Leveraged strategies for ex-USA investors using options on Interactive Brokers

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danyboy7
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Re: Need advice between leveraged Permanent Portfolio,Golden Butterfly and Obsidian

Post by danyboy7 »

galawdawg wrote: Sun Sep 06, 2020 8:14 am Here's my advice:

1. Develop a workable plan
2. Invest early and often
3. Never bear too much or too little risk
4. Diversify
5. Never try to time the market
6. Use index funds when possible
7. Keep costs low
8. Minimize taxes
9. Invest with simplicity
10. Stay the course

http://www.bogleheads.org/wiki/Boglehea ... philosophy

If your scheme plan doesn't fit, it probably isn't a very wise investment plan. You do realize this is the Bogleheads forum, right? :wink: :happy
Yes,I do and thanks for your points :sharebeer . Which one of the 3 would you use if you have to ? This is the main question of the topic
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corp_sharecropper
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Re: Need advice between leveraged Permanent Portfolio,Golden Butterfly and Obsidian

Post by corp_sharecropper »

While noting that it appears you plan to utilize LETFs, it's worth pointing out that had you implemented this using reg-t margin for the period of your PV backtest all 3 of your options would have blown up. Portfolio margin is a little harder to look back and figure out but my guess is you also would have blown up at least on 1, possibly all 3.

I have no problem with using leverage, in fact I think it makes sense if the investor is willing, able, and has a good understanding. That said, the portfolios you, OP, have proposed look doomed to failure. Once you have a significant amount tied up in this I don't think you, or anyone, could stomach the ride you'll get being that levered. You will be very vulnerable to behavioral/psychological hazards that could quite easily result in below no-leverage returns.

I can't think of a good reason to lever up that much. If you have a ton of money, why play the game like wino looking for a winning lotto ticket? If you don't have enough that you feel you need to leverage yourself to the moon to make it, your problem is your saving rate or expenses. Leverage is just best used not necessarily to reach for returns, but to try to smooth out volatility. I'd be willing to bet the vast majority of fund managers utilizing leverage are not going >100% equities, most use leverage to be able to equalize risk contribution of different assets, preferably ones with little/no correlation.
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Re: Need advice between leveraged Permanent Portfolio,Golden Butterfly and Obsidian

Post by danyboy7 »

corp_sharecropper wrote: Sun Sep 06, 2020 9:08 am While noting that it appears you plan to utilize LETFs, it's worth pointing out that had you implemented this using reg-t margin for the period of your PV backtest all 3 of your options would have blown up. Portfolio margin is a little harder to look back and figure out but my guess is you also would have blown up at least on 1, possibly all 3.

I have no problem with using leverage, in fact I think it makes sense if the investor is willing, able, and has a good understanding. That said, the portfolios you, OP, have proposed look doomed to failure. Once you have a significant amount tied up in this I don't think you, or anyone, could stomach the ride you'll get being that levered. You will be very vulnerable to behavioral/psychological hazards that could quite easily result in below no-leverage returns.

I can't think of a good reason to lever up that much. If you have a ton of money, why play the game like wino looking for a winning lotto ticket? If you don't have enough that you feel you need to leverage yourself to the moon to make it, your problem is your saving rate or expenses. Leverage is just best used not necessarily to reach for returns, but to try to smooth out volatility. I'd be willing to bet the vast majority of fund managers utilizing leverage are not going >100% equities, most use leverage to be able to equalize risk contribution of different assets, preferably ones with little/no correlation.
Yes,LETFs for those 3. Options only on HF,still on "working in progress"
While I may agree that Obsidian requires a huge risk tollerance,Permanent and GB's leveraged versions show a standard deviation roughly around 15% and 20% respectively which is not that bad,considering the leverage involved.
I would consider much crazier things like holding single LETFs without any type of counter-hedge,as I have seen folks holding TQQQ/UPRO or doing 100% Tesla portfolios.
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DesertMan
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Re: Need advice between leveraged Permanent Portfolio,Golden Butterfly and Obsidian

Post by DesertMan »

I'm assuming you are ok with losing the money you intend to put into this setup. Trying to get rich quick never works, but if you are judicious with leverage and give it some time you may do well.

If you are insistent on using so much leverage your best bet is to choose a portfolio with very low standard deviation. That means either very little stock and lots of intermediate bonds, or a large allocation to something like TAIL to counter the volatility.

