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2 Comments

  1. Theta FAANG
    July 13, 2021 @ 9:44 am

    Very glad to see the follow up that was requested in the prior SPY backtest in January.

    Can you clarify if this is reinvesting the premium that is successfully collected?

    The primary attractiveness of this strategy is the accelerated compounding benefits of collecting multiple percentages of premium in very short time periods, for example ~1-4% in one week’s time. Many wealth generating charts make assumptions of 5% over one YEAR’s time, across 40-60 years, while this strategy does something similar in one week or one month with the proper selection of medium volatility or slightly higher premium option’s contracts. As such, despite drawdowns and attempting to learn the most probable time of exiting the trade before expiration, this should still have compounding growth (and greater portfolio volatility). Whereas the buy and hold strategy of the underlying SPY does not introduce new capital except potentially from the ETF’s management team reinvesting dividends.

    Thoughts?

    Theta FAANG

    Reply

    • spintwig.com
      July 18, 2021 @ 8:19 pm

      There is not enough premium received over the life of the backtest to purchase an additional 100 shares of SPY and open an additional option contract. Thus, reinvestment is not possible.

      At the same token, 69% of the strategy returns are attributable to the long SPY position. The rate of growth of SPY is materially faster than the rate of growth from the short options. This prevents any opportunity for option profits to be reinvested in a wheel-like strategy.

      1-4% per week is indeed doable for the short term depending on the underlying, but it is not sustainable. Extend such a strat over the span of several years and the eventual losses may generate a less-than-desirable CAGR.

      I’m not aware of ETFs that retain and reinvest dividends as opposed to distributing them to shareholders. Perhaps come CEFs, but none that come to mind off the top of my head.

      Reply

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