hcgdavis 11:37 am on Wednesday, July 11, 2018
Tags: pietrade ( 143 )

Here is a good one…

Here is a good one for you margin users, looks like 60% of total portfolio is ideal.

https://www.tastytrade.com/tt/shows/market-measures/episodes/puts-or-stock-07-09-2018

hcgdavis 11:38 am on Wednesday, July 11, 2018

Sorry, not 60% margin use, using 60% of your total portfolio on options.
- MikeL 3:21 pm on Wednesday, July 11, 2018
  
  Does this mean that if we do cash secured, we should still use only 60%?
  I think it would only apply for margin use.
  - hcgdavis 4:42 pm on Wednesday, July 11, 2018
    
    Yes only use 60% of available capital. So a 100k account you would not have more than 60k in options.
Ramie 6:57 pm on Wednesday, July 11, 2018

Great, interesting piece. Thanks for posting it.

My take is the 60% really is the upper limit in terms of leverage before you start getting diminishing returns and more importantly, suffer a drawdown you can’t come back from. I got the feeling they weren’t recommending that level as an ideal %, more as an upper guideline of what not to surpass.

There were a few good studies done maybe a year or so ago on what the levels probably should be and they focused on what they call TROC (their own version or ROC, or TastyTrade Return on Capital). Basically it involved looking at theta as a % of your total account. The range was somewhere between (roughly) .1% and .5%. That is, for a $100,000 account somewhere between 100 and 500 total position theta per day. From that, they estimate you really only keep about 25% of that number. The net 25% of your total theta for a year divided by account value = TROC %. That seemed reasonable to me. The real key was how much premium you’re selling (closer to .1% or to .5% or even higher) since you could get go to multiples of daily theta if IV is favorable. I also remember them saying you should use about 1/3 of your account to put those positions on. I’m assuming they meant in a standard margin account, so using the $100,000 example, you would have a margin requirement of let’s say $35,000 to keep somewhere between 100 and 500 of position theta coming in every day.

I think I need to watch those again and see how what they’re saying compares to what’s in this latest piece. Sometimes it takes me watching a few times to drive it home. I’ll see if I can find the TROC pieces.
- MikeL 7:21 pm on Wednesday, July 11, 2018
  
  Please correct me if I am wrong.
  
  Just as an example:
  using 50% of capital in a 100K account for weekly trades.
  
  I would have $50K invested every week and keep $50K in cash.
  This means I can sell only 5 puts on a $100 product. 5x$100×100 = $50K
  Or any other combination for a differently priced products.
  
  In this case, let’s assume that I am earning 0.5% return on risk per week, about 26% per year.
  But, that would be only 13% per year on the entire account of $100K.
  I am not including interest, fees, etc… in the calculation.
  
  If I include into this calculation the premium given back on closing positions (even $0.05 or $0.10 per contract), then return would be significantly lower.
  
  I am sure that I am missing something here.
  What am I missing in this example?
  - hcgdavis 8:01 pm on Wednesday, July 11, 2018
    
    The market measure was saying you could get the same returns being 100% long stock SPY as you would selling ATM puts but only using 18% of the account value. Less at risk, same returns = better real return.
    
    With the 60% rule they were saying what @ramie77 is saying above. Only want 60% of your account in put sales to prevent a loss that you would not be able to recover from. If you take that 1 step further, they only charge you 20% of the strike value of the sold puts on margin. So easy to get over leveraged if you use all your buying power in a margin account. In a cash account, I use almost the full value.
    
    Using margin, 10 WDC contacts at the 75 strike uses about 16k in buying power reduction. But if assigned at that level you need 75k to take assignment in cash or 37.5k if using 50% margin. In a 100k account if you had 20 contracts and were assigned on all at the same time, that would be 150k or roughly 50% margin. Take that too far, 30 contracts, now you are looking at 225k, or a margin call and account liquidated.
    
    I would agree with that personally, the accounts I have blown out over the years were all over leveraged. Cash accounts were fine.
    
    So to answer your questions, cash accounts can do more. Margin would never go above 60%. I personally use 20-50% as max.
    
    So a 1% return per week on say a #pietrade would return 52% per year on a cash account, but using margin 104% because you are only putting up half that amount. I am dumbing down the math but is achievable with reasonable risk management.
    
    I and tastytrade are not saying go 60% margin, they are just saying that is the max to avoid blowing up an account.
    
    Hope that helps.

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