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Hi All,

I have been playing with python (always dangerous), and have tried to automate some of the ROE_CashLTDebt and the Cohen Put option strategy from Post 183757. The basic screen as I understand it correctly is VL T1-5, ROE top 28%, Top 30 by Cash - Long Term Debt (all of this comes straight from VL, and is done using a spreadsheet).

The list I get is:
GOOG
MSFT
FB
AMZN
CSCO
ACN
VRTX
COST
NVDA
INTU
MRNA
BERY
MOH
ROST
MELI
TROW
AB
AEE
AMD
FTNT
LRCX
NTAP
VEEV
REGN
EXPD
NVR
ANGO
DKS
WSM

Going through this and looking at the Jan 21, 2022 PUT OPTIONS for each of them, and looking for the best premium available, I get the following:


SYMBOL PRICE DESCRIPTION STRIKE BID ASK TARGET CASH REQ'd RETURN CONTRACTS REVENUE
MRNA 191.6 MRNA Jan 21 2022 185 Put 185 25.6 27.95 26.305 158.695 16.58% 5 $13,152.50
MELI 1362.45 MELI Jan 21 2022 1340 Put 1340 155.6 164.4 158.24 1181.76 13.39% 1 $15,824.00
NVDA 671.13 NVDA Jan 21 2022 640 Put 640 65.65 66.4 65.875 574.125 11.47% 1 $6,587.50
AMD 81.97 AMD Jan 21 2022 77.5 Put 77.5 7.45 7.55 7.48 70.02 10.68% 12 $8,976.00
DKS 96.8 DKS Jan 21 2022 90 Put 90 9.2 9.9 9.41 80.59 11.68% 10 $9,410.00
LRCX 648.99 LRCX Jan 21 2022 620 Put 620 62.1 65.5 63.12 556.88 11.33% 1 $6,312.00



Assuming 6 positions and a $500K cash reserve (or $250K w/2x leverage), you generate a revenue of 60K, for which you are on the hook for $475K should they all be put to you. The hedge costs 14K, with a SP500 366 PUT, leaving you with a net of $46K, or 9.78% return on the $475K at risk.

The issue I have is that the best premiums are always closest to in the money. And I am not sure that cherry picking the stocks by which ones have the best option premiums to scalp is kosher.

Comments are welcome,

--Gabriel
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Just as an update from the previous post, we no get the following table:


SYMBOL PRICE DESCRIPTION STRIKE BID ASK TARGET REQ'd OTM % PREMIUM CONTRACTS REVENUE
MRNA 201.92 MRNA Jan 21 2022 195 Put 195 29.15 30.45 29.54 165.46 3.43% 17.85% 5 $14,770.00
MELI 1410.81 MELI Jan 21 2022 1380 Put 1380 152.5 160.5 154.9 1225.1 2.18% 12.64% 1 $15,490.00
NVDA 716.59 NVDA Jan 21 2022 680 Put 680 62.95 64.05 63.28 616.72 5.11% 10.26% 1 $6,328.00
DKS 95.08 DKS Jan 21 2022 90 Put 90 9.3 9.6 9.39 80.61 5.34% 11.65% 10 $9,390.00
LRCX 646.39 LRCX Jan 21 2022 620 Put 620 58.25 59.75 58.7 561.3 4.08% 10.46% 1 $5,870.00
AMD 80.94 AMD Jan 21 2022 77.5 Put 77.5 6.95 7.05 6.98 70.52 4.25% 9.90% 12 $8,376.00


which commits $488276 (500K) or 1/2 that with a 2:1 leverage, has a mean OTM% of 3.86%, a premium of 12.3%, and a hedge of 13.11% down, or a SPY368 PUT. The cost of the hedge is 21% of the profit, so it isn't cheap. Net you receive $47K or 9.66% on the money at risk.

If I go out to one year (Jun 2022 PUTS), I have fewer options available.