The leveraged Permanent Portfolio is the best of your proposed portfolios. Not having access to TMF is a good thing right now because long bonds are due for a beating when rates rise. So just hold more intermediate bonds.
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danyboy7
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Re: Need advice between leveraged Permanent Portfolio,Golden Butterfly and Obsidian

Post by danyboy7 »

DesertMan wrote: Sun Sep 06, 2020 9:36 am
The leveraged Permanent Portfolio is the best of your proposed portfolios. Not having access to TMF is a good thing right now because long bonds are due for a beating when rates rise. So just hold more intermediate bonds.
Allright,thank you very much for your opinion.You're right,it's well know that TMF could suffer a huge loss if interest rates rise but FED's policy doesn't seem to skew toward that direction.
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Re: Leveraged strategies for ex-USA investors using options on Interactive Brokers

Post by danyboy7 »

glorat wrote: Sun Sep 06, 2020 7:30 am
danyboy7 wrote: Sun Sep 06, 2020 7:09 am
glorat wrote: Sun Sep 06, 2020 7:01 am I think all of us in this thread understand that if the market goes down 33% and correlation behaves unexpectedly just once, you're wiped out.
Dear Glorat,again the market can't go down 33% on a single day,see the circuit breakers.The maximul daily loss on sp500 is -20%
And yes, I need to go long in order to have a x3 exposure.I was trying to see how I can mitigate the risks of using options.
Dear Glorat,again the market can't go down 33% on a single day,see the circuit breakers.The maximul daily loss on sp500 is -20%
And yes, I need to go long in order to have a x3 exposure.I was trying to see how I can mitigate the risks of using options
Good thing I didn't claim the market could go down 33% on a single day. The point is that if it goes down 33% *before you have had a chance to rebalance* you are in trouble. You'll need to check the markets reasonably frequently for news (which most options traders seem to do). Obviously, this is opposite of what bogleheads are recommended (who are recommended to ignore daily news)

Aside from that, what risk are you looking to mitigate? You mentioned the risk of being naked or the risk of margin calls but I think that's in itself unavoidable (but mitigated by checking the market often). Is there something else?
What if I buy only call options on Upro and Tmf ? I wouldn't risk margin calls
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refinedchain
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Re: How to set leveraged strategies using options on Interactive Brokers

Post by refinedchain »

danyboy7 wrote: Fri Sep 04, 2020 11:33 am
000 wrote: Fri Sep 04, 2020 8:13 am At a high level, the implied leverage of an option is positively related with how deep out of the money (OTM) it is.

To see this, work through an exercise comparing price appreciation as a percent of premium paid of an at the money (ATM) and an OTM option.

Note that most options are likely to go to zero. Maybe you want futures instead?
Isn't much riskier to use futures in this case ?
And are there futures for all the 6 etfs ?
There are futures corresponding to all 6 etfs, even the utilities. They are all brought to you by https://www.cmegroup.com/. They are equally as risky as a synthetic long option. Many of them even have options.

If you want to go with vertical option spreads, 1x ETFs tend to have cheaper options than the options on futures in my experience. You must shop around mutual fund companies to find the ETFs with the highest volume. If you choose your ETF poorly, you can end up with downright criminal spreads that will prevent you from getting anywhere close to replicating 3x leverage.
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Re: How to set leveraged strategies using options on Interactive Brokers

Post by danyboy7 »

refinedchain wrote: Sun Sep 06, 2020 10:53 am
danyboy7 wrote: Fri Sep 04, 2020 11:33 am
000 wrote: Fri Sep 04, 2020 8:13 am At a high level, the implied leverage of an option is positively related with how deep out of the money (OTM) it is.

To see this, work through an exercise comparing price appreciation as a percent of premium paid of an at the money (ATM) and an OTM option.

Note that most options are likely to go to zero. Maybe you want futures instead?
Isn't much riskier to use futures in this case ?
And are there futures for all the 6 etfs ?
There are futures corresponding to all 6 etfs, even the utilities. They are all brought to you by https://www.cmegroup.com/. They are equally as risky as a synthetic long option. Many of them even have options.

