I bought a bull spread in MMM.

music selection:  “Crazy On You” — Diamante

weigh-in:  207.6 (1.4) – 11 consecutive weeks of progress!

The 3M company is a Dividend Aristocrat and big slow moving large cap.  Year to date the stock chart shows a strong uptrend.  I think it is a great time for a bull call spread.  With shares trading at 206.86, I bought the 195/200 strikes bull call spread for 4.15 a share (12 spreads).  I put 4,980 in capital at risk over 40 days.  The trade enjoys 3.32% downside protection before profits are threatened.  Should that not be breached, I will earn the full profit of 1,020 on the trade.  That is good for 20.5% or 187% annualized.

I have five spreads expiring in 12 days.  All are in the money and should that condition persist, I will earn 12,065 in profits on closed positions for the month of May.  A good month!

Devour your prey raptors!

Bull call spread 3M (MMM) with yield up to 187%

Never miss another opportunity to devour prey!

9 thoughts on “Bull call spread 3M (MMM) with yield up to 187%

  • May 10, 2021 at 9:35 pm
    Permalink

    Glad the 5 spreads are all ITM. I’ve been thinking your HD bull call spread must be looking real good… nice timing. Sometimes I’m afraid to buy in after things have run up a bunch (I got called out of HD at 280!) but I know that is part of the gambler’s fallacy and doesn’t always make sense.

    I always appreciate your and Chris B’s thoughts about particular stocks and/or the market, but I wish there were more of it here! I don’t know where you two go for discussion, but I am interested if you have suggestions. I found this blog through the MMM boards, and while there do seem to be some savvy options folks there, the vast majority are very vocal that buy-and hold the market is the best and only way — which may be true, but doesn’t help facilitate discussion of options trades. One place I have been quite happy with is the PMTraders sub of reddit, but if you have other thoughts, please share!

    Reply
    • May 12, 2021 at 3:37 am
      Permalink

      I’m a MMM forum addict to the point it is a bad habit! At least I’m not wasting time on Facebook though.

      This blog is an interesting alternative take on FIRE. What I really like is how it goes against my instincts and everything I’ve read on boggle heads, J Collins, MMM, 1500 days, Mr. Tako, yada yada every FIRE blog. At the last low point I thought FV was done but here he is still fighting the good fight one trade at a time.

      If I was to recommend another options trading site (it’s more a business and platform than a blog) I’d suggest https://optionalpha.com/university . Some of their content gets into the theory of strategy, but there’s a lot of content to wade through.

      Learning to trade options has probably cost me a five or six figure sum of money over the past decade, because paper accounts are no fun and I tend to have strong opinions that coincide with incorrectness. However I “lost” those funds by using options to decrease my portfolio risk, so maybe a more appropriate comparison would be with using a more conservative AA. YMMV.

      Reply
      • May 13, 2021 at 12:36 am
        Permalink

        wow, a lot has changed in the market since Monday.

        Thanks for your thoughts on places for discussion. I will check out options alpha.

        I particularly appreciate you being candid about options losses. But… do I assume correctly that while the options had losses, you held long positions that appreciated more than the losses?

        In 2020 my options had losses but the “buy-and-hold” portfolio had gains that were greater than the losses. This year my options are up ~11% so far, including these past couple days, which is just a smidge above the long portfolio. I do question whether I should be doing the options at all… they take a lot of time and mental energy. But are also pretty interesting.

        It’s interesting you mentioned that you had paid a price to learn how to better trade options, because I’ve been thinking about that a lot lately.

        I and others often say we learned a lesson, especially after a loss or near loss. “I learned about vega risk” “I learned about position sizing” “I learned not to overmanage” etc etc.

        But I do wonder (and maybe your personal experience can shed light) … all this learning seems to imply that there might be some end point where we might have learned sufficiently to be able to trade successfully. But is that possible? Is the future sufficiently unknowable that no amount of learning can allow us to have an edge — the goal being to consistently beat the market on a risk-adjusted basis.

        Also, do either of you have any guess about what’s happening with the market right now? I’ll put that the bottom for SPY in May will be 390… but that opinion is worth what you paid for it 🙂

        Reply
        • May 13, 2021 at 7:57 pm
          Permalink

          Skeptic,

          I don’t have any good forums for options. I’ve tried a couple times to get one started here but it always fizzles. I don’t have enough traffic to support an online community.

