Has premiums from all cash beating SP appreciation been true even during sharp upturns like the recent 909->1200+ one?
short-term, no
long-term, yes IF i stick with the formula (see bottom)
on a sharp spike up, the total account value (TAV) of all-cash will be way less than that of an acct with stock, but the real cash-on-hand will be more; from that point on and over time, the accumulated extra cash compounds regardless of SP direction
imagine SP going up 200 tomorrow:
- you won't sell if you're a HODLer, so that 200 is only a paper gain and not realized gain
- your TAV is inflated but it is full of hot air (unrealized gain that is temporary and fluctuating)
- even if you wanted to sell, you can't coz the shares are used as backing or you want to wait for the peak some more
- all that waiting means tied-up capital (as stock) isn't working hard
- temptation to open extra contracts is there coz new margin created (but you forgot that the new margin is from unrealized gain so the new contracts are on shaky ground and not cash-secured)
- the next day, SP is down 100 (you were happy, now you are angry, etc)
- now you have to babysit margin (ie focus is on preventative maintenance instead of making money)
meanwhile, in those 2 days the all-cash acct
- opened 2x more contracts
- has TAV that is just cash minus the value of open contracts (ie no margin and it is stable and everything backed by cash and and it won't blow up if positions are defined risks)
- TAV doesn't have hot air; it has doubled income and it's real cash (which i will then use as additional capital for next week)
my SECRET FORMULA to the all-cash scheme is to open Credit Spreads and
make the decision-making MECHANICAL (ie remove emotions and temptations and guessing):
1. DO NOT BE GREEDY.
2. Aim for 15% OTM and be happy with the credit, whatever it is. Hopefully, that's $2, if possible. It's actually more nowadays.
3. Not happy with the credit? IC it at the same 15% OTM and aim for $1, if possible. It's actually more nowadays.
4. When it is safe to do so at 1-2 DTE, see if you can move to 10% OTM.
5. Roll at 80% profits (or whatever) and repeat.
imagine automating slow and steady profits while at the same time removing the noise from margin and SP swings; as a trader, consistently increasing real cash is more important to me than inflated TAV fluctuating at the mercy of the market