interest or Volume lower than a certain value.
I used that spreadsheet with various expirations, over a period of two days, to get a sense for where the best borrowing rates were located. One finding was that the bigger the box, the better the rate. I cannot explain why. I think it's because spreads on the options are somewhat similar, so the more you borrow with one set of options, the better in general.
3) On the day I sold the box, I took the above findings into consideration, found myself a couple of legs that had reasonable open interest, put in the orders and patiently waited. I slowly moved my price.

I was willing to get filled at a 0.7% rate but got filled at 0.5%.
I would be interested to get a copy of your spreadsheet. I know what I'm doing well enough that I won't shoot my eye out.
Semantics
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Re: Lifecycle Investing - Leveraging when young

Post by Semantics »

Steve Reading wrote: Fri Aug 28, 2020 8:02 am
Semantics wrote: Fri Aug 28, 2020 1:19 am
Steve Reading wrote: Thu Aug 27, 2020 4:59 pm
zhuyz05 wrote: Thu Aug 27, 2020 4:14 pm
Steve Reading wrote: Thu Aug 27, 2020 2:29 pm

My retirement accounts are not leveraged. They're all stock ETFs.
My taxable account is leveraged 2:1 at the moment. It's all invested in stock ETFs as well. No futures.
I achieved this leverage via margin at IB*. I don't use bonds/gold/etc at all. I don't use leveraged ETFs and I don't use the Excellent Adventure.

*I also sold a few SPX option box spreads short as a way to get a more favorable borrowing rate than IB's margin rate. This doesn't change the above mechanics, it just makes it so instead of paying 1.2-1.6% on my cash debit, I pay closer to 0.5%. That's all.
Do you mind sharing how to do the box spreads? Thanks!
I would say you first read this page (in there, there's a PDF explaining box spreads as well):
https://www.reddit.com/r/options/commen ... 85_margin/

Once I get a chance, I'll make a post detailing the box spreads I did, how I came chose the strike prices, etc. Let me know if the above is unclear. It probably is complicated if you're not too familiar with options.

I wonder if BHs would appreciate a small tutorial :confused
I'd be interested in hearing if you had to do anything special to get them to fill. I tried opening a relatively small box spread on SPX a couple weeks ago as an experiment, and couldn't get them to fill even at around 0.7% which was higher than the 10 year rate. And that was for 4 months out. Broker is Schwab. Maybe I should just try again at IBKR, I also have an account there.
I didn't do anything particularly special with the orders themselves. Reading your comment, I think we implemented it similarly. We put in limit orders that were very good, and then slowly worsened the price until we got filled or not.

Maybe IBKR was better than Schwab. My only experience with Schwab was setting up some synthetic stock positions a year ago and was happy with the prices. Of course, a box is tougher.

What I would say I did (and you might not have) is the following:
1) I made a spreadsheet where I could plug in the options chain, and, given a box spread size (ex: 1000 points), it would spit out the set of options from the option chain that produced the lowest rate, accounting for spreads of the options as well.
2) I could also filter to ignore any options with Open Interest or Volume lower than a certain value.
I used that spreadsheet with various expirations, over a period of two days, to get a sense for where the best borrowing rates were located. One finding was that the bigger the box, the better the rate. I cannot explain why. I think it's because spreads on the options are somewhat similar, so the more you borrow with one set of options, the better in general.
3) On the day I sold the box, I took the above findings into consideration, found myself a couple of legs that had reasonable open interest, put in the orders and patiently waited. I slowly moved my price.

I was willing to get filled at a 0.7% rate but got filled at 0.5%.
This is great info - sounds like I just need to be more methodical. I tried a few arbitrary strike prices, and it was a pretty narrow spread (I assumed there might be better liquidity closer to ATM, didn't really check the OI).
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

whodidntante wrote: Fri Aug 28, 2020 10:32 am I would be interested to get a copy of your spreadsheet. I know what I'm doing well enough that I won't shoot my eye out.
It's pretty crude. You literally just copy-paste the options chain from Barcharts in a specific location, and the formulas just do the math based on the Bid and Ask prices. If I get a chance, I can upload as a Google Sheet but it's really nothing otherworldly.
Semantics wrote: Fri Aug 28, 2020 10:46 am This is great info - sounds like I just need to be more methodical. I tried a few arbitrary strike prices, and it was a pretty narrow spread (I assumed there might be better liquidity closer to ATM, didn't really check the OI).
Just be wary that, for short-term expiration (say, Dec 2020), the spreads actually will be fairly small. If you think about it, the spreads on the Dec 2022 contract could be 6x larger and the borrowing cost might still be lower for the Dec 2022 contract since it is much farther away.