If you want to go with vertical option spreads, 1x ETFs tend to have cheaper options than the options on futures in my experience. You must shop around mutual fund companies to find the ETFs with the highest volume. If you choose your ETF poorly, you can end up with downright criminal spreads that will prevent you from getting anywhere close to replicating 3x leverage.
Honestly I've never used futures so I'm gonna have to do some homeworks I guess....however thanks for your input
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Schlabba
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Re: How to set leveraged strategies using options on Interactive Brokers

Post by Schlabba »

danyboy7 wrote: Sun Sep 06, 2020 1:32 pm
refinedchain wrote: Sun Sep 06, 2020 10:53 am
danyboy7 wrote: Fri Sep 04, 2020 11:33 am
000 wrote: Fri Sep 04, 2020 8:13 am At a high level, the implied leverage of an option is positively related with how deep out of the money (OTM) it is.

To see this, work through an exercise comparing price appreciation as a percent of premium paid of an at the money (ATM) and an OTM option.

Note that most options are likely to go to zero. Maybe you want futures instead?
Isn't much riskier to use futures in this case ?
And are there futures for all the 6 etfs ?
There are futures corresponding to all 6 etfs, even the utilities. They are all brought to you by https://www.cmegroup.com/. They are equally as risky as a synthetic long option. Many of them even have options.

If you want to go with vertical option spreads, 1x ETFs tend to have cheaper options than the options on futures in my experience. You must shop around mutual fund companies to find the ETFs with the highest volume. If you choose your ETF poorly, you can end up with downright criminal spreads that will prevent you from getting anywhere close to replicating 3x leverage.
Honestly I've never used futures so I'm gonna have to do some homeworks I guess....however thanks for your input
Would it also be possible to buy a so-called "Turbo" or "Sprinter" instead of using futures? Such as (taking a random example from the list of my broker, not a recommendation): S&P 500 SL 1914.00 HB 2.17 FN 1857.6682 R 100.00 ING Sprinter Long

As far as I am reading right now, ING sprinters include a built-in stoploss. So if you get in today, you either ride your way up faster than the market, or you have a predefined loss.

Edit: I think I'll make my own thread asking about sprinters & turbo's.
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BH+
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Re: Leveraged strategies for ex-USA investors using options on Interactive Brokers

Post by BH+ »

I would second the suggestions above to use futures. That would be the most cost effective and direct way to gain leverage.

One option strategy is to buy very deep-in-the-money call options on SPX. For example, you could buy the Dec '22 1500 calls, effectively with no time value (actually at a slight discount to par). That will give you close to 2X leverage. The bid-ask spread is wide and liquidity is not great, but you will only need to transact once and hold until expiration.
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Re: Need advice between leveraged Permanent Portfolio,Golden Butterfly and Obsidian

Post by 000 »

danyboy7 wrote: Sun Sep 06, 2020 1:25 am
000 wrote: Sat Sep 05, 2020 10:02 pm Why would you leverage a portfolio holding cash? :oops:

Leverage is a negative allocation to cash.
I've counted cash as positive and leverage as negative in the allocation of CashX.What's the problem ? The leveraged PP has LETFs instead of the original ones and the standard cash
The problem is you are looking at things in isolation.

3x on 75% non-cash and 1x on 25% cash is roughly equivalent to 2.25x on 100% non-cash.

3x on 20% of the portfolio and 1x on 80% is roughly equivalent to 1.4x on 100% of the portfolio.

Trying to use high leverage on a small part of the portfolio is less efficient than lightly leveraging the whole portfolio (but depending on implementation may have less ultimate downside). This is the problem with the HEDGEFUNDIE Excellent Adventure as well as your proposals. They don't use leverage in a systematic way with the whole portfolio in consideration.
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Re: Need advice between leveraged Permanent Portfolio,Golden Butterfly and Obsidian

Post by danyboy7 »

000 wrote: Sun Sep 06, 2020 5:44 pm
danyboy7 wrote: Sun Sep 06, 2020 1:25 am
000 wrote: Sat Sep 05, 2020 10:02 pm Why would you leverage a portfolio holding cash? :oops:

Leverage is a negative allocation to cash.
I've counted cash as positive and leverage as negative in the allocation of CashX.What's the problem ? The leveraged PP has LETFs instead of the original ones and the standard cash

3x on 75% non-cash and 1x on 25% cash is roughly equivalent to 2.25x on 100% non-cash.
Correct but since there aren't x4 LETFs,this is the best I can do.So yes,overall PPx3 has an x2.25 exposure.

