Lifecycle Investing - Leveraging when young

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305pelusa
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Re: Lifecycle Investing - Leveraging when young

Post by 305pelusa » Fri Aug 09, 2019 2:01 pm

Lee_WSP wrote:
Fri Aug 09, 2019 1:58 pm
305pelusa wrote:
Fri Aug 09, 2019 11:58 am
Lee_WSP wrote:
Fri Aug 09, 2019 10:51 am
305pelusa wrote:
Fri Aug 09, 2019 6:10 am
Lee_WSP wrote:
Thu Aug 08, 2019 10:35 pm
https://personal.vanguard.com/pdf/s315.pdf

Figure 2
I see the problem. You're not making the correct comparison. Lump sum beats DCA over a 12 month period 66% of the time.

But leverage with Lifecycle Investment takes your future savings from far more from a year to today. When you leverage and put, say, your next 3 years of future savings in the market today, it takes 3 years for DCA to achieve that. Lump sum wins 90% of the time in that scenario.

So far for you to make use of those Vanguard results, you need to understand how many years of future savings leverage will invest today. It is NOT 12 months.

The authors of Lifecycle Investing have already done this for you. Lifecycle Investing has outperformed 100% of the times historically.
:oops:

If Lump sum beats DCA over a 12 month period of time, then using leverage to do the lump sum beats savings 66% of the time if the cost of borrowing were zero.

The other 33% of the time, DCA or spreading out the investments would have come out ahead.

If you have more money at the end of 12 months, you will have more money in the future due to compounding interest.

If you had $50,000 in twelve months or $75,000 in twelve months, which scenario sets you up better later in life? If you say $50k, I have nothing further to discuss with you.

The research doesn't go past 12 months because it assumes you are fully invested after the 12 month period. There is no point in seeing which strategy does better after 12 months, they'll both do equally well because they're both fully invested.
That will only be the case if you fully pay off your debt after a year. So your argument is correct for credit cards. It is incorrect for any other leverage option where one can defer payment past a year.

If you take a loan and fully pay it after 10 years, every single day before that time, the leveraged investor will be more invested in equities. Only once you pay the loan will the two "equalize" in terms of dollar amounts in equities
:oops:

No it is not. Both situations you describe is a lump sum upfront investment vs splitting it up over a longer time frame.
Ok it's so obvious in my mind that I'm correct that I think it's likely we're talking about different things.

Please take me step by step through how the findings that lump summing vs DCAing over 12 months matters to a strategy of leverage that borrows and pays back over decades.

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Ben Mathew
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Re: Lifecycle Investing - Leveraging when young

Post by Ben Mathew » Fri Aug 09, 2019 8:07 pm

305pelusa wrote:
Fri Aug 09, 2019 8:39 am
Ben Mathew wrote:
Thu Aug 08, 2019 9:30 pm
.
Not sure how best to notify you of a question but here we go.

I'm considering leveraging a bit with derivatives too and I'm realizing a downside to the futures. If I want to establish them, I'd need to sell some of my stocks to convert into T-bills for collateral. This isn't ideal due to tax considerations.

The synthetic long stock with options, however, could be established today with no money down. My stocks serve as collateral. My savings contributions would then be funneled into T-bills to "delever" and ensure any losses on the put are covered by T-bill liquidation instead.

Basically, I like that I can use my stocks as collateral at first with the options and then my savings contribution take over the collateral. Futures wouldn't allow this.

Thoughts?
I haven't thought about this carefully, but wouldn't having enough in T-bills to cover the put losses require de-leveraging to the point that it's just a stock position?

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Re: Lifecycle Investing - Leveraging when young

Post by 305pelusa » Fri Aug 09, 2019 9:33 pm

Ben Mathew wrote:
Fri Aug 09, 2019 8:07 pm
305pelusa wrote:
Fri Aug 09, 2019 8:39 am
Ben Mathew wrote:
Thu Aug 08, 2019 9:30 pm
.
Not sure how best to notify you of a question but here we go.

I'm considering leveraging a bit with derivatives too and I'm realizing a downside to the futures. If I want to establish them, I'd need to sell some of my stocks to convert into T-bills for collateral. This isn't ideal due to tax considerations.

The synthetic long stock with options, however, could be established today with no money down. My stocks serve as collateral. My savings contributions would then be funneled into T-bills to "delever" and ensure any losses on the put are covered by T-bill liquidation instead.

Basically, I like that I can use my stocks as collateral at first with the options and then my savings contribution take over the collateral. Futures wouldn't allow this.

Thoughts?
I haven't thought about this carefully, but wouldn't having enough in T-bills to cover the put losses require de-leveraging to the point that it's just a stock position?
Yes that's true. I guess what I'm saying is that achieving the desired equity exposure is easy. Just buy/sell options as needed. But I'm trying to figure out how to "pay down" that debt (delever). If I had no transaction costs, then the technically correct way is to liquidate the options position and re-establish with less leverage (this will take a debit, which will be paid for by my savings contribution).

But that would just be silly (liquidating every 2 weeks!). So another way to pay down would be to buy T-bills because the options would be assigned one way or another in the future. These Tbills are the bonds of the put-call parity. Now, the options won't actually be assigned (I would liquidate them before that), but the math should work out identically whether options are assigned or simply covered.

"Paying down the futures" would be identical. Just purchase Tbills, slowly bringing down my leverage while maintaining the same equity exposure.

The advantage of the options is that I might never have to sell a single stock. If the market keeps going up, or if it goes down (but my future Tbill acquisitions are enough to cover the losses), then the rest of my stocks would be untouched. If the market goes down enough, then I will have to sell stocks to cover the put once expiration nears.

With the futures, however, I WILL have to liquidate the stocks because it is required to even establish the position. I rather like the fact that with the options, there's a good chance I never have to trigger gains from the stocks I currently have. Does that make sense?

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Re: Lifecycle Investing - Leveraging when young

Post by Naris » Sat Aug 10, 2019 4:11 pm

This has been a very interesting thread -- thanks 305pelusa. I've found your explanations quite clear, and the ideas are very thought provoking. For what it's worth, I also appreciate how patient and thorough you have been in responding to questions / criticisms.

Personally, I was already at 100% stocks in my investment account, along with a degree of leverage (not prepaying low interest rate student loans, not prepaying a mortgage). I had already figured that if stocks did poorly over the next couple years and I came out behind on the money that I could have allocated toward prepaying student loans, then that would mean my other baseline stock purchases would have been made more cheaply. My big concern from a stock market performance perspective has been, and remains, the possibility that stocks will perform quite well for the next 5-10+ years, followed by lengthy underperformance. Even if the aggregate returns end up being pretty typical, the sequencing could hurt.

I haven't seen much discussion of sequence of returns risk for accumulators before, so I've especially enjoyed the way you've framed the discussion.

I'll make substantive point: I think people are underselling how profitable leveraging 0% intro APR credit cards can be. I have personally pulled out in excess of $50,000 from 0% intro APR credit cards (~15month term) at an effective origination fee of approximately 50 basis points. This is the cheapest debt I can find anywhere by a substantial amount. Using a 0% intro APR credit card to pay your baseline living expenses certainly can work, but there are much better alternatives.

For instance, if you have a HELOC, you can send a payment using Plastiq from a Mastercard credit card (e.g. the Citi DoubleCash) to your HELOC, pull the money from the HELOC shortly before the Plastiq payment arrives (to minimize interest), then balance transfer the money from the original card to a Chase Slate credit card. If you have high enough limits with Chase (which Chase allows you to freely shift between your cards at Chase), you can push $30,000 onto the Chase Slate card at a net cost of 0.5% (2.5% Plastiq fee less the 2% cash back on the Citi DoubleCash).

I think there are potentially even better options, such as using 0% intro APR cards to overpay taxes, but I haven't personally used those methods. I have personally used the method outlined above and confirmed that it really does work. Suffice it to say, it is possible to obtain mid-five figures in 0% intro APR credit card balances at extremely minimal costs. I believe this should also be relatively repeatable, albeit you have to be able to cash flow the payoffs in between initiating each round (another place where a HELOC can come in handy).

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Ben Mathew
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Re: Lifecycle Investing - Leveraging when young

Post by Ben Mathew » Sat Aug 10, 2019 7:20 pm

305pelusa wrote:
Fri Aug 09, 2019 9:33 pm
Ben Mathew wrote:
Fri Aug 09, 2019 8:07 pm
305pelusa wrote:
Fri Aug 09, 2019 8:39 am
Ben Mathew wrote:
Thu Aug 08, 2019 9:30 pm
.
Not sure how best to notify you of a question but here we go.

I'm considering leveraging a bit with derivatives too and I'm realizing a downside to the futures. If I want to establish them, I'd need to sell some of my stocks to convert into T-bills for collateral. This isn't ideal due to tax considerations.

The synthetic long stock with options, however, could be established today with no money down. My stocks serve as collateral. My savings contributions would then be funneled into T-bills to "delever" and ensure any losses on the put are covered by T-bill liquidation instead.

Basically, I like that I can use my stocks as collateral at first with the options and then my savings contribution take over the collateral. Futures wouldn't allow this.

Thoughts?
I haven't thought about this carefully, but wouldn't having enough in T-bills to cover the put losses require de-leveraging to the point that it's just a stock position?
Yes that's true. I guess what I'm saying is that achieving the desired equity exposure is easy. Just buy/sell options as needed. But I'm trying to figure out how to "pay down" that debt (delever). If I had no transaction costs, then the technically correct way is to liquidate the options position and re-establish with less leverage (this will take a debit, which will be paid for by my savings contribution).