It's imperative you make a little formula where you plug in box spread points, expiration date, and borrowing rate, and it spits out the price you should ask for the limit order. That way, you can methodically work the limit order on the go. Ex: "Ok 0.3% would be a price of -100. I see that 0.4% would be a price of -99. Ok let me change the limit order to -99 and update it, see if it gets filled".

So maybe just a tiiiny bit more involved than the Reddit link I gave before but not bad at all. I think IBKR might just get very good order filling too and I'm just fooling myself with the above haha.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Lifecycle Investing - Leveraging when young

Post by ChrisBenn »

bling wrote: Fri Aug 28, 2020 9:08 am
Steve Reading wrote: Thu Aug 27, 2020 8:48 pm
bling wrote: Thu Aug 27, 2020 7:56 pm what are the requirements for being able to trade a synthetic stock option? does the put count as a "naked put" since you don't own the underlying stock, and thus be required to meet strict margin requirements?
You’d need to be cleared to sell naked puts. Yes, the put is naked.
it's probably extremely rare (due to buying LEAPs and rolling way before expiry), but of course with a put there's always the risk of being assigned. when/if this happens, does the call automatically get sold to cover the assigned put or do you need to do it manually?
You could also sell the box spread on SPX (index option) which doesn't allow early execution of the contract (european style).
bling
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Re: Lifecycle Investing - Leveraging when young

Post by bling »

is there an alternative options strategy that approximates a synthetic stock without selling a naked put option?

i've been researching more on this topic (which led me to the legendary story of a box spread gone wrong on WSB) and short of lying on my options application questionnaire i doubt i would be granted the highest level of options trading.

so it seems the best thing for newbies trying this out would probably be one of the leveraged ETFs, followed by a long calls, and then the various options spreads.
flyingcows
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Re: Lifecycle Investing - Leveraging when young

Post by flyingcows »

bling wrote: Fri Aug 28, 2020 7:15 pm is there an alternative options strategy that approximates a synthetic stock without selling a naked put option?
Sure, you could make any short naked trade a defined risk trade, and get a fairly similar risk/reward profile by buying a far out of the money long option that is very cheap, thus making the spread very wide.

For example, replace your naked put with a put credit spread using XYZ stock trading currently at 350:

Sell the Oct 15th 340 strike put for $10.00
Buy the Oct 15th 310 strike put for $1.00

1 contract brings you a $900 net credit with a max risk of $2,100 (width of spread - net credit received)

With a standard margin account, buying power reduction would be $2,100 (max risk) to open the trade.

Finally, buy your long call option(s) using some or all of the credit received
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

bling wrote: Fri Aug 28, 2020 7:15 pm is there an alternative options strategy that approximates a synthetic stock without selling a naked put option?
Are you asking because you are concerned about the potential losses from a naked put, or due to the difficulty of getting approved?
bling wrote: Fri Aug 28, 2020 7:15 pm i've been researching more on this topic (which led me to the legendary story of a box spread gone wrong on WSB) and short of lying on my options application questionnaire i doubt i would be granted the highest level of options trading.
You could just use IBKR/Robinhood/etc, which don't even ask.
bling wrote: Fri Aug 28, 2020 7:15 pm so it seems the best thing for newbies trying this out would probably be one of the leveraged ETFs, followed by a long calls, and then the various options spreads.
For tax-advantaged accounts, just use futures. They're actually pretty easy to use and there's no cash drag any more since interest rates are ~0% any ways.

If taxable, I would recommend IBKR margin. You can sell an SPX box to get even lower financing but you don't have to. You can keep things super simple with just margin. The rates are great already.

I don't like using spreads or synthetic longs with options in taxable because you will have to realize the gains. I did it before but have learned :happy Either way, setting up various spreads probably is more work than just margin.

I don't like long calls only at the moment. The implied rates appear too pricey for my taste (~4.3% for Dec 22 contracts) plus you also realize gains every so often.

