Lifetime Income: S&P500 Plus Index Options

This month’s analysis is an interesting twist on the constant payout strategy I covered last month.  Last month’s strategy consisted of putting all capital in S&P500 ETF’s, and drawing out a constant amount each year.  This provides a fixed annual payout for as long as the capital lasts.

In this month’s strategy, all capital is again invested in S&P500 ETF’s, and a constant amount is withdrawn each year.  However, a portion of the withdrawn amount is invested in 12-month call options on the S&P500 ETF.  If these options are in the money at the end of the year, the value is available for additional spending.  If the options are not in the money at the end of the year, the amount available for spending is reduced by the amount that was spent on the options.

If there are investment topics you’re interested in that I haven’t covered yet please send me an email:

 

joseph AT StockMarketMovement.com

Lifetime Income: Constant S&P500 Inflation-Adjusted Payout

Continuing on the annuities and lifetime income topic, I’m going to look at a modification of last month’s analysis.  Last month, I analyzed putting capital into S&P500 stocks, and taking the dividends and a fixed percentage of assets every year as payout.  The advantage of this strategy is that capital will never go to $0 (unless the S&P500 goes to 0), because the capital withdrawn is a fixed percentage of its current value.  The downside is that year to year payout varies greatly, making budgeting extremely difficult.

In this month’s analysis, I look at what happens if the amount taken out each year is constant (adjusted for inflation).  Obviously budgeting is a lot easier, because the same amount of income is available each year.  However, with this strategy the capital can go to $0, and as you’ll see it would have gone to $0 with higher withdrawal rates over the study period.

If there are investment topics you’re interested in that I haven’t covered yet please send me an email:

joseph AT StockMarketMovement.com

Lifetime Income: S&P500 Payout

I’m changing tracks a bit this month.  I got an email asking about annuities and annuity alternatives.  There’s no single way to look at this, so I’ll post analyses looking at it several different ways.

This month’s analysis is very simple, put a lump sum of money into the S&P 500, and take out only dividends and a small percentage of the underlying capital.  This is very different than an annuity, which pays the same amount (possibly with an annual inflation adjustment) every year.  There are many variations of annuities.  You can get a good introduction on Investopedia to learn the basics.

Today’s analysis runs from 1970 through 2016, and all of the results are inflation-adjusted.

If there is enough capital to live off of only the dividends, this strategy would have worked out fairly well over the study period.  The annual inflation-adjusted payout was reasonably consistent through the mid 1980’s, at which point growth in the stock market and corporate earnings allowed the annual payout to appreciate substantially.  By the end of the study period, inflation-adjusted annual payout was more than twice the initial value, and underlying asset value was more than three times the initial asset value.

Taking out even a small percentage of capital each year as payout had a significant effect.  While the annual payout over the study period was reasonably maintained, the portfolio value was not.  Over a longer period of time, it’s likely the payout would reduce substantially as well.

Take a look at the analysis and let me know if you have any questions, or variations you’d be interested in seeing.

I love hearing from my fellow investors, so if there’s anything you’re interested in please send me an email:

joseph AT StockMarketMovement.com

Option Trading Strategy – QQQ Put Spreads

A ‘Put Spread‘ is when you buy a put and simultaneously sell a put on the same underlying security, with the same expiration date, but at different strike prices.  E.g., buy a put on QQQ for $100 per share 3 months out, and simultaneously sell a put on QQQ for $105 per share 3 months out.  As usual Investopedia has a good description of the basic idea.

Put spreads do best in markets that are rising, but not strongly.

The strategy I describe involves specifically 3-month put spreads.  Any term could be used, of course, and I’ve investigated several others.  I like the 3-month spreads because they don’t tie money up for a long time, even though longer term spreads are probably more consistent.  If there were 12-month QQQ options available every quarter I would probably switch to those to get long term capital gains tax (20%) instead of short term capital gains tax (39.6%), but QQQ currently only has 12-month options available in January.

I appreciate all the emails I receive to discuss investing, so if there’s anything you’re interested in please send me an email:

joseph AT StockMarketMovement.com

 

Option Trading Strategy – QQQ Diagonal Put Spreads

A ‘diagonal put spread’ is when puts are bought and sold on the same security, and both the strike price and expiration date are different on the two legs.

E.g., buy a 9 month put on QQQ at 135, and sell a 3 month put on QQQ at 145.  In the strategy analyzed this month, another 3 month put on QQQ is sold when the first 3 month put expires, and a third 3 month put on QQQ is sold when the second 3 month put expires.  In this way, the long put protects against arbitrarily large losses when the market drops (though money is lost when the market drops), and profit is made off of selling put option premium.

Take a look at my analysis of how QQQ diagonal put spreads have worked out over the past 10 years.  I’d especially like to hear from anyone who has been using this strategy on non-index options.