But that would just be silly (liquidating every 2 weeks!). So another way to pay down would be to buy T-bills because the options would be assigned one way or another in the future. These Tbills are the bonds of the put-call parity. Now, the options won't actually be assigned (I would liquidate them before that), but the math should work out identically whether options are assigned or simply covered.

"Paying down the futures" would be identical. Just purchase Tbills, slowly bringing down my leverage while maintaining the same equity exposure.
This makes sense to me. Hopefully someone with more experience trading options and futures will weigh in as well.

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305pelusa
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Re: Lifecycle Investing - Leveraging when young

Post by 305pelusa » Sat Aug 10, 2019 10:02 pm

Ben Mathew wrote:
Sat Aug 10, 2019 7:20 pm
This makes sense to me. Hopefully someone with more experience trading options and futures will weigh in as well.
Not sure there's many of those around here (or if they are, they just aren't reading).

I've been asking questions on the options Reddit. It's been helpful too.
Naris wrote:
Sat Aug 10, 2019 4:11 pm
This has been a very interesting thread -- thanks 305pelusa. I've found your explanations quite clear, and the ideas are very thought provoking. For what it's worth, I also appreciate how patient and thorough you have been in responding to questions / criticisms.
Thanks dude/dudette. I appreciate that.
Naris wrote:
Sat Aug 10, 2019 4:11 pm
My big concern from a stock market performance perspective has been, and remains, the possibility that stocks will perform quite well for the next 5-10+ years, followed by lengthy underperformance. Even if the aggregate returns end up being pretty typical, the sequencing could hurt.
Totally, same here. No one is paying us to risk that bad sequence of returns so we're just diversifying it away, sacrificing some of the great returns if the market drops now and soars later, to avoid the terrible ones if soar now and drop in the future.
Naris wrote:
Sat Aug 10, 2019 4:11 pm
I'll make substantive point: I think people are underselling how profitable leveraging 0% intro APR credit cards can be. I have personally pulled out in excess of $50,000 from 0% intro APR credit cards (~15month term) at an effective origination fee of approximately 50 basis points. This is the cheapest debt I can find anywhere by a substantial amount. Using a 0% intro APR credit card to pay your baseline living expenses certainly can work, but there are much better alternatives.

For instance, if you have a HELOC, you can send a payment using Plastiq from a Mastercard credit card (e.g. the Citi DoubleCash) to your HELOC, pull the money from the HELOC shortly before the Plastiq payment arrives (to minimize interest), then balance transfer the money from the original card to a Chase Slate credit card. If you have high enough limits with Chase (which Chase allows you to freely shift between your cards at Chase), you can push $30,000 onto the Chase Slate card at a net cost of 0.5% (2.5% Plastiq fee less the 2% cash back on the Citi DoubleCash).

I think there are potentially even better options, such as using 0% intro APR cards to overpay taxes, but I haven't personally used those methods. I have personally used the method outlined above and confirmed that it really does work. Suffice it to say, it is possible to obtain mid-five figures in 0% intro APR credit card balances at extremely minimal costs. I believe this should also be relatively repeatable, albeit you have to be able to cash flow the payoffs in between initiating each round (another place where a HELOC can come in handy).
Very cool, I didn't know this one. I appreciate the contribution.

I read a couple of years ago about using Paypal to get upfront cash advances with your credit card at no fees. Totally legal too, Paypal even gives you steps. You just need a buddy. Once I take out my next CC, I'll look into it.

FIProfessor
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Re: Lifecycle Investing - Leveraging when young

Post by FIProfessor » Sun Aug 11, 2019 3:57 pm

305pelusa wrote:
Thu Aug 08, 2019 9:12 am
FIProfessor wrote:
Thu Aug 08, 2019 8:56 am
Should we think of the pure LEAP position advocated by the book as closer to a non-callable loan achievable with options? The interest rate is worse than the put-call parity strategy, but it's probably better than what you can get with an auto loan, I'd imagine.
Not really. The only difference between callable and non-callable is that no one forces you to liquidate. But you still owe the same amount of money long term.

Pure LEAP options are like loans where if things work out (stocks go up) you pay back the loan (and make a profit). But if things go south (stocks go down), your loan is FORGIVEN. And for this protection, you pay a higher rate. Selling the put eliminates that "forgiveness" clause and decrease the rate in turn.

If the forgiveness was cheap, I'd consider it. I have a hard time finding LEAPs at rates lower than 4%, so I've honestly not looked too much more into it.
Ah, good point. What I can't understand is that the implied cost of this forgiveness seems high even in cases where it seems like it should be worth very little. Looking at December 2021 SPY LEAPS, there's one with a strike price of $25 (so the insurance here is essentially worthless), but when I calculate the implied interest rate using the book's spreadsheets, the rate is astronomical.

The only explanation I can think of is that SPY is an American option, so one is paying a premium to be able to exercise early, which might be considerable. But the ability to exercise early is not really valuable to someone following the book's strategy. So we ought to consider European-style options like SPX instead. Looking at SPX options, I see ones whose implied interest rate is more like ~3.6%, which is not so bad:

Now, SPX contracts are rather large, but there is a "mini" version, called XSP, which is 1/10th S&P. I don't see ones for December 2021, so instead, I'll look at the December 2020 calls. Let's take a look at at the one with the smallest strike price listed on Yahoo's options chain https://finance.yahoo.com/quote/XSP2012 ... 8C00165000. Using the book's spreadsheet we have:

Current level of XSP index: $291.87
Strike Price of Option: $165.00
Price of Option: $124.76
Implied amount borrowed: $167.11
Implied extra payment: -$2.11
Annual S&P dividends per share / 10: $5.60
Days to expiration: 478
Forgone dividends: $7.33
Transaction cost per share: $0.30
Total implied payments: $5.52
Implied interest: 2.52%

This seems too good to be true. Have I made a mistake?

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Re: Lifecycle Investing - Leveraging when young

Post by 305pelusa » Sun Aug 11, 2019 4:51 pm

FIProfessor wrote:
Sun Aug 11, 2019 3:57 pm
305pelusa wrote:
Thu Aug 08, 2019 9:12 am
FIProfessor wrote:
Thu Aug 08, 2019 8:56 am
Should we think of the pure LEAP position advocated by the book as closer to a non-callable loan achievable with options? The interest rate is worse than the put-call parity strategy, but it's probably better than what you can get with an auto loan, I'd imagine.
Not really. The only difference between callable and non-callable is that no one forces you to liquidate. But you still owe the same amount of money long term.

Pure LEAP options are like loans where if things work out (stocks go up) you pay back the loan (and make a profit). But if things go south (stocks go down), your loan is FORGIVEN. And for this protection, you pay a higher rate. Selling the put eliminates that "forgiveness" clause and decrease the rate in turn.

If the forgiveness was cheap, I'd consider it. I have a hard time finding LEAPs at rates lower than 4%, so I've honestly not looked too much more into it.
Ah, good point. What I can't understand is that the implied cost of this forgiveness seems high even in cases where it seems like it should be worth very little. Looking at December 2021 SPY LEAPS, there's one with a strike price of $25 (so the insurance here is essentially worthless), but when I calculate the implied interest rate using the book's spreadsheets, the rate is astronomical.

The only explanation I can think of is that SPY is an American option, so one is paying a premium to be able to exercise early, which might be considerable. But the ability to exercise early is not really valuable to someone following the book's strategy. So we ought to consider European-style options like SPX instead.
I tell you, I have learned some serious amount of options theory since I started this thread. I can answer your question.

The problem is that you are too deep in the money. The foregone dividends of that call are much higher than the downside protection (the equivalent put value). If purchased, this is an option that would be efficiently exercised before the next upcoming dividend day. This is a problem related to the fact that it is American, you are correct.

Similarly to how I don't want to sell puts that are too deep in the money for the put-call parity (because they will get exercised well before expiration), you don't want to buy calls that are too in the money either (as the efficient thing to do would be to exercise them before expiration as well).

So there's a really difficult dynamic here. You can't just go too deep in the money with the call, or else you've effectively purchased a 3 month option. But you certainly want to stay well within the money, or else the downside protection is worth quite a bit (the corresponding put).

My recommendation? Look for calls whose foregone dividends are well under the cost of the put (like the Dec 2021 call at strike 265). These cannot be efficiently exercised within a few months. And then sell that corresponding put to make sure you don't pay for that downside protection. This is another way of thinking about the put-call parity.
FIProfessor wrote:
Sun Aug 11, 2019 3:57 pm
So we ought to consider European-style options like SPX instead. Looking at SPX options, I see ones whose implied interest rate is more like ~3.6%, which is not so bad:
Full disclosure, I have looked very little into the Europeans. They are traded much less, which is a bit concerning to me. Not just because there's more opportunity for inefficiencies. But the fact that they cannot be exercised early limits the amount of arbitrage significantly.

The only Europeans I looked into were the SPX, but these are daily-cash settled too. I'm not sure how I feel about that because a big advantage of the Americans is that I can keep my short put at a "loss" as long as my stocks provide sufficient collateral. With the American SPX, it looked to me like I needed actual cash collateral on a daily basis. Meaning, I like that my stocks are doing double duty as collateral instead of having to liquidate them.

My theory is very shaky here but I will say this:
FIProfessor wrote:
Sun Aug 11, 2019 3:57 pm
Current level of XSP index: $291.87
Strike Price of Option: $165.00
Price of Option: $124.76
Implied amount borrowed: $167.11
Implied extra payment: -$2.11
Annual S&P dividends per share / 10: $5.60
Days to expiration: 478
Forgone dividends: $7.33
Transaction cost per share: $0.30
Total implied payments: $5.52
Implied interest: 2.52%

This seems too good to be true. Have I made a mistake?
Yes, the foregone dividends isn't the dividend rate/365*478. You don't get a tiny bit of dividend every day. The dividends are actual events. Specifically, there will be 6 dividends from now until you exercise that option. That means 5.6*1.5 = 8.4 in dividends.