I can't talk much about LETFs. I used to dislike them but Uncorrelated has changed my views here. I don't like that they're a bit opaque. I've heard stories of trading desks front running the end-of-day rebalancing they perform for instance. I also have some concerns in terms of counterparty risk of the swaps. I generally feel safer being the one that handles the derivatives. I'd say, if you feel comfortable with them, you could use them, they're definitely the easiest!

Just my 2 cents.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Lifecycle Investing - Leveraging when young

Post by langlands »

Steve Reading wrote: Fri Aug 28, 2020 9:05 pm
bling wrote: Fri Aug 28, 2020 7:15 pm so it seems the best thing for newbies trying this out would probably be one of the leveraged ETFs, followed by a long calls, and then the various options spreads.
For tax-advantaged accounts, just use futures. They're actually pretty easy to use and there's no cash drag any more since interest rates are ~0% any ways.

If taxable, I would recommend IBKR margin. You can sell an SPX box to get even lower financing but you don't have to. You can keep things super simple with just margin. The rates are great already.

I don't like using spreads or synthetic longs with options in taxable because you will have to realize the gains. I did it before but have learned :happy Either way, setting up various spreads probably is more work than just margin.

I don't like long calls only at the moment. The implied rates appear too pricey for my taste (~4.3% for Dec 22 contracts) plus you also realize gains every so often.

I can't talk much about LETFs. I used to dislike them but Uncorrelated has changed my views here. I don't like that they're a bit opaque. I've heard stories of trading desks front running the end-of-day rebalancing they perform for instance. I also have some concerns in terms of counterparty risk of the swaps. I generally feel safer being the one that handles the derivatives. I'd say, if you feel comfortable with them, you could use them, they're definitely the easiest!

Just my 2 cents.
Is a box spread essentially a free lunch? Especially with SPX options (which don't have assignment risk), it seems you can always use a box spread to guarantee near risk free borrowing. I'm confused why anyone would use IBKR margin, or indeed accept any margin rate above the risk free rate. It seems a little too good to be true, but I can't find the down side.
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Steve Reading
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

langlands wrote: Fri Aug 28, 2020 10:49 pm
Steve Reading wrote: Fri Aug 28, 2020 9:05 pm
bling wrote: Fri Aug 28, 2020 7:15 pm so it seems the best thing for newbies trying this out would probably be one of the leveraged ETFs, followed by a long calls, and then the various options spreads.
For tax-advantaged accounts, just use futures. They're actually pretty easy to use and there's no cash drag any more since interest rates are ~0% any ways.

If taxable, I would recommend IBKR margin. You can sell an SPX box to get even lower financing but you don't have to. You can keep things super simple with just margin. The rates are great already.

I don't like using spreads or synthetic longs with options in taxable because you will have to realize the gains. I did it before but have learned :happy Either way, setting up various spreads probably is more work than just margin.

I don't like long calls only at the moment. The implied rates appear too pricey for my taste (~4.3% for Dec 22 contracts) plus you also realize gains every so often.

I can't talk much about LETFs. I used to dislike them but Uncorrelated has changed my views here. I don't like that they're a bit opaque. I've heard stories of trading desks front running the end-of-day rebalancing they perform for instance. I also have some concerns in terms of counterparty risk of the swaps. I generally feel safer being the one that handles the derivatives. I'd say, if you feel comfortable with them, you could use them, they're definitely the easiest!

Just my 2 cents.
Is a box spread essentially a free lunch? Especially with SPX options (which don't have assignment risk), it seems you can always use a box spread to guarantee near risk free borrowing. I'm confused why anyone would use IBKR margin, or indeed accept any margin rate above the risk free rate. It seems a little too good to be true, but I can't find the down side.
Margin is far more flexible and convenient from a trading perspective. You might use margin to double your purchasing power of AAPL this week, or cover some futures settlements for the next few days while you wire more money. Borrowing/paying back your broker has no commissions or spreads so to speak and if the duration and amount are small enough, margin probably does come out ahead.

I’d say the box spread is well-suited for long-term buy-and-hold margin investors that are borrowing in quantities large enough to actually matter. Not sure how common that is. One annoyance for this group is that you can’t just amortize the box like I could with the margin debt. So I actually left a negative cash balance ($20K) that I’ll pay with cash flow by December when a box expires and I replace it with another. That comes out to be a little cheaper than box spreading the entire debit amount and then adding contributions that just sit there as cash until December.

