I know I'm annoying because I keep harping on the benefit of options collars to control risk, but it is possible to experience another GFC while invested in stocks and not experience the "ride".
Even today it is possible to enter a costless collar with the following trades, that will limit your possible downside to 10% while allowing 16% upside over the next 500 days (December 19, 2025).
Buy 100 QQQ for $439/share
Sell 1 call at 510 (16.2% above today's price) for about $25
Buy 1 put at 394.78 strike (10% below today's price) for about $25
If you don't like these specific numbers or dates, different selections are possible, but the point remains the same. There's no reason to fear, even if the top is in.
pardon my ignorance of options, but if it was "that easy", wouldn't everyone do it?
In your scenario, if the market drops 11% you'd sell and be in cash. Then it climbs 10-15, whatever %, and you miss out. Or you buy back after the climb, but then it drops again! And climbs again, etc. two 10% drops, and back up, a buy and hold would be at zero, but unless perfectly timed, options strategy would be -10%, twice.
Sure, it's great you miss the drop, but you still need to be right on when to get back in.
You're right that the options go up as the stocks go down, and you're right that a profit exceeding the market return could only be obtained by exiting the options after the stock has already gone down. However, there are additional factors:
1) The lower portfolio volatility and knowledge that they have a firm floor on losses could keep a jittery investor from selling their risky assets during a scary recession. This would increase the investor's long-term rate of return compared to most retail investors' behavior. Plus they sleep at night.
2) The strategy should improve portfolio survivability after SORR events if the retiree exits some options positions in addition to selling stock. E.g. sell 100 shares and exit 1 long put plus 1 short call at the same time. This is simply maintaining the same asset allocation through the bear market, but you come out the other side having sold fewer shares because the options were profitable.
Those benefits apply without any need for market timing. However, if you wanted to use the strategy to beat the market you'd just need to wait until stocks were sufficiently down and then exit the options while holding the stocks. Maybe you set your market decline threshold at -20% and say you'll drop your hedges if the stock falls that far. Note that this is not predicting the market in advance (market timing); it is executing a plan in response to facts which have already occurred.
When your threshold is hit, you sell your puts and buy back your calls with some of the proceeds, leaving only the stock behind in your portfolio. You beat the market regardless of which of the following outcomes occur:
- If stocks are higher in a few months, you experience maybe half the drop but 100% of the rebound.
- If stocks keep falling and are lower in a few months, you beat the market because you earned a significant profit on the sale of the options.
Like scandium, I just couldn't really figure out to make this work for me, so will try to handle things with AA instead. I'll explain.
So if I take 25% of my stock to 'protect', and say I am trying to hedge against a 30-40+% percent drop, and do a put where I can sell at a 10% drop. So the stock drops 15% and I exericise my option, selling at 10% from purchase. Great - I saved 5% of the drop. But I've locked in a 10% loss.
And which way is the market going? Could be like the covid drop - quick, recovered, and up to new highs before anyone even adjusted to the drop. So I've locked in 10% loss and the market is back up to a new high.
Or - the market is just starting a serious tumble. now it's 25% down - I hesitate, then it pops up to 20% and I buy back in, but then it plunges to the full 40% drop over the next 6 months.
So maybe I prevented larger losses, but may be I was too quick to lock in and the market recovered before I knew what was up.
There are too many unknowns and too many moving parts, imo, to make this a slam dunk at capital preservation.
Putting 25% in cash or the much lauded bond tent seems much more controllable.
Topic: Top is in (Read 3393332 times)