The Europeans are tricky because they do not get to be exercised before that last dividend date (while the Americans can). So the foregone dividends between your American and European calls will be different. My sheet is telling me a rate of 3.16%, which still looks pretty good. However, it's hard to say if I'm missing something or not. My spreadsheet is geared towards Americans right now haha.

FIProfessor
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Re: Lifecycle Investing - Leveraging when young

Post by FIProfessor » Sun Aug 11, 2019 5:51 pm

305pelusa wrote:
Sun Aug 11, 2019 4:51 pm
FIProfessor wrote:
Sun Aug 11, 2019 3:57 pm
305pelusa wrote:
Thu Aug 08, 2019 9:12 am
FIProfessor wrote:
Thu Aug 08, 2019 8:56 am
Should we think of the pure LEAP position advocated by the book as closer to a non-callable loan achievable with options? The interest rate is worse than the put-call parity strategy, but it's probably better than what you can get with an auto loan, I'd imagine.
Not really. The only difference between callable and non-callable is that no one forces you to liquidate. But you still owe the same amount of money long term.

Pure LEAP options are like loans where if things work out (stocks go up) you pay back the loan (and make a profit). But if things go south (stocks go down), your loan is FORGIVEN. And for this protection, you pay a higher rate. Selling the put eliminates that "forgiveness" clause and decrease the rate in turn.

If the forgiveness was cheap, I'd consider it. I have a hard time finding LEAPs at rates lower than 4%, so I've honestly not looked too much more into it.
Ah, good point. What I can't understand is that the implied cost of this forgiveness seems high even in cases where it seems like it should be worth very little. Looking at December 2021 SPY LEAPS, there's one with a strike price of $25 (so the insurance here is essentially worthless), but when I calculate the implied interest rate using the book's spreadsheets, the rate is astronomical.

The only explanation I can think of is that SPY is an American option, so one is paying a premium to be able to exercise early, which might be considerable. But the ability to exercise early is not really valuable to someone following the book's strategy. So we ought to consider European-style options like SPX instead.
I tell you, I have learned some serious amount of options theory since I started this thread. I can answer your question.

The problem is that you are too deep in the money. The foregone dividends of that call are much higher than the downside protection (the equivalent put value). If purchased, this is an option that would be efficiently exercised before the next upcoming dividend day. This is a problem related to the fact that it is American, you are correct.

Similarly to how I don't want to sell puts that are too deep in the money for the put-call parity (because they will get exercised well before expiration), you don't want to buy calls that are too in the money either (as the efficient thing to do would be to exercise them before expiration as well).

So there's a really difficult dynamic here. You can't just go too deep in the money with the call, or else you've effectively purchased a 3 month option. But you certainly want to stay well within the money, or else the downside protection is worth quite a bit (the corresponding put).

My recommendation? Look for calls whose foregone dividends are well under the cost of the put (like the Dec 2021 call at strike 265). These cannot be efficiently exercised within a few months. And then sell that corresponding put to make sure you don't pay for that downside protection. This is another way of thinking about the put-call parity.
FIProfessor wrote:
Sun Aug 11, 2019 3:57 pm
So we ought to consider European-style options like SPX instead. Looking at SPX options, I see ones whose implied interest rate is more like ~3.6%, which is not so bad:
Full disclosure, I have looked very little into the Europeans. They are traded much less, which is a bit concerning to me. Not just because there's more opportunity for inefficiencies. But the fact that they cannot be exercised early limits the amount of arbitrage significantly.

The only Europeans I looked into were the SPX, but these are daily-cash settled too. I'm not sure how I feel about that because a big advantage of the Americans is that I can keep my short put at a "loss" as long as my stocks provide sufficient collateral. With the American SPX, it looked to me like I needed actual cash collateral on a daily basis. Meaning, I like that my stocks are doing double duty as collateral instead of having to liquidate them.

My theory is very shaky here but I will say this:
FIProfessor wrote:
Sun Aug 11, 2019 3:57 pm
Current level of XSP index: $291.87
Strike Price of Option: $165.00
Price of Option: $124.76
Implied amount borrowed: $167.11
Implied extra payment: -$2.11
Annual S&P dividends per share / 10: $5.60
Days to expiration: 478
Forgone dividends: $7.33
Transaction cost per share: $0.30
Total implied payments: $5.52
Implied interest: 2.52%

This seems too good to be true. Have I made a mistake?
Yes, the foregone dividends isn't the dividend rate/365*478. You don't get a tiny bit of dividend every day. The dividends are actual events. Specifically, there will be 6 dividends from now until you exercise that option. That means 5.6*1.5 = 8.4 in dividends.

The Europeans are tricky because they do not get to be exercised before that last dividend date (while the Americans can). So the foregone dividends between your American and European calls will be different. My sheet is telling me a rate of 3.16%, which still looks pretty good. However, it's hard to say if I'm missing something or not. My spreadsheet is geared towards Americans right now haha.
Thank you! Yes, the book's spreadsheet does warn that they're fudging things by treating the dividends as if they were continuously distributed. I thought it would be less of an issue in the case of SPX -- since it's based on an index as opposed to an ETF like SPY, there isn't actually a fixed date when dividends are distributed. But that was misguided, because the relevant counterfactual is to consider buying SPDR directly.

Another unfortunate aspect of SPX in a taxable account is that it's treated similarly to futures, with a 60/40 rate.

Overall, I wish the book had included a little bit more about the mechanics of options. To really feel comfortable executing it with options, I'd have to learn more, as you have.

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Re: Lifecycle Investing - Leveraging when young

Post by 305pelusa » Sun Aug 11, 2019 7:45 pm

FIProfessor wrote:
Sun Aug 11, 2019 5:51 pm
I thought it would be less of an issue in the case of SPX -- since it's based on an index as opposed to an ETF like SPY, there isn't actually a fixed date when dividends are distributed. But that was misguided, because the relevant counterfactual is to consider buying SPDR directly.
I figured the S&P 500 index should drop with the ex-dividend as well. If it didn't (while SPY did), then they would slowly drift apart no? I don't know haha, not super certain.
FIProfessor wrote:
Sun Aug 11, 2019 5:51 pm
Another unfortunate aspect of SPX in a taxable account is that it's treated similarly to futures, with a 60/40 rate.
Yeah, that's the other thing. I'm currently leaning towards the 1 year options. They offer similar rates to 2-3 year LEAPs (even counting for the additional commissions), and would get nice tax treatment.
FIProfessor wrote:
Sun Aug 11, 2019 5:51 pm
Overall, I wish the book had included a little bit more about the mechanics of options. To really feel comfortable executing it with options, I'd have to learn more, as you have.
I think back then, call rates were a lot more reasonable. 2:1 leverage still had the issue you encountered; it might be deep in the money enough that you wouldn't profitably hold for 2-3 years (you'd exercise earlier, which would give a much higher borrow rate than your calculation).

It remains very much a DIY strategy.

I've been looking into this quite a bit and I've found a few options that I like. If my brokerage approves me for Level 5 trading, I will be using the put-call strategy for some small amount of leverage. I will report back here if I end up doing this.

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Re: Lifecycle Investing - Leveraging when young

Post by 305pelusa » Sun Aug 11, 2019 8:16 pm

BTW, to be totally fair, it is possible to do this just with calls. I've found LEAPs call rates to be the lowest at 3:1 leverage. This seems to be a sweet spot. Higher leverage and you pay too much in downside protection. Lower leverage (more in the money) and the cost of the downside protection begins to be so low that there is a great expectation of exercise well before expiration.

I've found these LEAP calls to have ~3.8% rates. This remains a very competitive choice. You get quite a bit of leverage out of these (which means you get more exposure for your buck), with absolutely no risks of margin calls. They are like unsecured, uncallable loans, with no interest payments, favorable tax treatment and "loan forgiveness" in the form of downside protection.

I am currently at a stage in Phase 1 where 3.8% is too high to pay for exposure, which is why I am going down the rabbit hole of selling puts. But upon second though, 3.8% is still a very good rate for a type of loan that is basically the absolute best terms you could ask for. Many people invest in stocks with debt (mortgage , auto, etc) at rates higher than that.

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Re: Lifecycle Investing - Leveraging when young

Post by kfitz1313 » Mon Aug 12, 2019 12:07 am

305pelusa wrote:
Sun Aug 11, 2019 8:16 pm
I am currently at a stage in Phase 1 where 3.8% is too high to pay for exposure, which is why I am going down the rabbit hole of selling puts. But upon second though, 3.8% is still a very good rate for a type of loan that is basically the absolute best terms you could ask for. Many people invest in stocks with debt (mortgage , auto, etc) at rates higher than that.
Why do you consider the 3.8% too high? Is it too high relative to your other options or just too high in general? As you point out, many people use mortgages, auto, etc. with higher rates.

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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP » Mon Aug 12, 2019 12:49 am

Options are not the same as owning stocks and should not be treated as such. Buying options is not the same as leveraging money to buy more SPY, the value can be and is frequently zero at expiration.

