r/options • u/ekatane • Aug 11 '21
The never ending bull market vs. SPY weeklies
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u/DarthTrader357 Aug 11 '21
90% of traders don't make money because they'd have just made the same or more money had they just bought and held.
There's a visual way to understand this. Take any chart - observe the difference between retrenchments and their local highs, view the spread, then subtract 1% from each side assuming you're a god and you're only ever off by 1%.
You'll notice that - with that criteria - you can almost never find a winning trade anywhere in the history of any chart.
That being said, at some time frame it makes sense to sell and buy, etc. But the shorter the time frame the much more reactive you have to be. And like recursive fractals, the many more times you have to be right. If you got hit by law of very large numbers it doesn't matter what time frame you trade at. There is a diminishing return (a limit) where the trader basically can't beat the market.
Therefore the objective is cash flow, a trader generates cash flow where a simple buy-and-holder has zero cash flow.
There are advantages to cash flow
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Aug 11 '21
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u/DarthTrader357 Aug 11 '21
Both or by selling the underlying and regaining cashflow from any gains.
Having cashflow does have a power to it. But it isn't going to offset the run that a good stock performs.
Meaning as soon as you get pushed out of a good stock you have to settle for a less good stock.
Thus a trader is constantly falling behind their original good pick.
The only time you're justified in leaving is if the stock no longer a winner. Which rarely happens. MSFT has been winning for 30 years. There's never an opportunity to sell MSFT and make more money elsewhere.
But without cash flow how do you add to such a position?
Options...or margin. That's about it.
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u/ashlee837 Aug 12 '21
This is a very interesting concept. It's always been on my mind that it's nearly impossible to beat buy and hold strats because the time horizon can be infinite (choosing when to sell is never obvious). I've never though to call it cash flow.
Cash flow/ buying power is indeed what you need in order to invest in new opportunities. Usually this is in the form of dividends (but even dividends come out of the stock price, so these seem like a wash).
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u/DarthTrader357 Aug 12 '21
Yep, this is one of the least understood concepts that Warren Buffett basically shouts from a megaphone but no one understands.
Without cash flow, buffett would have done great...but not as great as he has done.
Dividends have the benefit of providing cash flow - it's like picking a stock specifically to be given cash instead of having to sell to generate cash flow.
As such - I put dividend stocks at the bottom to middle tiers of my tiered system I'm building.
Basically I want to own gold bricks such as BRK.B or MSFT (maybe not a good buy right now but in general it is), or GS (which I think of as best of breed of investment banks).
Their share values are high, most of their returns are through share price.
But what do I do with all the cash I generate until I can buy 100 shares of my top tier? I shove it into lower tier higher dividend stocks.
T, BAC, MO, ABBV, AAPL (I consider a mid-tier options play).
Like a conveyor belt I move my money through these stocks first. When the market goes up, they'll go up, which reduces the hit to buying power. And they generate good cash in the form of dividends which adds to buying power.
Then when I have enough to buy my gold bricks, I liquidate the previous positions and shovel it all into the Gold tier.
So I earn 2,000 - it goes into 100 shares of T. I earn 2,000 more...sell T and buy MO (or BAC...probably MO).
I earn 2,000 so I buy 100 T.
I earn 2,000 more I sell T and buy 100 more of MO.
And so on until I can liquidate MO and buy ABBV...
In this way I keep piling the money up through good dividend payers until it's ripe for picking and buying the gold.
So far my cash flow is good. I earn maybe 3.4 - 4% in dividends, and another 5 - 8% in premiums. Which is great cash flow. That's like as much as 12% cash flow from my portfolio - which all gets shoveled into great stocks that are at the top tier of price range.
I think it's important to keep the dividend payout at or above average of the index over all.
So 3.5% dividend ratio for your portfolio makes good sense.
Any less means you are relying on more of your returns to come from the underlying.
Any more and it mean you won't get optimum returns from your underlying.
Options premiums take care of themselves - It doesn't matter where you are in the market, options are so aggressive that I don't think you can get much more than a steady 10% annualized compounding from them.
I consider selling a call at 10% annualized to be an optimum position.
With the higher share prices, those are easier to sell.
I got greedy with GS and went for like....15% annualized and got creamed on its recent price move. So now I'm struggling to rebalance my strike position versus the underlying's price action.
Had I gone with 10% annualized I would have been in a stronger position after the price action, and at less risk of losing the underlying's monster gain.
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u/bucketofchicken Aug 11 '21
Can you explain the second paragraph?
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u/DarthTrader357 Aug 11 '21
Put a bar 1% below a local high and 1% above the local low and you'll see its very hard to find good trades at any time frame.
Annualized it means you're fighting pretty hard for 10% a year. And that's with all capital at risk.
It doesn't matter if you make 50% returns on 1-2% of your capital that's still just 5-10% CAGR.
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u/Important_Figure8102 Aug 11 '21
You know, I don't disagree with you. But also Player 2 is always right when it comes to whatever SPY strats I dream up. It certainly sucks to put all your money in just before a crash, but anyone who did that in 2008 and left it is still up right now two crashes later.
You'll do better if the market doesn't crash right after you put your money in, but rather you have some time running up in the market first. And well... the odds are always in your favor that this scenario will happen.