Anyways, maybe I am missing something. So far, the positions look correct, no issues thus far. There are some subtleties in the way these get taxed year end but nothing major from my understanding.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
zhuyz05
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Re: Lifecycle Investing - Leveraging when young

Post by zhuyz05 »

Steve Reading wrote: Fri Aug 28, 2020 9:05 pm
bling wrote: Fri Aug 28, 2020 7:15 pm is there an alternative options strategy that approximates a synthetic stock without selling a naked put option?
Are you asking because you are concerned about the potential losses from a naked put, or due to the difficulty of getting approved?
bling wrote: Fri Aug 28, 2020 7:15 pm i've been researching more on this topic (which led me to the legendary story of a box spread gone wrong on WSB) and short of lying on my options application questionnaire i doubt i would be granted the highest level of options trading.
You could just use IBKR/Robinhood/etc, which don't even ask.
bling wrote: Fri Aug 28, 2020 7:15 pm so it seems the best thing for newbies trying this out would probably be one of the leveraged ETFs, followed by a long calls, and then the various options spreads.
For tax-advantaged accounts, just use futures. They're actually pretty easy to use and there's no cash drag any more since interest rates are ~0% any ways.

If taxable, I would recommend IBKR margin. You can sell an SPX box to get even lower financing but you don't have to. You can keep things super simple with just margin. The rates are great already.

I don't like using spreads or synthetic longs with options in taxable because you will have to realize the gains. I did it before but have learned :happy Either way, setting up various spreads probably is more work than just margin.

I don't like long calls only at the moment. The implied rates appear too pricey for my taste (~4.3% for Dec 22 contracts) plus you also realize gains every so often.

I can't talk much about LETFs. I used to dislike them but Uncorrelated has changed my views here. I don't like that they're a bit opaque. I've heard stories of trading desks front running the end-of-day rebalancing they perform for instance. I also have some concerns in terms of counterparty risk of the swaps. I generally feel safer being the one that handles the derivatives. I'd say, if you feel comfortable with them, you could use them, they're definitely the easiest!

Just my 2 cents.
What's your thought on using futures in taxable? If I understand correctly, the effective borrowing rate to get the same amount of equity exposure will just be inflated by a factor that depends on the tax rate for the gain/loss, right?
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Re: Lifecycle Investing - Leveraging when young

Post by bling »

Steve Reading wrote: Fri Aug 28, 2020 9:05 pm
bling wrote: Fri Aug 28, 2020 7:15 pm is there an alternative options strategy that approximates a synthetic stock without selling a naked put option?
Are you asking because you are concerned about the potential losses from a naked put, or due to the difficulty of getting approved?
the potential for unlimited losses, hence the follow-up question about what happens if one leg is randomly assigned. you can only learn so much from theory and paper trading, but it's always those "this can never happen" events that end up wiping people out.
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

zhuyz05 wrote: Sat Aug 29, 2020 8:04 am What's your thought on using futures in taxable? If I understand correctly, the effective borrowing rate to get the same amount of equity exposure will just be inflated by a factor that depends on the tax rate for the gain/loss, right?
Depending on your tax bracket, the tax drag can make them more expensive than margin. But it's close so you'll have to run your own numbers. In tax-advantaged, it's just a no-brainer. It's the cheapest form of financing, hands down (~0.3% last time I checked or thereabouts).
bling wrote: Sat Aug 29, 2020 8:34 am
Steve Reading wrote: Fri Aug 28, 2020 9:05 pm
bling wrote: Fri Aug 28, 2020 7:15 pm is there an alternative options strategy that approximates a synthetic stock without selling a naked put option?
Are you asking because you are concerned about the potential losses from a naked put, or due to the difficulty of getting approved?
the potential for unlimited losses, hence the follow-up question about what happens if one leg is randomly assigned. you can only learn so much from theory and paper trading, but it's always those "this can never happen" events that end up wiping people out.
Regardless of whether we're talking about boxes or synthetic longs, just use SPX options and you don't have to worry about assignment. With the synthetic long, assignment is perfectly fine, even a good thing. So SPY puts are OK. They're just less tax efficient. With the boxes, I don't want an assignment. That would auto assign the other long put in the leg. Just a mess.