          I have no crystal ball but my tea leaves say we have a lot of choppy volatility before a “blow off top” where the markets double over the next 9 to 18 months. Then the 50-60% crash and decades long climb back to previous high. This is basically a repeat of the dot-com boom.

          Reply
          • May 15, 2021 at 12:05 am
            Permalink

            I really appreciate your read on the market. Who knows what the future will bring, but this ranks among the best reads I’ve heard.

            I think a lot about the 2000 crash. I’m really not afraid of the 2008 crashes where you’re back to even in a couple years, but I really really do not want to experience a repeat of 2000 where the portfolio is underwater for more than a decade. And the main problem back then — overvaluation — SEEMS like it’s happening again, though like you said it could have a long way up before it comes down, and also this could just be the new normal, in a world of income inequality where the superrich have a ton of money they need to park somewhere, there just may be higher PEs than the historical norm. I don’t know. But I appreciate your take.

        • May 14, 2021 at 2:35 pm
          Permalink

          Excellent question about whether there is an end point to learning options, where one consistently makes money. It is rumored to exist, but those rumors are also sold by people selling options media. Nobody who is reeling in the cash would have time or interest to explain their secrets to a noob. We all know that, and we also know the landscape of free-money ideas is quite picked over by very smart people.

          FV may disagree with me here but IMO there is a better goal than trying to reel in cash. Options can be used to lower the risk of aggressive portfolios. This means one can make their portfolios more aggressive than their risk tolerance would otherwise allow.

          So if someone is in a 60/40 allocation, dragged down by a bunch of treasuries earning 2% BELOW the rate of inflation, I would suggest going 95% stocks and using the remaining 5% to do a tilted collar strategy with a long duration. Capped gains and losses, but much better odds of long term success IMO. Or do 90% stocks 10% protective puts, letting the portfolio fly without fear of corrections.

          We must accept that options are priced fairly efficiently, but also realize they allow us to select our own return function. In a world of overpriced equities, negative real bond yields, and bubbles galore that seems especially important.

          Reply
          • May 14, 2021 at 11:44 pm
            Permalink

            Chris B,

            You make strong points. Derivatives markets were invented for the purpose of hedging risk, not speculation. Greed gets ahead of fear sometimes though. Your strategy is the reverse of the strategy promoted by Nassem Talib of “Anti-Fragile” fame. He says 95% cash and equivalents (90 day Treasuries) and 5% long dated calls on the index. He has good historical data to support that as a viable strategy.

  • May 14, 2021 at 11:58 pm
    Permalink

    There is a lot to think about in your response.

    (one small point: I know what a collar is… but tilted collar? Does this mean the delta of the calls and strikes are not equal, or that you are buying more puts than calls?)

    I know a couple things about owning/managing businesses, and sometimes people ask me how to learn to make money at business. It is hard to explain that while there ARE a lot of relevant teachable skills (finance, marketing, how to write a business plan, etc.) at the end of the day it’s a competition, so as soon as you get an edge and learn something valuable, others will be trying to learn it too and eventually the advantage is eroded, so you have to constantly be adjusting and innovating. But you don’t know in advance whether your “innovations” are really new profitable ideas or just money pits that you write off as R&D.

    I imagine this is similar with options, and the stock market in general. That said, some funds seem to average 15-22%/year (with some drawdown years of course), including the full market cycle, so success doesn’t seem impossible. I’d consider it a success to average 12% pretax, if I could limit the worst drawdown to -15%. Probably not going to get there.

    I hear what you are saying about using the options to enable a larger allocation in stocks… and that would probably be relevant to me, because I know it is more or less proven that buy-and-hold the indexes or other diverse basket is the proven best strategy, and yet I can’t seem to bring myself to put more than 65% in this market that I feel in every way is overpriced, overhyped, and running on fumes (which is not to say that we aren’t going to see huge gains before the drop, as FV says, because if the market followed my ideas about reasonable PEs we’d still be at 2018 valuations). The other 35% I have in options strategies right now, with a varying amount of bearish plays in the mix, but as I said the YTD performance has been extremely close to market performance.

    Does the 90/10 strategy really mean that if you had a 100k portfolio, you’d buy 10k worth of puts over the course of the year? It is a simple idea but somehow find it hard to imagine myself actually spending 10% to hedge. But it does make sense. I looked at what it would cost to buy a May 2022 ATM put, and I don’t think I could do it.