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Re: Lifecycle Investing - Leveraging when young

Post by 305pelusa » Mon Aug 12, 2019 7:02 am

kfitz1313 wrote:
Mon Aug 12, 2019 12:07 am
305pelusa wrote:
Sun Aug 11, 2019 8:16 pm
I am currently at a stage in Phase 1 where 3.8% is too high to pay for exposure, which is why I am going down the rabbit hole of selling puts. But upon second though, 3.8% is still a very good rate for a type of loan that is basically the absolute best terms you could ask for. Many people invest in stocks with debt (mortgage , auto, etc) at rates higher than that.
Why do you consider the 3.8% too high? Is it too high relative to your other options or just too high in general? As you point out, many people use mortgages, auto, etc. with higher rates.
The Samuelson Share equation takes equity returns and your returns on your alternative risk free Investment. For leveraged investors, that's your borrowing rate. If I use 3.8%, the Samuelson share comes out such that I can hit my equity target today with no leverage. So leveraging at 3.8% is akin to taking more risk that I would want (a higher Samuelson share than desirable).

So it is too high compared to my current options, risk aversion, current savings and more. It's a very individual calculation and everyone will get a different number. If you want more help figuring it out, I can give you a hand. Younger people (less current savings), with more working years ahead of them (more future savings), with lower risk aversion than me and perhaps higher expectations of market returns might find the formula would recommend leveraging (at least a little bit) with these options.

It is indeed lower than many other debts so something to munch on. I'm not gonna be that poster quoted out of context recommending people liquidate their stocks, pay off their car and re-establish with options. Even if that's what my numbers imply.

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Re: Lifecycle Investing - Leveraging when young

Post by 305pelusa » Mon Aug 12, 2019 7:15 am

Lee_WSP wrote:
Mon Aug 12, 2019 12:49 am
Options are not the same as owning stocks and should not be treated as such. Buying options is not the same as leveraging money to buy more SPY, the value can be and is frequently zero at expiration.
I mean this in the nicest way possible but I recommend you read more before misinforming.

Here's some guided questions:
1) What must occur in the S&P for a 3:1 call (say SPY 200) to expire worthless? How "frequently" does that happen?
2) There are Greeks associated with that call. Which Greek could give you a hint about the likelihood of expiring in the money based on market expectations? Which Greek tells you it's 3:1 leverage? (Hint: it's the same).
3) If you KNEW the 3:1 call will expire worthless in advance, and you had to invest in either stocks or that call, which one is generally superior?

You can complain the above is condescending (I don't mean it too), or you can try to read into it and answer those questions. I think you'll come out with a greater appreciation of the deep in the money LEAP call.

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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP » Mon Aug 12, 2019 10:08 am

Frequently is more often than zero. How often has an S&P index fund gone to zero? Never. Never ever; and if it did, we'd all have larger problems to worry about.

You're trying to hard to make an option equivalent to holding stocks. They are not. You are paying for the right to purchase the underlying equity at a strike price. You do not own anything other than the right to purchase it if you so choose.

You own the right to the underlying shares in the index fund you invest in.

They are totally different financial instruments.

Apparently even more options are allowed to expire worthless than I thought. I honestly thought the vast majority of 'Americans' were exercised at a loss while they still had value to them.

According to historical OCC statistics for the year 2015 (for activity in customer and firm accounts), the breakdown is as follows:

Position closed by selling the option: 71.3%
Exercised: 7.0%
Held and allowed to expire worthless: 21.7%

https://www.thebalance.com/options-expi ... ss-4056646

But Investopedia puts the number even higher:

Based on a CME study of expiring and exercised options covering a period of three years (1997, 1998 and 1999), an average of 76.5% of all options held to expiration at the Chicago Mercantile Exchange expired worthless (out of the money). This average remained consistent for the three-year period: 76.3%, 75.8% and 77.5% respectively, as shown in Figure 1. From this general level, therefore, we can conclude that for every option exercised in the money at expiration, there were three options contracts that expired out of the money and thus worthless, meaning option sellers had better odds than option buyers for positions held until expiration.

Image

https://www.investopedia.com/articles/o ... 100103.asp

Options are a zero sum game played against huge institutional banks. Do you really think you're going to win all the time?

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Re: Lifecycle Investing - Leveraging when young

Post by 305pelusa » Mon Aug 12, 2019 10:27 am

Lee_WSP wrote:
Mon Aug 12, 2019 10:08 am
Frequently is more often than zero. How often has an S&P index fund gone to zero? Never. Never ever; and if it did, we'd all have larger problems to worry about.

You're trying to hard to make an option equivalent to holding stocks. They are not. You are paying for the right to purchase the underlying equity at a strike price. You do not own anything other than the right to purchase it if you so choose.

You own the right to the underlying shares in the index fund you invest in.

They are totally different financial instruments.

Apparently even more options are allowed to expire worthless than I thought. I honestly thought the vast majority of 'Americans' were exercised at a loss while they still had value to them.

According to historical OCC statistics for the year 2015 (for activity in customer and firm accounts), the breakdown is as follows:

Position closed by selling the option: 71.3%
Exercised: 7.0%
Held and allowed to expire worthless: 21.7%

https://www.thebalance.com/options-expi ... ss-4056646

But Investopedia puts the number even higher:

Based on a CME study of expiring and exercised options covering a period of three years (1997, 1998 and 1999), an average of 76.5% of all options held to expiration at the Chicago Mercantile Exchange expired worthless (out of the money). This average remained consistent for the three-year period: 76.3%, 75.8% and 77.5% respectively, as shown in Figure 1. From this general level, therefore, we can conclude that for every option exercised in the money at expiration, there were three options contracts that expired out of the money and thus worthless, meaning option sellers had better odds than option buyers for positions held until expiration.

Image

https://www.investopedia.com/articles/o ... 100103.asp
If you took the time to answer my questions, you would realize how meaningless all of your arguments above are.

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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP » Mon Aug 12, 2019 10:42 am

I'm not wasting my time to play your game. This is your thread. Put up the evidence yourself. I'm not going to learn the ins and outs of a strategy i think is too risky to play.

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Re: Lifecycle Investing - Leveraging when young

Post by 305pelusa » Mon Aug 12, 2019 10:49 am

Lee_WSP wrote:
Mon Aug 12, 2019 10:42 am
I'm not wasting my time to play your game. This is your thread. Put up the evidence yourself. I'm not going to learn the ins and outs of a strategy i think is too risky to play.
Lol I don't need to convince or present evidence to anyone. My offer was in case you wanted to learn about options. You don't want to "waste your time"; that's fine. Just understand the only person losing here is yourself since you will continue to be ignorant on the topic.

If you want to understand options and this strategy, answer the questions. If they're too hard (understandable), ask for help. If it's a waste of your time, that's cool too.

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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP » Mon Aug 12, 2019 10:51 am

305pelusa wrote:
Mon Aug 12, 2019 10:49 am
Lee_WSP wrote:
Mon Aug 12, 2019 10:42 am
I'm not wasting my time to play your game. This is your thread. Put up the evidence yourself. I'm not going to learn the ins and outs of a strategy i think is too risky to play.
Lol I don't need to convince or present evidence to anyone. My offer was in case you wanted to learn about options. You don't want to "waste your time"; that's fine. Just understand the only person losing here is yourself since you will continue to be ignorant on the topic.

If you want to understand options and this strategy, answer the questions. If they're too hard (understandable), ask for help. If it's a waste of your time, that's cool too.
The answers are not easily google-able. I'm not too lazy to plug the questions into google. But the answers are not there. So, no, I'm not going to waste more of my time trying to figure it out.

Look, I'm not saying you personally shouldn't do this. It's your money.

However, you posted the strategy in Bogleheads. By extension, you are opening the discussion. I am dutifully taking the opposing position. If you want to have a discussion, you need to present the evidence. Right now, we're just yelling at each other.

So please, stop yelling back at me and present evidence to refute my assertion. I may have been short in my responses, but I have backed them up with links and other evidence. Please do me the courtesy of doing so as well.

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Re: Lifecycle Investing - Leveraging when young

Post by 305pelusa » Mon Aug 12, 2019 11:08 am

Lee_WSP wrote:
Mon Aug 12, 2019 10:51 am
305pelusa wrote:
Mon Aug 12, 2019 10:49 am
Lee_WSP wrote:
Mon Aug 12, 2019 10:42 am
I'm not wasting my time to play your game. This is your thread. Put up the evidence yourself. I'm not going to learn the ins and outs of a strategy i think is too risky to play.
Lol I don't need to convince or present evidence to anyone. My offer was in case you wanted to learn about options. You don't want to "waste your time"; that's fine. Just understand the only person losing here is yourself since you will continue to be ignorant on the topic.

If you want to understand options and this strategy, answer the questions. If they're too hard (understandable), ask for help. If it's a waste of your time, that's cool too.
The answers are not easily google-able. I'm not too lazy to plug the questions into google. But the answers are not there. So, no, I'm not going to waste more of my time trying to figure it out.

Look, I'm not saying you personally shouldn't do this. It's your money.

However, you posted the strategy in Bogleheads. By extension, you are opening the discussion. I am dutifully taking the opposing position. If you want to have a discussion, you need to present the evidence. Right now, we're just yelling at each other.

So please, stop yelling back at me and present evidence to refute my assertion. I may have been short in my responses, but I have backed them up with links and other evidence. Please do me the courtesy of doing so as well.
I'd rather not just tell you because developing the intuition will be useful to you. I do want you to understand so here's some hints:
1) A call option with a strike price of 200 and an index SPY of 290. When would this option be useless? When exercising it isn't a good deal because you'd rather just buy the index itself in the market for a better price. What range of prices should SPY take for you to prefer buying it instead of exercising the call and buying it for 200?

And most importantly, is it a "frequent" occurrence for SPY to trade at that level?
Note that if you multiply SPY by 10, you get the S and P 500.