Unlimited losses, OTOH, is a big deal of course. And something European options don't fix.
One way to deal with it is to buy some insurance. If you use long calls, you're basically fully insured (can't lose more than you start with). But it's expensive. So you could buy a little less insurance by buying the long call and then using a put spread as flyingcows mentioned. You could then sell covered OTM calls to finance those long puts but now you limit upside.

Personally, I think the above gets complicated, really quickly. I think a better choice is to simply leverage long with no downside protection, and sell exposure on market downturns to maintain roughly constant leverage. So just margin or futures and when markets drop, bite the bullet and reduce some exposure.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
ChrisBenn
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Re: Lifecycle Investing - Leveraging when young

Post by ChrisBenn »

bling wrote: Sat Aug 29, 2020 8:34 am
Steve Reading wrote: Fri Aug 28, 2020 9:05 pm
bling wrote: Fri Aug 28, 2020 7:15 pm is there an alternative options strategy that approximates a synthetic stock without selling a naked put option?
Are you asking because you are concerned about the potential losses from a naked put, or due to the difficulty of getting approved?
the potential for unlimited losses, hence the follow-up question about what happens if one leg is randomly assigned. you can only learn so much from theory and paper trading, but it's always those "this can never happen" events that end up wiping people out.
I don't think you have unlimited losses with a synthetic long, unless I"m missing something. Your are selling a put which has a defined max loss (strike price * 100 - premium). Technically you could cash secure your put (place that aside in a cash equivalent) and you would have no additional potential obligation.

It's selling naked calls that have "unlimited loss risk" - as you don't know ahead of time what the price is going to be to buy the equity if someone exercises the call.
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

Looking for thoughts at this point of this strategy.

I currently have reached my target % allocation to stocks ("Phase 2"). In other words, I have about X% of my total wealth in stocks today (total wealth defined as discount all my future savings + add current savings). The X% comes from Merton's optimal AA using my borrowing rate (0.5%) as the RFR, as well as my own perspectives of future stock returns/volatility and personal risk aversion.

All of my leverage is in a taxable account. The problem is that I also have retirement accounts I'm contributing to. So the question is what to do with those contributions:
1) Technically, the correct thing would be to buy stocks, while simultaneously selling stocks (deleveraging) in taxable. But my taxable has serious short-term cap gains (I know, great problem to have!).
2) I could buy more stocks.
3) I could keep those contributions in cash/ST bonds. But it is a little weird to have cash in an account, while leveraging in another (at a higher rate).

I am leaning towards option 2 because my AA stock share is larger than X% if I use the T-Bill RFR (0.1%) instead of my borrowing rate (0.5%). Since the account contributions can't directly pay off my debt, I'm thinking it is the larger AA stock share that applies to that account.

OTOH, I could buy 7Y treasuries, which yield about 0.5%, so it would somewhat be akin to "paying off my debt" (it effectively offsets it). Since Intermediate term bonds don't have much volatility, maybe this is OK. One thing I like about this is that if the market drops, it would let me maintain my Phase 2 allocation better (I could sell the bonds to buy stocks).
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Lifecycle Investing - Leveraging when young

Post by djeayzonne »

Hey Steve,

I might be misunderstanding what you are really asking/having trouble with, but it seems straightforward to me:

Traditional retirement accounts is the best place for the bonds anyway, so start using contributions there for that while continuing to deleverage the taxable.

I don't remember anywhere in the book saying that you are supposed to immediately deleverage once the target is reached. I would definitely disagree and ignore that if even if it did though.

Questions out of curiosity: How were you able to reach this state so quickly after starting this only about two years ago? Either you were already pretty close or your target was really low. Either way, why did you even bother with this strategy and take on the risk just to negate 2 years of sequence risk???
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Re: Lifecycle Investing - Leveraging when young

Post by ChrisBenn »

I would think at a minimum holding for ltcg would always be the right choice - i.e. there is enough fuzziness in the various factors that now vs 1 year from now isn't super meaningful (assuming contribution rates are are fairly uniform).