    But the collar I could see myself doing perhaps. I liked the idea a lot — I remember when I originally read about it, I think it was ChpBstrd on MMM who mentioned it… but then when I’ve priced out actual possible trades with specific options, I didn’t like the risk/reward I was seeing. But I will look again. Also, I think at the time I was always looking at buying and selling same-dated puts and calls simultaneously, whereas now I might consider buying a long-dated put and selling a series of shorter dated calls along the way.

    >We must accept that options are priced fairly efficiently, but also realize they
    >allow us to select our own return function. In a world of overpriced equities,
    >negative real bond yields, and bubbles galore that seems especially important.

    I’m not going to turn on a dime, but I think you are speaking my language and the upshot is: I’m going to need to stop what I’m doing.

    Also, here is the link to that forum I mentioned before:
    https://www.reddit.com/r/PMTraders

    Reply
  • May 15, 2021 at 2:59 am
    Permalink

    Right. By tilted collar (a term I invented, I’m sure there’s a correct term) I mean paying a little bit extra so your deltas are not equal and you have more upside than you have downside. E.g. You could engineer a collar with 10% maximum downside and 15% maximum upside, but you’d have to pay some money on net for the options.

    The proper way to operate the collar is to have a written Investment Policy Statement which tells you under what conditions you will sell that long put for a fat profit. E.g. “If the market drops 20% from its most recent high, sell the put, buy back the call, plow the proceeds back into long stock, and wait until the market has recovered before re-establishing the collar.” Historically, this algorithm would result in you beating the market, because further losses get more and more rare the farther down you go. E.g. 20% corrections are a lot more common than 30% corrections which are a lot more common than 40% corrections…

    You’ll note that this plan involves changing the portfolio’s risk tolerance. I’m fine with that if I’ve just missed the first 15-25% of a big correction because that’s a huge alpha and I’m buying stocks cheap at that point. You’ll also note the plan does not eliminate the risk of losing big money. I’m fine with that too because my long-term sequence of returns risk is virtually eliminated if I can mitigate a couple of corrections while gaining the upside benefit of holding stock.

    But even if one chickens out during the correction and holds the collar all the way through the recovery or if the correction isn’t big enough to trigger the clause in the IPS, one can still outperform what their baseline would have been had they not held downside protection. E.g. That 90% stock portfolio is going to rebound stronger than a 50% portfolio and eventually pull ahead, given enough time. Funny thing is, that 90% portfolio will have similar daily volatility to the 50% portfolio.

    If you’re going to do a tilted collar, here are two pieces of advice:

    1) Wait for the VIX to get low. Like under 16. This will lower the price you pay for the put, which is more expensive than the call you are selling. The difference between these shrinks as implied vol goes down. If the market corrects, higher vol PLUS delta will inflate the value of your long put. Then you sell amid the next panic. Also, it’s nice to watch your options position hold a small gain when VIX hangs out a point or two higher than your entry point.

    2) Go with the longest duration you can stand, even though it ties up more money. LEAPS are available on SPY with >2 years duration. Why go long? Look at the expected time decay per year; it’s lower for long durations, and because the long put is more expensive than the short call you are not theta-neutral. Then, roll to the next available longest durations at about the one-year mark, or earlier if you like, adjusting your strikes. Why roll? Because you don’t want to be in a situation where your collar expires in a month or two and you’re in the middle of a financial crisis with high vol. In that scenario, the price to buy the next put has already gone through the roof. Ideally you watch the VIX and roll on your terms when VIX gets low rather than with no time remaining.

    FV, I’ve read Talib and it’s an interesting perspective. It made me wonder if fat tail risk is underpriced because it cannot be relied upon to accomplish any human goals, such as quick riches or at least retirement. I think a typical collar is well inside the range of fat tail risks. I am also not opposed to a “calls and cash” strategy such as 10% LEAPS call options plus 90% treasuries. That is an unlimited upside strategy that would leave a person in a very nice position to pounce at the bottom of a big 2000 or 2008 scale correction with 90% of their portfolio intact. Otherwise, it would be fairly easy to engineer 110%, 150%, or higher leverage with this approach and still miss out on serious damage during the worst corrections. You can bet I’ll be thinking about this as soon as VIX gets into the middle teens, maybe this summer.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

*

This site uses Akismet to reduce spam. Learn how your comment data is processed.