2) The Greek Delta refers to the number of dollars the option price increases by due to a one point increase in the index. If the market is really certain a call will be exercised (not expire worthless), then there should be perfect certainty between index movement and option movement. If the Delta was 0.5, there's some uncertainty the option will be exercised because it doesn't totally go up with the index.

It's a tough one so I'll just say the answer is 1. Now check the Delta of that SPY 200 call. Should be 1 or very near. Finally, this tells you the leverage. If you get a dollar for every dollar the SPY makes, but you paid a third of the price for that privilege (you paid ~100 bucks for a call on the SPY which is at ~290), you are leveraged 3:1.

3) A call option has downside protection. Your losses are capped at whatever you paid for it. Stocks do not; they can keep sinking. So if you knew the option will expire worthless with predictive powers, then this downside protection has kicked in. Would you rather be holding stocks or the call in that scenario?

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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP » Mon Aug 12, 2019 11:10 am

I do not believe in options and do not wish to learn more, please just dumb it down for me and everyone else if you wish to continue the discussion. Maybe you'll change my mind.

I can answer #3 though.

If I knew the future, I'd be stupid stinking rich and wouldn't be posting on a forum to try to learn more.

But, let's play the game. If somehow I knew the future, I'm just as well off either selling my positions in equities for a slight loss or taking the hit on the options price. It honestly doesn't matter if I knew the future.

However, since I don't know the future, with equities, I can just keep on holding it until they go back up again. The options money is lost and new money must be dug up to keep on with the strategy. That's the key difference.

edit: I change my answer. I'd rather take the equities hit because I can deduct the loss. The price of options is not deductible unless you're running it as a business.

edit 2:
In your example, you're giving a strike price that is 100 points below the current market price for the underlying asset. How much of a premium are you paying for this option?

Edit 3: I just realized the premise of the question is wrong. Your position in equities is only realized upon liquidation. Therefore your question itself is moot. But if forced to sell, the equities sale is better because of the deduction.

Options end at a specified point in time realizing any gains or loses.

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Re: Lifecycle Investing - Leveraging when young

Post by 305pelusa » Mon Aug 12, 2019 12:06 pm

Lee_WSP wrote:
Mon Aug 12, 2019 11:10 am
I do not believe in options and do not wish to learn more, please just dumb it down for me and everyone else if you wish to continue the discussion. Maybe you'll change my mind.

I can answer #3 though.

If I knew the future, I'd be stupid stinking rich and wouldn't be posting on a forum to try to learn more.

But, let's play the game. If somehow I knew the future, I'm just as well off either selling my positions in equities for a slight loss or taking the hit on the options price. It honestly doesn't matter if I knew the future.

However, since I don't know the future, with equities, I can just keep on holding it until they go back up again. The options money is lost and new money must be dug up to keep on with the strategy. That's the key difference.

edit: I change my answer. I'd rather take the equities hit because I can deduct the loss. The price of options is not deductible unless you're running it as a business.

edit 2:
In your example, you're giving a strike price that is 100 points below the current market price for the underlying asset. How much of a premium are you paying for this option?
The answers:
1) If SPY is between 0-199, the call will be worthless. It is very infrequent for then index to lose 33%. Hence, these types of calls rarely expire worthless.
2) Answered already.
3) The Best choice is to invest a third of your money on that 3:1 call and leave the two thirds as cash instead of going all in on stocks. If stocks drop more than 33% by the time the call expires, the former person will have more dollars.

To your edit:
Option losses are deductible AFAIK.

To your second edit:
The premium is (Call Price + Strike Price - Underlying index). It's factored in to the implied borrowing rate.

So if I have a product that moves dollar for dollar with stocks, it is like owning stocks. The difference is that it is much better due to downside protection; if the index keeps dropping, you don't lose any more money.
And for that leverage and downside protection, you pay a premium. It comes out to ~3.8% implied borrowing rate for many of the options I've looked at.

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Re: Lifecycle Investing - Leveraging when young

Post by rascott » Mon Aug 12, 2019 12:52 pm

Lee_WSP wrote:
Mon Aug 12, 2019 10:42 am
I'm not wasting my time to play your game. This is your thread. Put up the evidence yourself. I'm not going to learn the ins and outs of a strategy i think is too risky to play.

Then why are you debating him if you don't care to learn what he's doing?

All he is doing is buying equities via leverage....at what amounts to about a 3% borrowing rate. Fundamentally not different than someone taking a mortgage and investing it into the SP500. Actually a little better than that since his downside is limited where the SP500 investor isn't.

If you are young and just starting out there is a risk of being wiped out if you were to keep at it....but the idea is obviously it doesn't much matter as most of your capital is future income.

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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP » Mon Aug 12, 2019 1:18 pm

305pelusa wrote:
Mon Aug 12, 2019 12:06 pm
To your edit:
Option losses are deductible AFAIK.
An option is the right to purchase an underlying asset in the future at a certain price. The premium is the price you paid for that right.

To take a deduction if you are not a business it must be one of the qualified deductions. The most applicable is a short term capital gains loss. However, in order to take a loss, you have to have capital gains.

An option is not a capital asset, it is the right to purchase the underlying capital asset.

Therefore, the option price is not deductible and neither are any losses upon execution because you did not own the underlying asset.
rascott wrote:
Mon Aug 12, 2019 12:52 pm
Then why are you debating him if you don't care to learn what he's doing?
I do not care to learn the intricacies of options trading because I am not convinced of the strategy. I do care to learn if the strategy is sound or not. I have looked into options, and the amount of learning to become well versed is light years beyond my current interest in the subject. Billions of dollars are spent arbitraging options. Entire careers are built on this type of trade. I'm not going to figure them out in even a year of study.
If you are young and just starting out there is a risk of being wiped out if you were to keep at it....but the idea is obviously it doesn't much matter as most of your capital is future income.
True, but if you had instead just purchased equities, you can ride it out and they'll either come back or we've got bigger things to worry about. Options and futures force you to realize your gains or losses; they aren't just on paper come the expiration date.

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Re: Lifecycle Investing - Leveraging when young

Post by rascott » Mon Aug 12, 2019 1:31 pm

Lee_WSP wrote:
Mon Aug 12, 2019 1:18 pm
305pelusa wrote:
Mon Aug 12, 2019 12:06 pm
To your edit:
Option losses are deductible AFAIK.
An option is the right to purchase an underlying asset in the future at a certain price. The premium is the price you paid for that right.

To take a deduction if you are not a business it must be one of the qualified deductions. The most applicable is a short term capital gains loss. However, in order to take a loss, you have to have capital gains.

An option is not a capital asset, it is the right to purchase the underlying capital asset.

Therefore, the option price is not deductible and neither are any losses upon execution because you did not own the underlying asset.
rascott wrote:
Mon Aug 12, 2019 12:52 pm
Then why are you debating him if you don't care to learn what he's doing?
I do not care to learn the intricacies of options trading because I am not convinced of the strategy. I do care to learn if the strategy is sound or not. I have looked into options, and the amount of learning to become well versed is light years beyond my current interest in the subject. Billions of dollars are spent arbitraging options. Entire careers are built on this type of trade. I'm not going to figure them out in even a year of study.
If you are young and just starting out there is a risk of being wiped out if you were to keep at it....but the idea is obviously it doesn't much matter as most of your capital is future income.
True, but if you had instead just purchased equities, you can ride it out and they'll either come back or we've got bigger things to worry about. Options and futures force you to realize your gains or losses; they aren't just on paper come the expiration date.

Or you keep rolling to more options and then those will come back too. There really is no difference, other than the implied cost of the leverage.

Let's say you have $100k, you buy SPY and the market drops by 33% you have $67k.

If bought options for 3x leverage, you'd have $100k in equity exposure for a $33k cost... those go to zero value but you still have $67k in cash.

The two positions are identical (ignoring the implied interest cost of the leverage).

The OP doesn't have the $67k in financial capital, but has it in human capital (future earnings). So he uses options to create an equity position of $100k, backed by his human capital.
Last edited by rascott on Mon Aug 12, 2019 1:34 pm, edited 1 time in total.

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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP » Mon Aug 12, 2019 1:33 pm

rascott wrote:
Mon Aug 12, 2019 1:31 pm
Or you keep rolling to more options and then those will come back too. There really is no difference, other than the implied cost of the leverage.

Let's say you have $100k, you buy SPY and the market drops by 33% you have $67k.

If bought options for 3x leverage, you'd have $100k in equity exposure for a $33k cost... those go to zero value but you still have $67k in cash.

The two positions are identical (ignoring the implied interest cost of the leverage).
On paper I suppose, but in reality, the losses of the equities holder is not realized unless he/she sells. Those losses are purely hypothetical. The options loss is real.

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Re: Lifecycle Investing - Leveraging when young

Post by rascott » Mon Aug 12, 2019 1:40 pm

Lee_WSP wrote:
Mon Aug 12, 2019 1:33 pm
rascott wrote:
Mon Aug 12, 2019 1:31 pm
Or you keep rolling to more options and then those will come back too. There really is no difference, other than the implied cost of the leverage.

Let's say you have $100k, you buy SPY and the market drops by 33% you have $67k.

If bought options for 3x leverage, you'd have $100k in equity exposure for a $33k cost... those go to zero value but you still have $67k in cash.

The two positions are identical (ignoring the implied interest cost of the leverage).
On paper I suppose, but in reality, the losses of the equities holder is not realized unless he/she sells. Those losses are purely hypothetical. The options loss is real.


That's just mental accounting. Ignoring tax pourposes (which I don't really know).....you are in the same spot. There is no such thing as a hypothetical loss. You have lost the value. By holding on you are doing the same thing as if your position was liquidated and then you took what's left over and bought it again. Just like the option buyer.

