Thoughts of a mechanical engineer turned programmer turned statistical investor. Here to save you from making mistakes I made at the beginning of my investing career.

Some new strategies to end the quarter

We’re nearing the end of the quarter and I wanted to do a quick post about a slightly different strategy I opened on a couple of positions.

I call the strategy a “Phil spread” named after my mentor Phil Davis from philstockworld and a combination of short puts with a bull call spread. It looks like this on INTC:

I chose to go with an equal number of short puts and BCS contracts, but it doesn’t need to be. The idea is to leverage the money you make on the short puts, in a situation you think the stock may go up significantly. And when I say leverage, what I mean is relative to the margin requirement.

Because BCSs don’t require margin (max loss is cost of the spread), the short put strategy and the “phil spread” strategy have the same margin requirement. The max gain though is quite different in each case:

For the short put, the max gain is the initial credit you received, in this case $350.

For the Phil spread, the max gain is the full value of the BCS minus the initial cost of the whole position. In this case I got 350$ for the short puts but then paid 601 for the BCS, putting me at a net 250$ entry. The max value of the positions on expiry is $2000 (200x$10 spread), so minus the 250$ initial debit, max gain is a cool $1,750.

This can be seen nicely in the stats of the orders.

For the short put:

For the phil spread:

The max loss in both cases is quite similar ($3,682 vs $4,388, obviously at different strikes), whereas the max gain is significantly different. If the stock stays where it is +- for the next 2 years, the short put position is more benificial bc you still pocket the initial credit. If the stock goes up 33% over the next 2 years, the phil spread makes almost 100% of the margin reqirement of the trade. In 2 years.

If something isn’t clear about the graphs, feel free to comment and I will try to explain more… Or google how to read options graphs 🙂

Needless to say, in an even slightly upward moving market, the phil spread strategy can be super (!!!) lucrative. In a sideways or down market, the short put strategy will be more effective and more conservative. I don’t try to forsee the future and have no idea what the next 2 years may bring for the economy, but I figure its worth having a few small phil spread positions on specific companies which may go up if the economy does strengthen. And I left myself plenty of space to roll down and out in the future if the opportunity arises.

The other thing I did which I haven’t posted about in this blog yet is a kind of hedge: a (relatively short term) SQQQ bull call spread, which I offset the cost of by selling some AAPL puts. SQQQ is the 3x inverse s&p etf, so if s&p goes down 10% SQQQ should go up 30%, and then the idea is that if the s&p goes down, I will make money on the BCS and I can use that money to adjust the short puts, and if the s&p goes up, so should AAPL, and therefore the “hedge” is free. And I concede that it isn’t a super effective hedge, because if the S&P goes down, I’ll make $7k on the hedge, but lose a lot more than that on the rest of my portfolio. But since I’m looking to increase exposure to AAPL, I feel comfortable with the tradeoff. You can see the details of the exact positions on my porfolio screenshot at the bottom of the post.

Other than that, I might as well update on portfolio performance, as I may not get to it at the very end of the quarter: YTD I’m up 20% vs the nasdaqs 9%, so not bad, but also off end of January highs:

In addition to the intel phil spread, I did a 1x phil spread on google as well at 75$ short puts and 90-100 bcs, and also added on SPWR, in addition to my existing 5x short 15$ puts (which are showing 1,200$ paper losses), a $10-15-20 phil spread.

It will be interesting to see how the slight shift in strategy effects portfolio performance in the coming months. If the market goes slightly higher it will definitely improve the performance. If it goes lower, I’m quite under-invested (<50%), so have plenty of cash on the side to deploy if the oppotunity arises.

And then just a screenshot of the portfolio:

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