Investing - Theory, News & General • Modified versions of HFEA with ITT and Futures / Lifecycle Investing with Modern Portfolio Theory

Folks PLEASE sanity check me on this:

I think we can get cheaper financing than box spreads - Sell deep ITM leaps (puts)

This assumes portfolio margin, so the leveraged portion just dips into buying power instead of paying margin fees.

For example DEC2024 600P is basically all intrinsic:

Cash from short put goes into STT.

This seems like near free leverage? Full exposure to the index, slight risk if we close above 600 but we can just roll up. We're selling on SPX so minimal fees and 60/40 tax treatment. Thoughts?

You are showing SPY options which are American exercise style options, and not SPX options. It may not matter for your argument.
Writing cash-secured puts is a well known strategy, with better risk-adjusted returns than the index in the past. There are many papers about this, including papers from CBOE, and there is even a "put write" index that you can use to examine historical performance. (The put write index uses more ATM options though; but the principle is the same.)
I'm not sure if you can call it "near free leverage", and how you determine "near free". The call options corresponding to your put options at strike price 6000 have a positive price (not zero); so you have to consider volatility, even if the likelihood of not being assigned (i.e. the index at expiration above 6000) is a relatively rare event; making "rare" synonymous with "zero" often works in the short run, but won't work in the long run; or else you could also for example sell the 6000 call options for "free cash" (except that it is not free).
There is a theory that selling volatility provides another independent source of return, i.e. that the market perpetually overestimates volatility, i.e. that implied volatility is, on average, higher than realized volatility. There is another theory that the risk-adjusted excess return of selling options during the last ca. 2 decades may have been the result of an anomaly that efficient markets may have "fixed" for the future; or perhaps that rare catastrophic events don't show in limited backtesting. Do some more reading. I still wanted to investigate if volatility can indeed be considered an independent source of return. If true, it might be a good addition, or variation, of mHFEA; for example look at the CBOE SPX put write index, leverage it to the same risk as plain SPX, and replace your SPX exposure in mHFEA with the put write exposure.

Statistics: Posted by parval — Sun Mar 03, 2024 5:45 pm — Replies 2985 — Views 466141