3x leverage is a lot for equities......and this wouldn't be at all suited for someone who already has built up significant financial capital.

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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP » Mon Aug 12, 2019 2:16 pm

rascott wrote:
Mon Aug 12, 2019 1:40 pm
Lee_WSP wrote:
Mon Aug 12, 2019 1:33 pm
rascott wrote:
Mon Aug 12, 2019 1:31 pm
Or you keep rolling to more options and then those will come back too. There really is no difference, other than the implied cost of the leverage.

Let's say you have $100k, you buy SPY and the market drops by 33% you have $67k.

If bought options for 3x leverage, you'd have $100k in equity exposure for a $33k cost... those go to zero value but you still have $67k in cash.

The two positions are identical (ignoring the implied interest cost of the leverage).
On paper I suppose, but in reality, the losses of the equities holder is not realized unless he/she sells. Those losses are purely hypothetical. The options loss is real.


That's just mental accounting. Ignoring tax pourposes (which I don't really know).....you are in the same spot. There is no such thing as a hypothetical loss. You have lost the value. By holding on you are doing the same thing as if your position was liquidated and then you took what's left over and bought it again. Just like the option buyer.

3x leverage is a lot for equities......and this wouldn't be at all suited for someone who already has built up significant financial capital.
I'll play your game.

The options trader is still at greater loss because of trading costs. They may be low, but they're still there.

Your hypothetical doesn't seem to have a cost for capital either. The cost of capital (the interest on the loan) would also be lost.

Edit: this hypothetical makes no sense. If you're just as well or worse off with either strategy, why buy the option in the first place?

The more I think about it, this is not how options work and your hypothetical is flawed. There is neither profit nor loss in this hypothetical.

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Re: Lifecycle Investing - Leveraging when young

Post by rascott » Mon Aug 12, 2019 3:21 pm

Lee_WSP wrote:
Mon Aug 12, 2019 2:16 pm
rascott wrote:
Mon Aug 12, 2019 1:40 pm
Lee_WSP wrote:
Mon Aug 12, 2019 1:33 pm
rascott wrote:
Mon Aug 12, 2019 1:31 pm
Or you keep rolling to more options and then those will come back too. There really is no difference, other than the implied cost of the leverage.

Let's say you have $100k, you buy SPY and the market drops by 33% you have $67k.

If bought options for 3x leverage, you'd have $100k in equity exposure for a $33k cost... those go to zero value but you still have $67k in cash.

The two positions are identical (ignoring the implied interest cost of the leverage).
On paper I suppose, but in reality, the losses of the equities holder is not realized unless he/she sells. Those losses are purely hypothetical. The options loss is real.


That's just mental accounting. Ignoring tax pourposes (which I don't really know).....you are in the same spot. There is no such thing as a hypothetical loss. You have lost the value. By holding on you are doing the same thing as if your position was liquidated and then you took what's left over and bought it again. Just like the option buyer.

3x leverage is a lot for equities......and this wouldn't be at all suited for someone who already has built up significant financial capital.
I'll play your game.

The options trader is still at greater loss because of trading costs. They may be low, but they're still there.

Your hypothetical doesn't seem to have a cost for capital either. The cost of capital (the interest on the loan) would also be lost.

Edit: this hypothetical makes no sense. If you're just as well or worse off with either strategy, why buy the option in the first place?

The more I think about it, this is not how options work and your hypothetical is flawed. There is neither profit nor loss in this hypothetical.

Yes, all leverage has costs involved. If the return minus trading costs is greater than the cost of capital, you come out ahead. If it isn't, you don't. I said specifically that my hypothetical ignored the the implied interest rate found in options. OP says he's paying about 3.2% or so, I haven't checked the math but sounds about right.

There isn't something nefarious about options vs any other kind of leverage one may use. They are a tool, that come with an associated cost. If you have a 4% mortgage and are buying equities rather than paying off your mortgage, you are also using leverage under the expectation that equities will return more than your cost of capital on your mortgage.

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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP » Mon Aug 12, 2019 3:39 pm

rascott wrote:
Mon Aug 12, 2019 3:21 pm
Lee_WSP wrote:
Mon Aug 12, 2019 2:16 pm
rascott wrote:
Mon Aug 12, 2019 1:40 pm
Lee_WSP wrote:
Mon Aug 12, 2019 1:33 pm
rascott wrote:
Mon Aug 12, 2019 1:31 pm
Or you keep rolling to more options and then those will come back too. There really is no difference, other than the implied cost of the leverage.

Let's say you have $100k, you buy SPY and the market drops by 33% you have $67k.

If bought options for 3x leverage, you'd have $100k in equity exposure for a $33k cost... those go to zero value but you still have $67k in cash.

The two positions are identical (ignoring the implied interest cost of the leverage).
On paper I suppose, but in reality, the losses of the equities holder is not realized unless he/she sells. Those losses are purely hypothetical. The options loss is real.


That's just mental accounting. Ignoring tax pourposes (which I don't really know).....you are in the same spot. There is no such thing as a hypothetical loss. You have lost the value. By holding on you are doing the same thing as if your position was liquidated and then you took what's left over and bought it again. Just like the option buyer.

3x leverage is a lot for equities......and this wouldn't be at all suited for someone who already has built up significant financial capital.
I'll play your game.

The options trader is still at greater loss because of trading costs. They may be low, but they're still there.

Your hypothetical doesn't seem to have a cost for capital either. The cost of capital (the interest on the loan) would also be lost.

Edit: this hypothetical makes no sense. If you're just as well or worse off with either strategy, why buy the option in the first place?

The more I think about it, this is not how options work and your hypothetical is flawed. There is neither profit nor loss in this hypothetical.

Yes, all leverage has costs involved. If the return minus trading costs is greater than the cost of capital, you come out ahead. If it isn't, you don't. I said specifically that my hypothetical ignored the the implied interest rate found in options. OP says he's paying about 3.2% or so, I haven't checked the math but sounds about right.

There isn't something nefarious about options vs any other kind of leverage one may use. They are a tool, that come with an associated cost. If you have a 4% mortgage and are buying equities rather than paying off your mortgage, you are also using leverage under the expectation that equities will return more than your cost of capital on your mortgage.
Well, then obviously the options strategy loses. What was the original point of this tangent? Why did you post those numbers? What point were you trying to make?

I am confused what we just went back and forth on.

The strategy doesn't leverage just for [(removed) --admin LadyGeek], the strategy leverages because the leverager does not have the other $67,000 in your hypothetical. Therefore, if he doesn't have that extra cash cushion, as a percentage, the leverager loses [(removed) --admin LadyGeek], a lot more than the unleveraged investor.

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Re: Lifecycle Investing - Leveraging when young

Post by rascott » Mon Aug 12, 2019 3:49 pm

Lee_WSP wrote:
Mon Aug 12, 2019 3:39 pm
rascott wrote:
Mon Aug 12, 2019 3:21 pm
Lee_WSP wrote:
Mon Aug 12, 2019 2:16 pm
rascott wrote:
Mon Aug 12, 2019 1:40 pm
Lee_WSP wrote:
Mon Aug 12, 2019 1:33 pm


On paper I suppose, but in reality, the losses of the equities holder is not realized unless he/she sells. Those losses are purely hypothetical. The options loss is real.


That's just mental accounting. Ignoring tax pourposes (which I don't really know).....you are in the same spot. There is no such thing as a hypothetical loss. You have lost the value. By holding on you are doing the same thing as if your position was liquidated and then you took what's left over and bought it again. Just like the option buyer.

3x leverage is a lot for equities......and this wouldn't be at all suited for someone who already has built up significant financial capital.
I'll play your game.

The options trader is still at greater loss because of trading costs. They may be low, but they're still there.

Your hypothetical doesn't seem to have a cost for capital either. The cost of capital (the interest on the loan) would also be lost.

Edit: this hypothetical makes no sense. If you're just as well or worse off with either strategy, why buy the option in the first place?

The more I think about it, this is not how options work and your hypothetical is flawed. There is neither profit nor loss in this hypothetical.

Yes, all leverage has costs involved. If the return minus trading costs is greater than the cost of capital, you come out ahead. If it isn't, you don't. I said specifically that my hypothetical ignored the the implied interest rate found in options. OP says he's paying about 3.2% or so, I haven't checked the math but sounds about right.

There isn't something nefarious about options vs any other kind of leverage one may use. They are a tool, that come with an associated cost. If you have a 4% mortgage and are buying equities rather than paying off your mortgage, you are also using leverage under the expectation that equities will return more than your cost of capital on your mortgage.
Well, then obviously the options strategy loses, which is my point, not sure why we had to go through all that rigmarole to get there.
Not sure point you are attempting to make, or that you understand what the OP is doing. Obviously you use leverage to have an equity position greater than your total current financial capital. He's basically borrowing money at 3% to buy equities via options. That is all.

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Re: Lifecycle Investing - Leveraging when young

Post by 305pelusa » Mon Aug 12, 2019 4:16 pm

Lee_WSP wrote:
Mon Aug 12, 2019 3:39 pm
rascott wrote:
Mon Aug 12, 2019 3:21 pm
Lee_WSP wrote:
Mon Aug 12, 2019 2:16 pm
rascott wrote:
Mon Aug 12, 2019 1:40 pm
Lee_WSP wrote:
Mon Aug 12, 2019 1:33 pm


On paper I suppose, but in reality, the losses of the equities holder is not realized unless he/she sells. Those losses are purely hypothetical. The options loss is real.


