VIX is down. Maybe time for "Calls and Cash".

[ChpBstrd]

The VIX just hit 15.5 which is another way of saying options are on sale with a relatively low rate of time decay built into the price. We're now back to levels last seen in February 2020. I'm not saying the VIX bottom is in - this low-implied-volatility environment could go on for years, as it did from 2013-2019, and VIX could go down from here - but I am saying that some strategies which didn't make sense previously are starting to make sense now.

Buying protective put options is getting cheaper. Similarly, replacing one's long stock positions with long call positions is getting cheaper - a "calls and cash" risk-hedged strategy with limited downside and unlimited upside.

At-the-money 420-strike SPY calls expiring in 2.51 years currently have an average time decay of 4.1% per year of the strike price. In reality, you suffer much less time decay than that if you roll annually, because time decay accelerates as an option approaches expiration, and is very slow for distant maturities. The same ATM options with 1.5 years remaining are worth $36.10 as opposed to $47.06 for the 2.5 year duration. Thus, we can expect the 2.5 year duration options to lose (47.06-36.10=) $10.96 in time value, all else being equal, in the first year. That's 2.6% of the $420/share strike price lost to time decay. What are the odds the stock market rises less than 2.6% in the next 12 months?

For the expected cost of 2.6%/year in time decay, one can obtain all the remaining price upside of SPY at a maximum risk of only what one paid for the option, or ~11% (that's assuming the option with 1.5 years remaining could become worthless in one year, which won't happen no matter what else happens, but probabilistic math is hard so let's be uber-conservative).

One does miss out on SPY's 1.3% dividend though, and let's conservatively assume we aren't investing our portfolio's remaining cash in short-term bonds yielding anything, so add that to the time decay for a total cost of 3.9% per year to do calls and cash as opposed to long SPY. So it's like an insurance policy for your portfolio with an 11% maximum deductible on a sliding scale and a cost of 3.9%/year. I pay close to 9% of my car's value for insurance per year, and I don't have a "car correction" every year either!

But wait, there's more! If SPY goes down and volatility spikes above its currently low levels, that volatility will contribute to your call option's price and make up for some of the delta lost. So there's a partial hedge involved when the calls and cash strategy is entered in a low-VIX environment. The cash-and-calls portfolio with 1x leverage would be less volatile than a 100% stock portfolio for this reason. One has the opportunity to harvest the options' inflated time value during a high-VIX market panic, and switch back to a long-stock strategy if desired. One would come out ahead in this scenario even if they missed the bottom, as long as they rode out the recovery until VIX was low again. This move would have worked great in December 2018 or April 2020, assuming one had the guts to switch from hedged to unhedged in the midst of a panic. But it's also optional.

These numbers make me wonder why anyone would buy bonds. Long and intermediate duration bonds can lose a lot more than 11%, I assure you. The main downside is the requirement to trade options just after the one-year mark has passed, or else face a higher rate of time decay. This could trigger capital gains taxes if done in taxable accounts, whereas by HODL'ing the stock directly you can defer capital gains forever. This is not an issue in IRA's. But if one has a heavy bond allocation with maybe 2% upside, this strategy offers about the same maximum risk but unlimited upside.

I wrote about calls and cash back in 2019. In hindsight, I wish I had done it instead of enduring 2Q 2020 with long stock! In hindsight, one could have come out ahead by selling one's calls during the high implied volatility of summer 2020, harvesting the time value after enjoying the benefits of the hedge, and rotating into long stock. Hindsight is 2020.
https://forum.mrmoneymustache.com/investor-alley/cash-and-calls-talk-me-out-of-it/

I think I'll start slowly easing my portfolio into this strategy, and I might go up to 2X leverage if VIX continues to fall toward 2017 levels. Comments/questions/concerns/insults are welcome.

[bacchi]

Have you done backtesting on this strategy?

Retiring with this strategy means saving an additional 11% for the first year.

$1,000000
$110,000 needed for puts

EOY1: 4% withdrawal --> $960k +- market gains

Leaps have now lost 3.9%. Do you roll them out? Do you roll them up?