So not an answer, but I think selling at the stcg rate is always wrong.
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

djeayzonne wrote: Wed Oct 14, 2020 2:53 pm Hey Steve,

I might be misunderstanding what you are really asking/having trouble with, but it seems straightforward to me:

Traditional retirement accounts is the best place for the bonds anyway, so start using contributions there for that while continuing to deleverage the taxable.
Thanks for the thoughts.
djeayzonne wrote: Wed Oct 14, 2020 2:53 pm Questions out of curiosity: How were you able to reach this state so quickly after starting this only about two years ago? Either you were already pretty close or your target was really low. Either way, why did you even bother with this strategy and take on the risk just to negate 2 years of sequence risk???
Well, I didn't start working and accumulating 2 years ago. I came to this strategy with some capital already (you can see it on the OP), plus borrowed some funds from a family member to further leverage. I'm also looking to FIRE so my entire lifecycle is somewhat compressed. I also consider a portion of my salary as "stock-like" (the book assumes it's all risk-free). And the market has helped tremendously. All of these factors meant my Phase 1 took about 5 years. FWIW, the 200/40 strategy, assuming 40 year employment, took 10 years on average for Phase 1 so I'm not too far off. If the market drops though, I would have to go back to Phase 1.

Phase 2 (deleverage) will take ~8 years so I effectively avoided 8 years of sequence risk (I took my next 8 years of stock contributions and invested them today so to speak). I bothered with the strategy because I was impressed with the effects of temporal diversification and looked like a reasonably simple free lunch.
ChrisBenn wrote: Wed Oct 14, 2020 5:19 pm I would think at a minimum holding for ltcg would always be the right choice - i.e. there is enough fuzziness in the various factors that now vs 1 year from now isn't super meaningful (assuming contribution rates are are fairly uniform).

So not an answer, but I think selling at the stcg rate is always wrong.
My goal is to realize no gains at all in my taxable account. I will pay the margin balances down via new contributions. Unless the market gains outrageous heights and I decide actually realizing LTCG and rebalancing is worth it.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
djeayzonne
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Re: Lifecycle Investing - Leveraging when young

Post by djeayzonne »

Steve Reading wrote: Wed Oct 14, 2020 6:10 pm
djeayzonne wrote: Wed Oct 14, 2020 2:53 pm Hey Steve,

I might be misunderstanding what you are really asking/having trouble with, but it seems straightforward to me:

Traditional retirement accounts is the best place for the bonds anyway, so start using contributions there for that while continuing to deleverage the taxable.
Thanks for the thoughts.
djeayzonne wrote: Wed Oct 14, 2020 2:53 pm Questions out of curiosity: How were you able to reach this state so quickly after starting this only about two years ago? Either you were already pretty close or your target was really low. Either way, why did you even bother with this strategy and take on the risk just to negate 2 years of sequence risk???
Well, I didn't start working and accumulating 2 years ago. I came to this strategy with some capital already (you can see it on the OP), plus borrowed some funds from a family member to further leverage. I'm also looking to FIRE so my entire lifecycle is somewhat compressed. I also consider a portion of my salary as "stock-like" (the book assumes it's all risk-free). And the market has helped tremendously. All of these factors meant my Phase 1 took about 5 years. FWIW, the 200/40 strategy, assuming 40 year employment, took 10 years on average for Phase 1 so I'm not too far off. If the market drops though, I would have to go back to Phase 1.

Phase 2 (deleverage) will take ~8 years so I effectively avoided 8 years of sequence risk (I took my next 8 years of stock contributions and invested them today so to speak). I bothered with the strategy because I was impressed with the effects of temporal diversification and looked like a reasonably simple free lunch.
ChrisBenn wrote: Wed Oct 14, 2020 5:19 pm I would think at a minimum holding for ltcg would always be the right choice - i.e. there is enough fuzziness in the various factors that now vs 1 year from now isn't super meaningful (assuming contribution rates are are fairly uniform).