I appreciate all the emails I receive to discuss investing, so if there’s anything you’re interested in please send me an email:

joseph AT StockMarketMovement.com

Option Trading Strategy – Buy QQQ Sell SPY

This month’s strategy is buying quarterly QQQ calls and selling quarterly SPY calls.  You can follow the link to see how this strategy has played out historically.

The idea behind this strategy is that the NASDAQ and SP500 tend to move together, but QQQ is more volatile and makes bigger moves.  Selling SPY partially offsets the cost of buying QQQ when the market is down, and QQQ outperforms SPY when the market is up.  At least that’s the theory, you can see how that compares to reality.

I appreciate all the emails I receive to discuss stock (/ option) trading, so if there’s anything you’re interested in please send me an email:

joseph AT StockMarketMovement.com

Option Trading Strategy – Buy Yearly Index Long Call Options

This month’s strategy is buying yearly index long call options.  You can follow the link to see how this strategy has played out historically.

The idea behind this strategy is to buy an index option that’s a little more than 12 months out, so that any profits will be long term capital gains rather than short term.

Options in this strategy are purchased 5% In The Money.  This is a trade-off between purchasing the options At The Money, which has a higher time premium but doesn’t have exposure to intrinsic value loss, and buying options deeply In The Money, which have a lower time premium but do have exposure to substantial intrinsic value loss.  Options could also be purchased Out of The Money, lowering the option premium, but then profit is only made if the index rises by more than the sum of (percent Out of The Money + option premium).  I’ve found 5% In The Money to be a reasonable trade-off.

As always, I appreciate all the emails I receive to discuss stock (/ option) trading, so if there’s anything you’re interested in please send me an email:

joseph AT StockMarketMovement.com

Option Trading Strategy – Buy Yearly Index Long Call Spreads

This month’s strategy is buying yearly index long call spreads.

In the variant of this strategy that I describe, profit is made primarily off of the difference between the option premium collected on the short end, minus the option premium paid on the long end.  The way it’s structured means profit is made even in a relatively flat market.

As always, I appreciate all the emails I receive to discuss stock (/ option) trading, so if there’s anything you’re interested in please send me an email:

joseph AT StockMarketMovement.com

Option Trading Strategy – Buy Monthly QQQ Options

The most common questions I get are about options trading.  Usually it’s from people looking for something to do with their ‘fun money’ (or ‘Vegas money’), not for investing.  I’ve gotten enough feedback, in fact, that I’ve started a new section on the website so they’re easy to find (rather than looking through old posts).

This month’s strategy is fairly simple, buying monthly call options on QQQ (the NASDAQ ETF).

If you need a refresher on options, Investopedia has a good summary.

I do appreciate all the emails I receive to discuss stock (/ option) trading, so if there’s anything you’re interested in please send me an email:

joseph AT StockMarketMovement.com

 

Quantopian Challenge

I’m going to take a small detour this month to discuss the Quantopian Challenge.  Quantopian runs an online investment algorithm contest.  You code your algorithm on their website (using the Python language and their libraries), and enter it into a monthly contest where you compete against other algorithm writers for the ‘best’ algorithm.

‘Best’ is subjective, of course.  Return on investment is an obvious criterion, but it isn’t the only one.  They’re also looking for a low correlation compared to the SP500 index (low Beta), use of hedging (having both long and short positions), and other criteria.  In fact, they don’t tell you exactly what all of the criteria are, or how they’re weighted to reach a final score.  But it is this final score that they use to declare the ‘best’ algorithm.

No actual money is traded up to this point, so you don’t have to worry about having capital (or losing it).  The interesting part is that Quantopian also runs a hedge fund, which does trade real money.  If they like your algorithm’s results, they may give it a capital allocation from their hedge fund, and give you a percentage of any profit it generates while they’re using it (but not any losses, so again, nothing to worry about there).  So, for example, they might trade $2 million of their fund using your algorithm.

It’s a clever idea.  They believe they can get a fairly large number of sophisticated, but non-professional, investors to write algorithms with the attributes they’re looking for, and in return they pay said investors a percentage of profits they generate.

Last Fall I spent some time coding one of my existing algorithms into their system and entered it into a contest.  Contests start once a month, and run for six months, so the first contest just ended.  My entry came in 11th place.  At the end there were about 320 algorithms in the contest.  There were more at the beginning, about 500 if I remember correctly.  The contest that just started in March has 1500 entries, so I guess it’s getting more popular.

(NOTE: When I looked at the just-ended contest earlier today it said I came in 12th, now it says 11th.  I have no idea why.  Maybe in a few weeks I’ll break into the top 3.)

The same algorithm automatically gets entered every month now.  I’ll work on tweaking it a bit, and see if I can top my existing algorithm.  You  can enter up to 3 algorithms at a time, so no need to shut down my current algorithm.  And I’ll update you on how I’m doing.

If you decide to enter the contest, please drop me an email and let me know.  I won’t ask for any details (or provide any of mine), but I do like to talk to people about investment strategies.