If you roll them, where does that 3.9% come from if not the portfolio? That would mean saving more in the first place. It seems a lot easier -- and more profitable -- to just take a 3.6% or lower WR on the $1.1M+.

[ChpBstrd]

@bacchi the closest I can get to backtesting is to look back at notes such as my 2019 post about the strategy. Had I followed the strategy in 2019/2020, I would have rolled the January 21, 2022 SPY calls at the 305 strike in late November or early December 2020 to the January 2023 calls. Because I can't get historical pricing for either option on those dates, I can only estimate the effect of holding the call option for the past 1 year and 7 months. This is sub-optimal, because time decay is getting more rapid the longer the option is owned, but let's see how it turns out.

Had I held those original Jan'22' 305-strike calls until now, they would be worth about $119.60, up from $31.47 when I made the post on Nov. 6, 2019. This is an $88.13 gain, or +28.9%, compared to a change of (423.29-311.79=) $111.50 for SPY or +35.8%. That (111.50-88.13=) $23.37/share underperformance of the calls vs. SPY represents -7.66% of the original strike price - i.e. losses to time decay. Divide that by 1.583 years and annual time decay is about 4.84% per year. This is in the ballpark - within basis points - of my estimate of annual time decay for the same option from 2019:

The relative cost of this protection is about 10.24% / 2.21 = 4.63% per year underperformance of the S&P 500.

Still, calls and cash underperformed a 100% SPY position by (35.8%-28.9%=) 6.9%, or 4.36%/year, with a total return of (88.13/305=) +28.9%. How bad is that in the context of a portfolio that had a maximum downside risk of only -10.24%? For comparison, Personal Capital's "blended" portfolio returned 28.1% in the same timeframe. In other words, the performance of call and cash was similar to a well-diversified portfolio. Except the well-diversified portfolio had no firm floor on potential losses, and was therefore less safe. Had 2020 turned out differently, and the S&P500 was down 40% today compared to November 2019 levels, the calls and cash portfolio would have lost about 10%, while the SPY portfolio would have been down 40%.

In conclusion, I think my numbers, process, and expectations work out. Cash and calls delivers performance similar to a diversified stock/bond portfolio without as much downside risk, and with the occasional opportunity to harvest the calls' inflated TV during market panics.

Had an investor gone with 2X leverage instead of 1X, their returns would have been (+28.9%*2=) 57.8% and their max downside would have been about 22.5%. Even this would have been easier to hold through 2020 than SPY alone.

[bwall]

Had I held those original Jan'22' 305-strike calls until now, they would be worth about $119.60, up from $31.47 when I made the post on Nov. 6, 2019. This is an $88.13 gain, or +28.9%, compared to a change of (423.29-311.79=) $111.50 for SPY or +35.8%.

Can you double check the math? I think it's more than 28.9%, but: ¯\_(ツ)_/¯

[ChpBstrd]

Had I held those original Jan'22' 305-strike calls until now, they would be worth about $119.60, up from $31.47 when I made the post on Nov. 6, 2019. This is an $88.13 gain, or +28.9%, compared to a change of (423.29-311.79=) $111.50 for SPY or +35.8%.

Can you double check the math? I think it's more than 28.9%, but: ¯\_(ツ)_/¯

I did [change in option value]/[strike price], so ((119.60-31.47)/305), because I'm comparing getting 1x leverage through the options with getting 1x leverage through owning the stock. I.e. if one had $30,500 one could have either bought 100 shares of SPY for $30,500 or bought 1 call option for $3,147 and left the remainder in cash. But you're right - I didn't spell out that step so it sounds like I was saying going from 31.47 to 119.60 was only a 28.9% increase in the price of the option. :) The increase is for the portfolio, including its cash.

[bwall]

Had I held those original Jan'22' 305-strike calls until now, they would be worth about $119.60, up from $31.47 when I made the post on Nov. 6, 2019. This is an $88.13 gain, or +28.9%, compared to a change of (423.29-311.79=) $111.50 for SPY or +35.8%.