That's just mental accounting. Ignoring tax pourposes (which I don't really know).....you are in the same spot. There is no such thing as a hypothetical loss. You have lost the value. By holding on you are doing the same thing as if your position was liquidated and then you took what's left over and bought it again. Just like the option buyer.

3x leverage is a lot for equities......and this wouldn't be at all suited for someone who already has built up significant financial capital.
I'll play your game.

The options trader is still at greater loss because of trading costs. They may be low, but they're still there.

Your hypothetical doesn't seem to have a cost for capital either. The cost of capital (the interest on the loan) would also be lost.

Edit: this hypothetical makes no sense. If you're just as well or worse off with either strategy, why buy the option in the first place?

The more I think about it, this is not how options work and your hypothetical is flawed. There is neither profit nor loss in this hypothetical.

Yes, all leverage has costs involved. If the return minus trading costs is greater than the cost of capital, you come out ahead. If it isn't, you don't. I said specifically that my hypothetical ignored the the implied interest rate found in options. OP says he's paying about 3.2% or so, I haven't checked the math but sounds about right.

There isn't something nefarious about options vs any other kind of leverage one may use. They are a tool, that come with an associated cost. If you have a 4% mortgage and are buying equities rather than paying off your mortgage, you are also using leverage under the expectation that equities will return more than your cost of capital on your mortgage.
Well, then obviously the options strategy loses. What was the original point of this tangent? Why did you post those numbers? What point were you trying to make?

I am confused what we just went back and forth on.

The strategy doesn't leverage [(removed) --admin LadyGeek], the strategy leverages because the leverager does not have the other $67,000 in your hypothetical. Therefore, if he doesn't have that extra cash cushion, as a percentage, the leverager loses [(removed) --admin LadyGeek] more than the unleveraged investor.
I just have 1 question for you. Do you have any debt (mortgage, auto, etc) at a higher rate than 3.8%? Just a simple yes or no.

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Re: Lifecycle Investing - Leveraging when young

Post by MoneyMarathon » Mon Aug 12, 2019 4:17 pm

305pelusa wrote:
Mon Aug 12, 2019 4:16 pm
I just have 1 question for you. Do you have any debt (mortgage, auto, etc) at a higher rate than 3.8%? Just a simple yes or no.
I don't.

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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP » Mon Aug 12, 2019 4:29 pm

305pelusa wrote:
Mon Aug 12, 2019 4:16 pm
I just have 1 question for you. Do you have any debt (mortgage, auto, etc) at a higher rate than 3.8%? Just a simple yes or no.
No.

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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP » Mon Aug 12, 2019 4:33 pm

rascott wrote:
Mon Aug 12, 2019 3:49 pm
Lee_WSP wrote:
Mon Aug 12, 2019 3:39 pm
rascott wrote:
Mon Aug 12, 2019 3:21 pm
Lee_WSP wrote:
Mon Aug 12, 2019 2:16 pm
rascott wrote:
Mon Aug 12, 2019 1:40 pm




That's just mental accounting. Ignoring tax pourposes (which I don't really know).....you are in the same spot. There is no such thing as a hypothetical loss. You have lost the value. By holding on you are doing the same thing as if your position was liquidated and then you took what's left over and bought it again. Just like the option buyer.

3x leverage is a lot for equities......and this wouldn't be at all suited for someone who already has built up significant financial capital.
I'll play your game.

The options trader is still at greater loss because of trading costs. They may be low, but they're still there.

Your hypothetical doesn't seem to have a cost for capital either. The cost of capital (the interest on the loan) would also be lost.

Edit: this hypothetical makes no sense. If you're just as well or worse off with either strategy, why buy the option in the first place?

The more I think about it, this is not how options work and your hypothetical is flawed. There is neither profit nor loss in this hypothetical.

Yes, all leverage has costs involved. If the return minus trading costs is greater than the cost of capital, you come out ahead. If it isn't, you don't. I said specifically that my hypothetical ignored the the implied interest rate found in options. OP says he's paying about 3.2% or so, I haven't checked the math but sounds about right.

There isn't something nefarious about options vs any other kind of leverage one may use. They are a tool, that come with an associated cost. If you have a 4% mortgage and are buying equities rather than paying off your mortgage, you are also using leverage under the expectation that equities will return more than your cost of capital on your mortgage.
Well, then obviously the options strategy loses, which is my point, not sure why we had to go through all that rigmarole to get there.
Not sure point you are attempting to make, or that you understand what the OP is doing. Obviously you use leverage to have an equity position greater than your total current financial capital. He's basically borrowing money at 3% to buy equities via options. That is all.
I understand that, but if you use leverage you also lever losses. If you use options, you lock in those losses. You do not get to come back from an options loss just by waiting. You can with a leveraged ETF.

If you have other long term loans such as a 0% auto or mortgage, then it doesn't necessarily make sense to pay it off early. However, I'd also say you're better off not buying the car and if you can plunk down the cash for the car, that's really the only time you can truly afford the car you're looking at and you should very well just go ahead and plunk down the cash. The car loses value so much faster than stocks can gain value.

I think mortgages are perfectly fine and just paying those as they come is the way to go. Just have a big enough emergency fund to cushion any income volatility.

I think student loans are a necessary evil and that's all I have to say about those. They're basically a tax on the young.

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Re: Lifecycle Investing - Leveraging when young

Post by rascott » Mon Aug 12, 2019 4:58 pm

Lee_WSP wrote:
Mon Aug 12, 2019 4:33 pm
rascott wrote:
Mon Aug 12, 2019 3:49 pm
Lee_WSP wrote:
Mon Aug 12, 2019 3:39 pm
rascott wrote:
Mon Aug 12, 2019 3:21 pm
Lee_WSP wrote:
Mon Aug 12, 2019 2:16 pm


I'll play your game.

The options trader is still at greater loss because of trading costs. They may be low, but they're still there.

Your hypothetical doesn't seem to have a cost for capital either. The cost of capital (the interest on the loan) would also be lost.

Edit: this hypothetical makes no sense. If you're just as well or worse off with either strategy, why buy the option in the first place?

The more I think about it, this is not how options work and your hypothetical is flawed. There is neither profit nor loss in this hypothetical.

Yes, all leverage has costs involved. If the return minus trading costs is greater than the cost of capital, you come out ahead. If it isn't, you don't. I said specifically that my hypothetical ignored the the implied interest rate found in options. OP says he's paying about 3.2% or so, I haven't checked the math but sounds about right.

There isn't something nefarious about options vs any other kind of leverage one may use. They are a tool, that come with an associated cost. If you have a 4% mortgage and are buying equities rather than paying off your mortgage, you are also using leverage under the expectation that equities will return more than your cost of capital on your mortgage.
Well, then obviously the options strategy loses, which is my point, not sure why we had to go through all that rigmarole to get there.
Not sure point you are attempting to make, or that you understand what the OP is doing. Obviously you use leverage to have an equity position greater than your total current financial capital. He's basically borrowing money at 3% to buy equities via options. That is all.
I understand that, but if you use leverage you also lever losses. If you use options, you lock in those losses. You do not get to come back from an options loss just by waiting. You can with a leveraged ETF.

If you have other long term loans such as a 0% auto or mortgage, then it doesn't necessarily make sense to pay it off early. However, I'd also say you're better off not buying the car and if you can plunk down the cash for the car, that's really the only time you can truly afford the car you're looking at and you should very well just go ahead and plunk down the cash. The car loses value so much faster than stocks can gain value.

I think mortgages are perfectly fine and just paying those as they come is the way to go. Just have a big enough emergency fund to cushion any income volatility.

I think student loans are a necessary evil and that's all I have to say about those. They're basically a tax on the young.
You don't lock in anything if you are constantly rolling the positions forward. If you are buying LEAPS that don't expire for a year or whatever......in 6 months you would just sell your current position that's 6 months from expire and buy a new one a year out with your proceeds.

If you wanted to do this you'd likely be best to read the book.

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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP » Mon Aug 12, 2019 5:11 pm

By having an expiration date, your losses or gains become realized on or before expiration. The same is not true for long term capital assets.

If your options position is wiped out or nearly wiped out, you don't get to keep on rolling them into new options.

And that's not even my biggest problem with options.

My biggest problem with options is that they're a zero sum game played against a financial institution with more brain power, man power, and financial resources than we as individuals will ever have. With the CBOE right there in the middle taking their cut.

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Re: Lifecycle Investing - Leveraging when young

Post by rascott » Mon Aug 12, 2019 5:23 pm

Lee_WSP wrote:
Mon Aug 12, 2019 5:11 pm
By having an expiration date, your losses or gains become realized on or before expiration. The same is not true for long term capital assets.

If your options position is wiped out or nearly wiped out, you don't get to keep on rolling them into new options.

And that's not even my biggest problem with options.

My biggest problem with options is that they're a zero sum game played against a financial institution with more brain power, man power, and financial resources than we as individuals will ever have. With the CBOE right there in the middle taking their cut.


I'm sorry but you really don't know what you are talking about. He's not trying to trade options for profit like a speculator.

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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP » Mon Aug 12, 2019 5:26 pm

How is it less risky to hold the option to expiration? What's the difference between this buy & hold options strategy and a European options trader? Both cannot exercise the option until expiration. Why is one speculative and one not?

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Re: Lifecycle Investing - Leveraging when young

Post by 305pelusa » Mon Aug 12, 2019 5:44 pm

rascott wrote:
Mon Aug 12, 2019 3:49 pm
Not sure point you are attempting to make, or that you understand what the OP is doing.
Poster has a problem with the call LEAPs because they "frequently expire worthless". He/she provided evidence of this. Poster does not even know what conditions must occur for an option to expire worthless. So poster has no understanding as to why the options I recommend almost never expire worthless; he/she also doesn't understand that if they were to expire worthless, then they were a better deal than stocks.