What do you guys think of running 4 portfolios of this (one per quarter) each looking out a year or 6 months ahead on the expiration date. Is running the 2x leverage on the cash pile too aggressive? I'm looking at this as a pretty conservative strategy, but maybe I can't see the steam roller I'm stepping in front of.

Thoughts?

-_Gabriel
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What do you guys think of running 4 portfolios of this (one per quarter) each looking out a year or 6 months ahead on the expiration date.

In general, if you're following the suggested formula to any close degree, it's a pretty safe strategy.
The one main way it can fail is if some of the stocks you're long go down, but the broad index you're using for your hedge doesn't.
This risk is substantially reduced by diversification.
It's possible for six things to go down but not the index, but it's extremely unlikely for 30 things to go down but not the index.
So, for risk mitigation, the main thing to bear in mind is to have lots of positions, in many sectors, to the extent that your portfolio size allows is.
So staggered portfolios would make sense not just for the advantage of avoiding inopportune entry dates, but also because you'll likely have more names.

If you're willing to deviate from the suggested strategy somewhat, I would suggest the following:
Go a little non-mechanical with your dates.
In any given quarter, try to enter your longs on days which the omens might suggest the market is a bit lower than average,
and enter your hedges when the market seems to be toppy.
If you do it on multiple dates, I speculate that it's not so hard to beat a random number generator at that task.
You could determine those days mechanically...e.g., open long positions (short puts) only on a day that's the lowest in the prior 4 weeks.
Lowest for the market, or lowest for that stock.
And vice versa for the hedging short positions. (long puts).

After a few years I ended up entering positions quite regularly, when the thing I want to be long looked cheaper than usual.
And changed positions sizes accordingly, too...if it looked richly priced I entered fewer long positions (short puts) and vice versa.
It gradually became entirely non mechanical, but averaged over time still the same overall general strategy.
A broad portfolio of short puts, and some number of long index puts for disaster hedging and to give the confidence for a little leverage against the cash pile backing it all up.

Jim
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Jim,what would be good SPY puts bought to hedge this,date and stike?
Thanks in advance.
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Maybe good and maybe not the following are what Value Line Options service lists as Puts Sold best from your list.
ACN
GOOG
AMZN
COST
FB
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I'm not Jim, but the formula in Cohen's book is that your hedge should be priced at %OTM + 0.75*%PREMIUM of the basket of stocks.

When I ran this yesterday for the 6 stocks from the ROE_CashLTDebt with the highest premium for a Jan. 2022 expiration, I get an aggregate OTM of 3.86% and premium of 12.33% (note that I weight the individual positions by the Cash required to back them up). Thus using the Cohen formula, the hedge put should be bought at 13.11% below current price of SPY.

Yesterday (when I ran the code), SPY was at 424.46, so 13.11% below that was 368.81, so the correct hedge put would be the Jan 2022 SPY 369 PUT (the number of contracts is set to cover the cash required pile).

Hope that helps. Maybe Jim will weigh in with some tweaks to the strategy for the hedges.

--G
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thanks hiphop

--I'm not Jim, but the formula in Cohen's book is that your hedge should be priced at %OTM + 0.75*%PREMIUM of the basket of stocks.

When I ran this yesterday for the 6 stocks from the ROE_CashLTDebt with the highest premium for a Jan. 2022 expiration, I get an aggregate OTM of 3.86% and premium of 12.33% (note that I weight the individual positions by the Cash required to back them up). Thus using the Cohen formula, the hedge put should be bought at 13.11% below current price of SPY.

Yesterday (when I ran the code), SPY was at 424.46, so 13.11% below that was 368.81, so the correct hedge put would be the Jan 2022 SPY 369 PUT (the number of contracts is set to cover the cash required pile).

Hope that helps. Maybe Jim will weigh in with some tweaks to the strategy for the hedges.

--G------------------------------------------------------------------------------------------------------
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