Can you double check the math? I think it's more than 28.9%, but: ¯\_(ツ)_/¯

I did [change in option value]/[strike price], so ((119.60-31.47)/305), because I'm comparing getting 1x leverage through the options with getting 1x leverage through owning the stock. I.e. if one had $30,500 one could have either bought 100 shares of SPY for $30,500 or bought 1 call option for $3,147 and left the remainder in cash. But you're right - I didn't spell out that step so it sounds like I was saying going from 31.47 to 119.60 was only a 28.9% increase in the price of the option. :) The increase is for the portfolio, including its cash.

Ah, ok. That makes sense now. I knew that you knew how to do math, but I just missed that step.

[index]

You may want xsp futures options instead of spy. Also, put your cash in mint or sneering else safe and help pay for the leverage.

[MustacheAndaHalf]

What about lower leverage with deep in the money calls?
Looking 2.5 years out, to Dec 2023, I found $200 strike SPY calls have lower leverage and lower cost.  The strike + contract cost just 0.5% more than the stock, which means paying just 0.2% per year for 1.9X leverage.

Had I followed the strategy in 2019/2020, I would have rolled the January 21, 2022 SPY calls at the 305 strike in late November or early December 2020 to the January 2023 calls. Because I can't get historical pricing for either option on those dates, I can only estimate the effect of holding the call option for the past 1 year and 7 months.

Bacci also mentioned your put options - do you have a way to test those?

In the past decade (2011-2020), the only down year was 2018 with a 4.5% drop.  Setting aside better decades, protective puts are a drag on your portfolio for that entire time.  How much does it cost to buy puts in 2011, then roll them forward to higher prices every single year?

You mention protective puts have gotten cheaper - what are the numbers on that?

SPY gained +55% in 2019-2020, going from about $275 to $425.  The price difference in put options isn't just time decay - it's also keeping up with a stock market that goes up most years.  $275 strike puts cost $12.35/sh, while $425 strike costs $54.29/sh.  That's like taking 10% of the value of SPY, and using it up just to bring the put options up to current prices.  Seems expensive to me.

[ChpBstrd]

What about lower leverage with deep in the money calls?
Looking 2.5 years out, to Dec 2023, I found $200 strike SPY calls have lower leverage and lower cost.  The strike + contract cost just 0.5% more than the stock, which means paying just 0.2% per year for 1.9X leverage.

I look at / talk about the ATM option because this way I can compare changes in the time value premium over time. I also talk about VIX because that's good shorthand for how fat or skinny tailed the bell curve distribution of TV is. A combination of low TV for ATM options plus a low VIX means that options are cheap and far-ITM and far-OTM options are even cheaper. This is what you observed with the $200 strike calls.

Note that with deep-ITM calls you are paying less - for less leverage and less downside protection. Those $200 strike calls will be in pain if SPY drops 35% or about $150 by the maturity date. Today's option price of ~$223 would drop ~67% in such a scenario. Meanwhile the $420-strike call might lose all $47 of its value (-100%) but it would be much less of a loss to the portfolio than the $200 call.

Bacci also mentioned your put options - do you have a way to test those?

In the past decade (2011-2020), the only down year was 2018 with a 4.5% drop.  Setting aside better decades, protective puts are a drag on your portfolio for that entire time.  How much does it cost to buy puts in 2011, then roll them forward to higher prices every single year?

You mention protective puts have gotten cheaper - what are the numbers on that?

SPY gained +55% in 2019-2020, going from about $275 to $425.  The price difference in put options isn't just time decay - it's also keeping up with a stock market that goes up most years.  $275 strike puts cost $12.35/sh, while $425 strike costs $54.29/sh.  That's like taking 10% of the value of SPY, and using it up just to bring the put options up to current prices.  Seems expensive to me.

Options always seem cheap when we're selling and expensive when we're buying :). It's amazing to me how the price of risk itself changes over time.

Projecting time decay is the only easy way for me to simulate backtests. Unless one has specialized option backtesting software, the only alternative would be to set up a paper trading account or regularly track prices on a spreadsheet. Stated another way, time decay is today's price for the positive risk of enjoying the upside of a call or put. VIX is shorthand for that price.

If I can say that a call option purchased two years ago would have experienced time decay of x% or $y by now, and I can calculate the delta as current price minus strike price, then I've accounted for the vast majority of the return.