-"Trying to use high leverage on a small part of the portfolio is less efficient than lightly leveraging the whole portfolio (but depending on implementation may have less ultimate downside). This is the problem with the HEDGEFUNDIE Excellent Adventure as well as your proposals. They don't use leverage in a systematic way with the whole portfolio in consideration"

I really don't understand this.HF leverages both stocks and bonds up to x3. And 2/3 of my portfolios proposals are x3 leverage indeed.
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Re: Need advice between leveraged Permanent Portfolio,Golden Butterfly and Obsidian

Post by danyboy7 »

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I've just implemented the x3 Golden Butterfly version

Post by danyboy7 »

[Thread merged into here, see below. --admin LadyGeek]

So I took my final decision 8-)
I'll start with Golden Butterfly x3 version.If FED will show signs of changing his policy regarding interest rates,I'll downgrade GBx3 to the Permanent x3 portfolio by adjusting the asset exposure.
I'm pretty sure that Obsidian will outperform GBx3 by a big ammount in the long run but honestly it's volatility requires an extraordinary pain tollerance if settled with a pretty decent lump sum.
Backtests: https://www.portfoliovisualizer.com/bac ... ymbol9=TYD
Rebalancing: quarterly
Rebalancing method: firstly,when portfolio's overall size will be relatively small, by buying (also fiscally efficient) the asset in order to mantain constant weightings. As long it reaches a great sum,selling method(fiscally taxable so pretty inefficient)
Starting capital: 10% of my total capital,increasing it gradually to a maximum 20% through the rebalacing method
Expected annualized net inflation adjusted CAGR: 17%
Expected Volatility : 20%
Expected Max Drowdown : 47% (occured during the sub-prime burst)
Investing time: 20 years
I will update this thread during the rebalancing periods
Last edited by danyboy7 on Mon Sep 07, 2020 10:49 am, edited 1 time in total.
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Re: I've just implemented the x3 Golden Butterfly version

Post by danyboy7 »

Here is a comparison between the behaviour of the real portfolio with real LETFs vs the theorical one done with backtest: https://www.portfoliovisualizer.com/bac ... tion9_2=40
https://imgur.com/ku3HH9P
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Re: I've just implemented the x3 Golden Butterfly version

Post by midareff »

Good luck..... the pathway to success is littered with failed exotic portfolios.
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Re: I've just implemented the x3 Golden Butterfly version

Post by danyboy7 »

midareff wrote: Mon Sep 07, 2020 10:45 am Good luck..... the pathway to success is littered with failed exotic portfolios.
Thanks a lot my friend,I would need it for sure :sharebeer
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danyboy7
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Re: I've just implemented the x3 Golden Butterfly version

Post by danyboy7 »

According to the compound interest calculator https://www.investor.gov/financial-tool ... calculator
A 20 year average return of 17%,thanks to the compound interest effect,could turn 20k in almost 500k
I do realize it will be pretty difficult to achieve those results yearly or even a the end of the 20 years. I would be happy to achieve an x10 too,roughly it would require a 12% average net CAGR.It would be a hell of result for sure
Last edited by danyboy7 on Mon Sep 07, 2020 10:58 am, edited 1 time in total.
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Re: I've just implemented the x3 Golden Butterfly version

Post by Ricola »

Are your costs for margin including in the analysis?
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Re: I've just implemented the x3 Golden Butterfly version

Post by danyboy7 »

Ricola wrote: Mon Sep 07, 2020 10:57 am Are your costs for margin including in the analysis?
No futures and no options,I'm using only leveraged ETFs.It's pretty hard to estimate exactly their borrowing costs required but I'm confident that it won't surpass their annual ter by too much.However as long as interest rates stay :arrow: low,the borrowing costs shouldn't be too expensive
I specify that all the ETFs that I'm using do have an accumulation policy of dividends.
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Re: Leveraged strategies for ex-USA investors using options on Interactive Brokers

Post by LadyGeek »

I merged danyboy7's threads into a similar discussion. The combined thread is in the Non-US Investing forum.

The Personal Investments forum is for US investors.

It's best to keep similar information together. Please use this thread for all of your portfolio discussions.
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Re: Leveraged strategies for ex-USA investors using options on Interactive Brokers

Post by danyboy7 »

LadyGeek wrote: Mon Sep 07, 2020 12:34 pm I merged danyboy7's threads into a similar discussion. The combined thread is in the Non-US Investing forum.

The Personal Investments forum is for US investors.

It's best to keep similar information together. Please use this thread for all of your portfolio discussions.
This thread is ALSO for US investors.This portfolio was invented by an american investor and mine version can be copied by US investor.
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Re: Leveraged strategies for ex-USA investors using options on Interactive Brokers

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