So yes, you're right. Poster unequivocally has no idea what I am doing.
Lee_WSP wrote:
Mon Aug 12, 2019 1:18 pm
Therefore, the option price is not deductible and neither are any losses upon execution because you did not own the underlying asset.
This is false.
Once again, will you quit posting false information on this thread?

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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP » Mon Aug 12, 2019 5:59 pm

305pelusa wrote:
Mon Aug 12, 2019 5:44 pm
rascott wrote:
Mon Aug 12, 2019 3:49 pm
Not sure point you are attempting to make, or that you understand what the OP is doing.
Poster has a problem with the call LEAPs because they "frequently expire worthless". He/she provided evidence of this. Poster does not even know what conditions must occur for an option to expire worthless. So poster has no understanding as to why the options I recommend almost never expire worthless; he/she also doesn't understand that if they were to expire worthless, then they were a better deal than stocks.

So yes, you're right. Poster unequivocally has no idea what I am doing.
Lee_WSP wrote:
Mon Aug 12, 2019 1:18 pm
Therefore, the option price is not deductible and neither are any losses upon execution because you did not own the underlying asset.
This is false.
Once again, will you quit posting false information on this thread?
You haven't shown any evidence to proving your position whereas I've cited numerous articles stating that the majority of options expire. The term frequently means more than zero. Please show the statistics as to how often your leaps are exercised.

Unlike you, I actually bothered to look it up. Options are only deductible if they expire or are sold for a loss. If exercised, they are not deductible.

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Re: Lifecycle Investing - Leveraging when young

Post by rascott » Mon Aug 12, 2019 6:05 pm

Lee_WSP wrote:
Mon Aug 12, 2019 5:59 pm
305pelusa wrote:
Mon Aug 12, 2019 5:44 pm
rascott wrote:
Mon Aug 12, 2019 3:49 pm
Not sure point you are attempting to make, or that you understand what the OP is doing.
Poster has a problem with the call LEAPs because they "frequently expire worthless". He/she provided evidence of this. Poster does not even know what conditions must occur for an option to expire worthless. So poster has no understanding as to why the options I recommend almost never expire worthless; he/she also doesn't understand that if they were to expire worthless, then they were a better deal than stocks.

So yes, you're right. Poster unequivocally has no idea what I am doing.
Lee_WSP wrote:
Mon Aug 12, 2019 1:18 pm
Therefore, the option price is not deductible and neither are any losses upon execution because you did not own the underlying asset.
This is false.
Once again, will you quit posting false information on this thread?
You haven't shown any evidence to proving your position whereas I've cited numerous articles stating that the majority of options expire. The term frequently means more than zero. Please show the statistics as to how often your leaps are exercised.

Unlike you, I actually bothered to look it up. Options are only deductible if they expire or are sold for a loss. If exercised, they are not deductible.

Do you understand the difference between an outside the money option and a deep in the money option?

Do you understand how an option price is calculated? If you can't grasp intrinsic value vs time value in option pricing then there is no point going further.

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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP » Mon Aug 12, 2019 6:10 pm

rascott wrote:
Mon Aug 12, 2019 6:05 pm
Do you understand the difference between an outside the money option and a deep in the money option?

Do you understand how an option price is calculated? If you can't grasp intrinsic value vs time value in option pricing then there is no point going further.
Yes.

No, and you cannot seriously claim that you truly understand the extraordinarily complex formulas investment banks use when they sell such options.

I understand the time value of money. I understand the GOAL of leveraging when young. As stated a dozen times already; I disagree with the proposed execution.

HOWEVER, as I've also said a few times, it's OP's money. He can do with it as he wishes. If he wants to talk about it, we'll talk about it. But let's not fool ourselves into thinking this is the next best strategy since index investing.

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Re: Lifecycle Investing - Leveraging when young

Post by LadyGeek » Mon Aug 12, 2019 6:42 pm

The points on the current disagreement regarding options and LEAPS have been made. There is no progress in this area of discussion, let's move on.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

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Re: Lifecycle Investing - Leveraging when young

Post by 305pelusa » Mon Aug 12, 2019 6:50 pm

Lee_WSP wrote:
Mon Aug 12, 2019 5:59 pm
The term frequently means more than zero.
This is laughable. Could you imagine if that was true?
You: "I frequently have to go to the bathroom doctor"
Doc: "Oh how often?"
You: "Once a day".
Doc: "Mkay what about exercise?"
You: "I exercise frequently. About every two decades"
Doc: "And alcohol?"
You: "Oh I am a very frequent drinker. I did it once at my wedding".
Lee_WSP wrote:
Mon Aug 12, 2019 5:59 pm
Unlike you, I actually bothered to look it up. Options are only deductible if they expire or are sold for a loss. If exercised, they are not deductible.
Well you've changed your argument haven't you? Because back here:
Lee_WSP wrote:
Mon Aug 12, 2019 11:10 am
edit: I change my answer. I'd rather take the equities hit because I can deduct the loss. The price of options is not deductible unless you're running it as a business.
You're saying stocks are better because you could've deducted your losses while the worthless, expired options don't let you do that.

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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP » Mon Aug 12, 2019 6:51 pm

I admit I was wrong about the deductible nature of options. They are not deductible if exercised, but are treated as sold for zero dollars if expired.

Are you 5? Why do I have to spell this out. I said I was wrong. Deductability was never my main criticism of the strategy, it was just something I thought of off the cuff. You could have just linked to some publication instead of trying to score points on the internet.

You still have not provided any evidence to refute the evidence I have already posted about LEAPS being any more or less exercised than all options.

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Re: Lifecycle Investing - Leveraging when young

Post by 305pelusa » Mon Aug 12, 2019 7:02 pm

Lee_WSP wrote:
Mon Aug 12, 2019 6:51 pm
I admit I was wrong about the deductible nature of options. They are not deductible if exercised, but are treated as sold for zero dollars if expired.

Why do I have to spell this out. I said I was wrong.
Sorry mate, I didn't notice you had said this. I must have missed it earlier. If exercised, they'll affect your cost basis, so it's a tax issue down the road. Glad we ironed it out.
Lee_WSP wrote:
Mon Aug 12, 2019 6:51 pm
Are you 5?
Mentally I peg myself between 3 and 60 years old depending on the day.
Lee_WSP wrote:
Mon Aug 12, 2019 6:51 pm
You still have not provided any evidence to refute the evidence I have already posted about LEAPS being any more or less exercised than all options.
I don't know how often exactly. But I do know it occurs about as often as the market dips 33% over the life of a given option. That's not a "frequent" event in my book, happens once or twice every decade perhaps. The out of the money options and at the money options expire very frequently, far more than the figures you quoted. Put together, you get the data you presented.
LadyGeek wrote:
Mon Aug 12, 2019 6:42 pm
The points on the current disagreement regarding options and LEAPS have been made. There is no progress in this area of discussion, let's move on.
Fair enough. I just wanted to clarify the tax consequences. We can just move along :happy

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Re: Lifecycle Investing - Leveraging when young

Post by Lee_WSP » Mon Aug 12, 2019 7:05 pm

305pelusa wrote:
Mon Aug 12, 2019 7:02 pm
Lee_WSP wrote:
Mon Aug 12, 2019 6:51 pm
You still have not provided any evidence to refute the evidence I have already posted about LEAPS being any more or less exercised than all options.
I don't know how often exactly. But I do know it occurs about as often as the market dips 33% over the life of a given option. That's not a "frequent" event in my book, happens once or twice every decade perhaps. The out of the money options and at the money options expire very frequently, far more than the figures you quoted. Put together, you get the data you presented.
I'm interested in continuing the discussion if we can get past trying to just score points and make arguments using evidence.

If you can show me statistics on this, I will reconsider my ardent opposition to options as leverage. But so far, I have not found any information to refute the idea that options are generally bad other than a few anecdotal posts by traders who claim to have succeeded.

But the mere fact that they succeeded doesn't prove anything. In any risky strategy, 1% will win while 99% will lose. Or something like that.

Or we can approach this another way. Can you actually buy a LEAP that is 33% in the money? How much does a SPY call option with a strike price of $191 cost?

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Re: Lifecycle Investing - Leveraging when young

Post by rascott » Mon Aug 12, 2019 7:25 pm

Lee_WSP wrote:
Mon Aug 12, 2019 7:05 pm
305pelusa wrote:
Mon Aug 12, 2019 7:02 pm
Lee_WSP wrote:
Mon Aug 12, 2019 6:51 pm
You still have not provided any evidence to refute the evidence I have already posted about LEAPS being any more or less exercised than all options.
I don't know how often exactly. But I do know it occurs about as often as the market dips 33% over the life of a given option. That's not a "frequent" event in my book, happens once or twice every decade perhaps. The out of the money options and at the money options expire very frequently, far more than the figures you quoted. Put together, you get the data you presented.
I'm interested in continuing the discussion if we can get past trying to just score points and make arguments using evidence.

If you can show me statistics on this, I will reconsider my ardent opposition to options as leverage. But so far, I have not found any information to refute the idea that options are generally bad other than a few anecdotal posts by traders who claim to have succeeded.

But the mere fact that they succeeded doesn't prove anything. In any risky strategy, 1% will win while 99% will lose. Or something like that.

Or we can approach this another way. Can you actually buy a LEAP that is 33% in the money? How much does a SPY call option with a strike price of $191 cost?

$190 call option for Sept 2020 is about $97, as of today.

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