[vand]

Still not at all convinced by this strategy..

Even suppose that with the benefit of hindsight, it turns out that we are at the start of the prolonged bear market... it's all well having a huge cash position and letting your call options expire worthless, but what will be your strategy then for easing back into the market?

If I were to adopt downside protection, I would do it with protective puts rather than cash + calls, because at least then you are fully invested but with a hedge in place, and the day you take profits on your puts should be the same day you put the money back into your portfolio to go back to unhedged.

But personally I'm always reminded that options are derivatives, not assets.  To outperform the market not only do you have to be right on direction, but you have to be right on timing, and if you can't stomach a 50% drop then you shouldn't hold a portfolio that has historical precedence for falling 50%.

[ChpBstrd]

Still not at all convinced by this strategy..

Even suppose that with the benefit of hindsight, it turns out that we are at the start of the prolonged bear market... it's all well having a huge cash position and letting your call options expire worthless, but what will be your strategy then for easing back into the market?

If I were to adopt downside protection, I would do it with protective puts rather than cash + calls, because at least then you are fully invested but with a hedge in place, and the day you take profits on your puts should be the same day you put the money back into your portfolio to go back to unhedged.

But personally I'm always reminded that options are derivatives, not assets.  To outperform the market not only do you have to be right on direction, but you have to be right on timing, and if you can't stomach a 50% drop then you shouldn't hold a portfolio that has historical precedence for falling 50%.

This brings up a good point. Either a protective put or a calls and cash strategy require an IPS that contains a plan for what to do in a downturn.

One possibility for the IPS is a commitment to do nothing. If one only rolled their options to the next year each December, and never changed the AA in response to major corrections, one would enjoy lower volatility and a firm floor on losses during those occasional -30% or -40% years. One would occasionally hit that floor - maybe 10% or 20% down - and then reallocate to new options at the normally scheduled time, as defined by the IPS. Another benefit is one might obtain more courage from having the firm floor on losses and much-reduced volatility, so maybe one could have a 90% stock / 10% put options portfolio, or a 10% call options / 90% cash portfolio instead of a traditional 60/40 stock-bond portfolio. The higher stock gearing would imply higher returns in the long term, and this outperformance of the alternative bond-heavy portfolio, plus gains from missing out on disaster years, would cover much of the cost of time decay.

Another possibility is to actively manage the hedge, using written criteria set in the IPS. One such criteria would be a trigger that would cause the investor to exit the hedge and change to another allocation. Here's an example for a protective put: "If the S&P 500 has fallen 25% from its high during the past 12 months, sell the put option and apply the proceeds to buy stock to enter a 100% stock allocation." For a calls and cash strategy it might be something like "If the S&P 500 has fallen 30% from its high during the past 12 months, sell the call option and enter an 80/20 stock/bond allocation."

To be optimal, such a strategy should exploit the increase in implied volatility that accompanies big corrections, while remaining geared - or leveraging up - to take advantage of the recovery. Selling a long option and buying the stock would harvest this IV while leaving upside exposure the same. E.g. if the ETF is $100 and you own the put at $125, you'll get a lot more than $25 for that put during a market panic when IV is high. Similarly, if you own a call option that just went waaaay-OTM in a market crash, you still have some inflated time value there that you can sell. In terms of risk, such a strategy would drop the protective hedges and increase the portfolio's exposure at exactly the time when risk is lowest - during a large correction. The risk would be if the market continues falling from there!

[i_have_so_much_to_learn]

How do you factor inflation into all of this?

[MustacheAndaHalf]

... How much does it cost to buy puts in 2011, then roll them forward to higher prices every single year?
... SPY gained +55% in 2019-2020, going from about $275 to $425.  The price difference in put options isn't just time decay - it's also keeping up with a stock market that goes up most years.  $275 strike puts cost $12.35/sh, while $425 strike costs $54.29/sh.  That's like taking 10% of the value of SPY, and using it up just to bring the put options up to current prices.  Seems expensive to me.

If I can say that a call option purchased two years ago would have experienced time decay of x% or $y by now, and I can calculate the delta as current price minus strike price, then I've accounted for the vast majority of the return.