So not an answer, but I think selling at the stcg rate is always wrong.
My goal is to realize no gains at all in my taxable account. I will pay the margin balances down via new contributions. Unless the market gains outrageous heights and I decide actually realizing LTCG and rebalancing is worth it.
Yeah, but you didn't actually start this strategy and leveraging until early 2019, correct?
Anyway, makes sense if you think it will take 8 years to deleverage.
That brings up another question though. Why do you think it will take so long to deleverage when you were in the leveraged phase for less than 2 years?
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Re: Lifecycle Investing - Leveraging when young

Post by Steve Reading »

djeayzonne wrote: Wed Oct 14, 2020 6:41 pm Yeah, but you didn't actually start this strategy and leveraging until early 2019, correct?
That's right. But you can't compare that timeline directly against someone who started off from zero dollars (like in the book) for obvious reasons. My "stock accumulation" period is closer to 5 years overall.
Imagine someone in their 30s with enough saved to leverage and immediately reach Phase 2. That person would've had "zero time" in a leveraged Phase 1, but might still take a decade to fully deleverage in Phase 2.
djeayzonne wrote: Wed Oct 14, 2020 6:41 pm Why do you think it will take so long to deleverage when you were in the leveraged phase for less than 2 years?
Looking at my debt and looking at my taxable contributions and it'll take about 8 years to pay it off. The reason I reached the target faster than that was because some contributions bought stocks but can't help deleverage (like my retirement accounts), borrowed some funds from family member to leverage faster and because the market has helped quite a bit.

The reality is that each person's path will look different, depending on a ton of factors.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Lifecycle Investing - Leveraging when young

Post by keith6014 »

For people utilizing LEAPs (SPX & TLT), how far and close with regard to expiration do you buy, sell them for roll over? I am guessing you don't sell them closer to expiration (3-4 months) . Otherwise, I suspect getting a fill on your limit order will be hard due to liquidity issues?
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Re: Lifecycle Investing - Leveraging when young

Post by kim.gold »

keith6014 wrote: Tue Oct 27, 2020 1:52 pm For people utilizing LEAPs (SPX & TLT), how far and close with regard to expiration do you buy, sell them for roll over? I am guessing you don't sell them closer to expiration (3-4 months) . Otherwise, I suspect getting a fill on your limit order will be hard due to liquidity issues?
Buy more than one year far and sell at 6 months to expiration. LEAPs always have low liquidity. Be prepared to deal with a large bid / ask spread. On SPY expects something like 1 to 2%.

You also need to consider the volatility of the LEAPs. A quick / short drop of the underlining comes with a rise of the volatility and increases the price of the option. Not recommended to buy.
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Re: Lifecycle Investing - Leveraging when young

Post by keith6014 »

kim.gold wrote: Tue Oct 27, 2020 5:33 pm
keith6014 wrote: Tue Oct 27, 2020 1:52 pm For people utilizing LEAPs (SPX & TLT), how far and close with regard to expiration do you buy, sell them for roll over? I am guessing you don't sell them closer to expiration (3-4 months) . Otherwise, I suspect getting a fill on your limit order will be hard due to liquidity issues?
Buy more than one year far and sell at 6 months to expiration. LEAPs always have low liquidity. Be prepared to deal with a large bid / ask spread. On SPY expects something like 1 to 2%.

You also need to consider the volatility of the LEAPs. A quick / short drop of the underlining comes with a rise of the volatility and increases the price of the option. Not recommended to buy.
I am surprised how submissive the contracts behave. Even after yesterday's big sell off (2%) , I was shocked how little it moved. I still have 15 months for the contract to expire.

At the 6 month phase the liquidity will increase and the spreads will tighten?
kim.gold
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Re: Lifecycle Investing - Leveraging when young

Post by kim.gold »

keith6014 wrote: Tue Oct 27, 2020 6:49 pm
kim.gold wrote: Tue Oct 27, 2020 5:33 pm
keith6014 wrote: Tue Oct 27, 2020 1:52 pm For people utilizing LEAPs (SPX & TLT), how far and close with regard to expiration do you buy, sell them for roll over? I am guessing you don't sell them closer to expiration (3-4 months) . Otherwise, I suspect getting a fill on your limit order will be hard due to liquidity issues?
Buy more than one year far and sell at 6 months to expiration. LEAPs always have low liquidity. Be prepared to deal with a large bid / ask spread. On SPY expects something like 1 to 2%.

You also need to consider the volatility of the LEAPs. A quick / short drop of the underlining comes with a rise of the volatility and increases the price of the option. Not recommended to buy.
I am surprised how submissive the contracts behave. Even after yesterday's big sell off (2%) , I was shocked how little it moved. I still have 15 months for the contract to expire.

At the 6 month phase the liquidity will increase and the spreads will tighten?
The 6 month spread is definitely smaller. Anyway, round trip, you still have more than 1% slippage.
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