"Almost all life depends on probabilities."
... Voltaire
How about earning around 100% in a year...by creating small WEEKLY gains...with a 90% probability of success each week??
Here's an example of how it works, using actual prices from the dates shown. The example assumes the use of 10 contracts for each option, but any amount would be workable, as these are very liquid and available options.
November 15, 2024:
S&P 500 Index = 5867
SELL 10 November 22 CALL options with a STRIKE PRICE of 6000 @ $465
BUY 10 November 22 CALL options with a STRIKE PRICE of 6005 @ $405
SELL 10 November 22 PUT options with a STRIKE PRICE of 5700 @ $790
BUY 10 November 22 PUT options with a STRIKE PRICE of 5695 @ $750
(This trade is called an "Iron Condor". The 4 legs are set up and entered as a single order with a "net credit" specified...and could be closed before expiration if desired at a "net debit" price. )
This trade will generate an immediate CASH CREDIT of $1,000 for the investor. ($100 x 10)
If the S&P 500 closes on November 22 between 5700 and 6000, the investor keeps the $1,000 credit.
If the S&P closes ABOVE 6005, the investor loses $4,000. ($5,000 on the CALL spread, minus the original $1,000 credit.)
If the S&P closes BELOW 5695, the investor loses $4,000. ($5,000 on the PUT spread, minus the original $1,000 credit.)
PLEASE NOTE: The CALL and PUT strike prices chosen for the SALES each week must have a separation which will project a 90% PROBABILITY OF SUCCESS, according to commonly accepted methods for determining probability. (That would be a "delta" of approximately 10. In the example shown, those were S&P 5700 and 6000)
If this approach is used every week over the course of a year, the probability is that the investor would be successful 90% of the time, or during approximately 46-47 weeks, and lose money during approximately 5-6 weeks.
Extrapolating the specific values available on the November 15 transaction over 52 weeks, it is reasonable to assume that the investor could generate CREDITS on 46 winning weeks of $46,000 (46 x $1000) and LOSSES on 6 weeks of $24,000 (6 x $4000), for TOTAL GAINS for the year of $22,000.*
UPDATE: November 22, 2024.
S&P 500 Closes @ 5969.
Once again, the S&P stayed within the range (5700 - 6000) which was projected with a probability of 90% at the outset one week ago.
So the "Iron Condor" produced a CASH CREDIT of $1,000 for one week's work, WITHOUT ACTUALLY HAVING TO INVEST ANY MONEY! ** Extrapolating these results with the 90% probability of 46 winning weeks and 6 losing weeks, TOTAL GAINS for a year would be $22,000 .
So what is a fair way to determine the actual ANNUAL RETURN on this strategy if we extrapolate the numbers shown above, since NO CASH is ever required to initiate the trades every week?**
The only time the account would be debited for cash by the brokerage firm would be when any of the weekly losses occurred. These would presumably occur randomly throughout the year. So one extremely conservative way to calculate the return would be to assume that all of the likely losses ($24,000) are "invested" at the outset. Thus the net gain of $22,000 would represent a return of 92% . (22,000/24,000 )
A more appropriate way of using the "average" investment of the $24,000 over the course of the year would result in a much higher return.
******
*Due to special tax treatment allowed for index option trades the net cash profits on these index option transactions are considered 60% Long Term Gains and 40% Short Term Gains for tax purposes...NOT ordinary interest income.
** The brokerage firm's "margin requirement" each week would be that the account must have enough value in it...from bonds, stocks, etc...to cover the maximum loss which might occur...$4,000 in the illustration. Cash does not have to be spent to initiate the trades.
Disclaimer: I am retired and no longer in the investment business. All of the information above is presumed to be accurate, but cannot be guaranteed. Please don't invest using ANY strategy without consulting with your financial, legal and tax advisors.
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