Back in 2011, at the money puts on SPY would have a $125 strike price.  Would you buy $125 strike puts on SPY now, when it's $425/share?   I don't see you examining the need to roll put options to higher prices.

Or let's say last year: SPY started 2020 just over $320.  With that strike price, SPY needs to drop 25% before the puts are in the money - they don't provide much protection.  To fix that, at the money puts cost much more (5x more for 2022 Jan puts).  There isn't just time decay here, there's adding cash to buy new puts.

Where did you calculate the cost of "rolling up" put options to higher strike prices every year?

[ChpBstrd]

... How much does it cost to buy puts in 2011, then roll them forward to higher prices every single year?
... SPY gained +55% in 2019-2020, going from about $275 to $425.  The price difference in put options isn't just time decay - it's also keeping up with a stock market that goes up most years.  $275 strike puts cost $12.35/sh, while $425 strike costs $54.29/sh.  That's like taking 10% of the value of SPY, and using it up just to bring the put options up to current prices.  Seems expensive to me.

If I can say that a call option purchased two years ago would have experienced time decay of x% or $y by now, and I can calculate the delta as current price minus strike price, then I've accounted for the vast majority of the return.

Back in 2011, at the money puts on SPY would have a $125 strike price.  Would you buy $125 strike puts on SPY now, when it's $425/share?   I don't see you examining the need to roll put options to higher prices.

Or let's say last year: SPY started 2020 just over $320.  With that strike price, SPY needs to drop 25% before the puts are in the money - they don't provide much protection.  To fix that, at the money puts cost much more (5x more for 2022 Jan puts).  There isn't just time decay here, there's adding cash to buy new puts.

Where did you calculate the cost of "rolling up" put options to higher strike prices every year?

This is why you watch the VIX. Calls & cash or protective puts make sense when implied volatility is low and therefore long options are cheap, whether put or call. It’s also another reason to use LEAPS rather than just buying a few months of protection at a time. If my long put or call has 2 years of duration left, then I have the flexibility to accelerate or delay my roll, depending on volatility. Rather than roll at a time of high vol, I can bide my time and wait for the bargain to come.

 E.g. buy the 2.5 year LEAPS.  After one year we are in a correction and VIX is 30. Now you can either be a scardy cat and hold the C&C or PP allocation a while longer or you can sell the highly appreciated options and plow the proceeds into newly cheap investments. Either way your portfolio volatility is much lower than the market and SORR is reduced. If you can go from hedged to unhedged at any time after the options have absorbed significant impact, even if you miss the bottom by months or tens of percents, you will still outperform the market while spending most of the year at a lower risk level.

In general, we want to be defensive when others are greedy and aggressive when others are fearful (as you discovered with the COVID sensitive stocks). Applied here that means buy calls or puts when the markets are tranquil and the VIX is low, and to sell them and switch to a more aggressive allocation in the midst of panic. You want to be exiting your hedged positions - selling those highly inflated puts and calls - at scary times like December  2018, and March 2020.

[BicycleB]

Can anyone buy these options, or do you need a specific amount of capital like a million dollars?

[vand]

Still not at all convinced by this strategy..

Even suppose that with the benefit of hindsight, it turns out that we are at the start of the prolonged bear market... it's all well having a huge cash position and letting your call options expire worthless, but what will be your strategy then for easing back into the market?

If I were to adopt downside protection, I would do it with protective puts rather than cash + calls, because at least then you are fully invested but with a hedge in place, and the day you take profits on your puts should be the same day you put the money back into your portfolio to go back to unhedged.

But personally I'm always reminded that options are derivatives, not assets.  To outperform the market not only do you have to be right on direction, but you have to be right on timing, and if you can't stomach a 50% drop then you shouldn't hold a portfolio that has historical precedence for falling 50%.

This brings up a good point. Either a protective put or a calls and cash strategy require an IPS that contains a plan for what to do in a downturn.

One possibility for the IPS is a commitment to do nothing. If one only rolled their options to the next year each December, and never changed the AA in response to major corrections, one would enjoy lower volatility and a firm floor on losses during those occasional -30% or -40% years. One would occasionally hit that floor - maybe 10% or 20% down - and then reallocate to new options at the normally scheduled time, as defined by the IPS. Another benefit is one might obtain more courage from having the firm floor on losses and much-reduced volatility, so maybe one could have a 90% stock / 10% put options portfolio, or a 10% call options / 90% cash portfolio instead of a traditional 60/40 stock-bond portfolio. The higher stock gearing would imply higher returns in the long term, and this outperformance of the alternative bond-heavy portfolio, plus gains from missing out on disaster years, would cover much of the cost of time decay.

Another possibility is to actively manage the hedge, using written criteria set in the IPS. One such criteria would be a trigger that would cause the investor to exit the hedge and change to another allocation. Here's an example for a protective put: "If the S&P 500 has fallen 25% from its high during the past 12 months, sell the put option and apply the proceeds to buy stock to enter a 100% stock allocation." For a calls and cash strategy it might be something like "If the S&P 500 has fallen 30% from its high during the past 12 months, sell the call option and enter an 80/20 stock/bond allocation."

To be optimal, such a strategy should exploit the increase in implied volatility that accompanies big corrections, while remaining geared - or leveraging up - to take advantage of the recovery. Selling a long option and buying the stock would harvest this IV while leaving upside exposure the same. E.g. if the ETF is $100 and you own the put at $125, you'll get a lot more than $25 for that put during a market panic when IV is high. Similarly, if you own a call option that just went waaaay-OTM in a market crash, you still have some inflated time value there that you can sell. In terms of risk, such a strategy would drop the protective hedges and increase the portfolio's exposure at exactly the time when risk is lowest - during a large correction. The risk would be if the market continues falling from there!

Firstly, I wouldn't place too much faith in your call options being worth anything should the market tank, even if the spike in implied volatility is significant.. They will still lose nearly all their value simple because they move further out of the money.

Second, I still consider put options on a long position to be a superior approach than calls/cash. Why? Because it keeps you in a default position of being long on the market.  With the former approach you are still a market participant who is hedged against a downside selloff; with the latter you shifting your position to being a neutral who is hedged against missing out on an upside move.  IMO There is a big psychological difference in the expectation and biases between the two approaches.

[MustacheAndaHalf]

... How much does it cost to buy puts in 2011, then roll them forward to higher prices every single year?
... SPY gained +55% in 2019-2020, going from about $275 to $425.  The price difference in put options isn't just time decay - it's also keeping up with a stock market that goes up most years.  $275 strike puts cost $12.35/sh, while $425 strike costs $54.29/sh.  That's like taking 10% of the value of SPY, and using it up just to bring the put options up to current prices.  Seems expensive to me.

If I can say that a call option purchased two years ago would have experienced time decay of x% or $y by now, and I can calculate the delta as current price minus strike price, then I've accounted for the vast majority of the return.

Back in 2011, at the money puts on SPY would have a $125 strike price.  Would you buy $125 strike puts on SPY now, when it's $425/share?   I don't see you examining the need to roll put options to higher prices.

Or let's say last year: SPY started 2020 just over $320.  With that strike price, SPY needs to drop 25% before the puts are in the money - they don't provide much protection.  To fix that, at the money puts cost much more (5x more for 2022 Jan puts).  There isn't just time decay here, there's adding cash to buy new puts.

Where did you calculate the cost of "rolling up" put options to higher strike prices every year?

E.g. buy the 2.5 year LEAPS.  After one year we are in a correction and VIX is 30. Now you can either be a scardy cat and hold the C&C or PP allocation a while longer or you can sell the highly appreciated options and plow the proceeds into newly cheap investments. Either way your portfolio volatility is much lower than the market and SORR is reduced. If you can go from hedged to unhedged at any time after the options have absorbed significant impact, even if you miss the bottom by months or tens of percents, you will still outperform the market while spending most of the year at a lower risk level.

But in my example, that's not true.  If someone bought protective puts from 2010-2019, those puts lost money every year.  They were a drag on the portfolio, causing it to underperform a portfolio without protective puts.

With a protective puts strategy, I think you're making two timing decisions: (1) that a correction will occur that is dramatic enough to make the puts worthwhile; and (2) that you can time the correction well enough to make the puts worthwhile.

[ChpBstrd]

... How much does it cost to buy puts in 2011, then roll them forward to higher prices every single year?
... SPY gained +55% in 2019-2020, going from about $275 to $425.  The price difference in put options isn't just time decay - it's also keeping up with a stock market that goes up most years.  $275 strike puts cost $12.35/sh, while $425 strike costs $54.29/sh.  That's like taking 10% of the value of SPY, and using it up just to bring the put options up to current prices.  Seems expensive to me.

If I can say that a call option purchased two years ago would have experienced time decay of x% or $y by now, and I can calculate the delta as current price minus strike price, then I've accounted for the vast majority of the return.

Back in 2011, at the money puts on SPY would have a $125 strike price.  Would you buy $125 strike puts on SPY now, when it's $425/share?   I don't see you examining the need to roll put options to higher prices.

Or let's say last year: SPY started 2020 just over $320.  With that strike price, SPY needs to drop 25% before the puts are in the money - they don't provide much protection.  To fix that, at the money puts cost much more (5x more for 2022 Jan puts).  There isn't just time decay here, there's adding cash to buy new puts.

Where did you calculate the cost of "rolling up" put options to higher strike prices every year?

E.g. buy the 2.5 year LEAPS.  After one year we are in a correction and VIX is 30. Now you can either be a scardy cat and hold the C&C or PP allocation a while longer or you can sell the highly appreciated options and plow the proceeds into newly cheap investments. Either way your portfolio volatility is much lower than the market and SORR is reduced. If you can go from hedged to unhedged at any time after the options have absorbed significant impact, even if you miss the bottom by months or tens of percents, you will still outperform the market while spending most of the year at a lower risk level.

But in my example, that's not true.  If someone bought protective puts from 2010-2019, those puts lost money every year.  They were a drag on the portfolio, causing it to underperform a portfolio without protective puts.

With a protective puts strategy, I think you're making two timing decisions: (1) that a correction will occur that is dramatic enough to make the puts worthwhile; and (2) that you can time the correction well enough to make the puts worthwhile.

It’s less a timing decision than it is a way to live with a higher equities allocation than one’s risk tolerance would otherwise allow for. It’s a way to avoid sitting in a 70/30 or 60/40 allocation because one is in the bond tent phase of accumulation or retirement, or a way to avoid some of the risk involved in owning stocks when the index PE is >30 or owning bonds when the 10y yield is 1.6% and there is a risk of inflation rising. If the everything bubble pops, it’ll be hedged portfolios that win the day, by losing less.

To the extent timing plays a role, entering a long option position is cheaper when vol is low, all else being equal. Optionally exiting the hedged position when vol is high and switching to a normal unhedged AA is a more aggressive move, and would imply that valuations had improved to the point one’s risk tolerance could be adjusted. Of course we should adjust our risk tolerance as valuations change.

[ChpBstrd]

At-the-money 420-strike SPY calls expiring in 2.51 years currently have an average time decay of 4.1% per year of the strike price. In reality, you suffer much less time decay than that if you roll annually, because time decay accelerates as an option approaches expiration, and is very slow for distant maturities. The same ATM options with 1.5 years remaining are worth $36.10 as opposed to $47.06 for the 2.5 year duration.

The December 15, 2023 call at the 420 strike described above now has a theoretical (and midpoint) price of $45.97, down (47.06-45.97=) $1.09 while SPY itself is down about $7.30 since 6/11/21. VIX went from about 15.64 to about 19.5 in that time. This illustrates how buying a hedged position while VIX is low creates a cushion for investors, because if stocks fall then volatility rises and partially supports the price of long options.

Now imagine if you’d switched to the calls last week, and now you can exit them for a $1.09 loss and buy the underlying for $7.30 cheaper than last Friday - all while staying invested long in the same asset. You’d have 1.47% more shares than you could have afforded on 6/11. I don’t advocate using this strategy for tiny one-week moves, but one can see in just this week how the principle would work to hedge against much bigger corrections.