Author Topic: Cash and Calls: talk me out of it  (Read 5946 times)

Car Jack

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Re: Cash and Calls: talk me out of it
« Reply #50 on: November 18, 2019, 08:27:23 AM »
Just start buying BND.  This is boring and what everyone is doing, but it works.  Buy BND until you're happy with the risk you hold.  The end.

index

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Re: Cash and Calls: talk me out of it
« Reply #51 on: November 18, 2019, 10:34:55 AM »
Just start buying BND.  This is boring and what everyone is doing, but it works.  Buy BND until you're happy with the risk you hold.  The end.

Buying bonds is a completely different risk profile. Go 50/50 bonds and equity. Recession happens and stocks go down 30%. You are down 15%. Next year the market returns 15% you are up 7.5%. With the option strategy, the market is down 30% you lose 4%. The market is up 15% you are up 11%...

MoneyQuirk

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Re: Cash and Calls: talk me out of it
« Reply #52 on: December 01, 2019, 11:48:25 PM »
It's not a terrible idea.

Personally, I wouldn't.

Not only are you losing (by default) 4.95% per year, but you're also missing out on 2% of dividends. So you're losing 6.95% based off of how you would be doing on the HOPE that your estimation is correct.

One of the most educational points I heard about calls/puts versus long/shorts is that in long/shorts you only have to be correct about the underlying thesis. VTI will go up over time. TSLA will go down over time (unless it can become consistently profitable, which it hasn't shown its ability to do yet). However, when you add in another variable, time, all of a sudden it becomes a very different animal. Not only do you have to be right with your underlying thesis (which usually isn't too hard), but you have to pick the right time.

"The market can remain irrational longer than you can remain solvent."

I would stick with being long in index funds.

yoda34

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Re: Cash and Calls: talk me out of it
« Reply #53 on: December 11, 2019, 12:47:05 PM »
It's really interesting and I've played around with very similar things. A couple of things that I've thought about:

- A %5 OTM put+stock and a ATM call+cash end up costing about the same and have virtually the same risk profile

- Since 1999 the S&P Total Return has lost more than 5% 4 times

- Trailing the S&P TR by ~5% a year will (as you know) cause drastic under performance compared to the benchmark (even avoiding the 2008 type years)

- However, while under-performing it will also avoid major SORR risk in case of big drops (as others have pointed out sideways markets are problematic)

- If you want to use leverage the call+cash option can get you the equivalent exposure without paying brokerage margin rates that you would pay in a put+stock model

- The biggest difference in my mind is having to invest the cash in an equivalent to get the dividend that you would get in a put+stock combo and having to invest in another bond fund. For example BND dropped about 13% in 2008 (I think doing that from memory) along with the market. Basically you're exposing your cash to another market risk (it might be small - I agree, but it's there) so your hedge really isn't as capped as you might think. So in the cash+call option, not only are you trailing the market by 5% you also have another market risk to consider in the fund where your cash is invested

For the record I have a SPX put hedge on my S&P portfolio

markbike528CBX

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Re: Cash and Calls: talk me out of it
« Reply #54 on: December 11, 2019, 02:32:22 PM »
I sell puts on stocks I want, at some reasonable price (close, or in-the-money). 

My initial impetus for this was to cover my trading fees.  Now that fees have gone low or away, I guess I'm just doing it for fun.

VXUS Jan 17 '20 $52 put, hold till expired/exercised. Repeat as necessary.

ChpBstrd

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Re: Cash and Calls: talk me out of it
« Reply #55 on: December 11, 2019, 06:59:19 PM »
It's really interesting and I've played around with very similar things. A couple of things that I've thought about:

- A %5 OTM put+stock and a ATM call+cash end up costing about the same and have virtually the same risk profile

- Since 1999 the S&P Total Return has lost more than 5% 4 times

- Trailing the S&P TR by ~5% a year will (as you know) cause drastic under performance compared to the benchmark (even avoiding the 2008 type years)

- However, while under-performing it will also avoid major SORR risk in case of big drops (as others have pointed out sideways markets are problematic)

- If you want to use leverage the call+cash option can get you the equivalent exposure without paying brokerage margin rates that you would pay in a put+stock model

- The biggest difference in my mind is having to invest the cash in an equivalent to get the dividend that you would get in a put+stock combo and having to invest in another bond fund. For example BND dropped about 13% in 2008 (I think doing that from memory) along with the market. Basically you're exposing your cash to another market risk (it might be small - I agree, but it's there) so your hedge really isn't as capped as you might think. So in the cash+call option, not only are you trailing the market by 5% you also have another market risk to consider in the fund where your cash is invested

For the record I have a SPX put hedge on my S&P portfolio

Lots of good observations here. I’ll add a couple of my thoughts:

-I bet this algorithm would perform well in historical backtests; one goes to a hedged position for 2-3y after a yield curve inversion, and stays long the rest of the time. The only ways to underperform would be if the relationship between yield curve inversion and recessions broke down.

-I cannot execute a hedging strategy for part of my portfolio- the part that is locked up in my employer’s 401k plan. In the 401k, I am only allowed to use the “long stock” risk profile. In my brokerage account I can choose any risk profile. So I’m only talking about changing the brokerage accounts here. However, I wonder if SORR would be improved by diversifying risk profiles. If my 401k must be nthe “long stock” profile, should my brokerage accounts also be “long stock” or would it be more reasonable to diversify into the “protective put / long call” profile? If diversification by asset classes is beneficial, wouldn’t diversification by risk profile also be beneficial? After all, what’s the difference between stocks and bonds, other than their risk profiles?

-One could also get cheap leverage with a long stock, long put, and long call combination.

-At today’s 1.75% yield on the S&P, it should be possible to find low volatility fixed income to replace that dividend. Even TIP yields 1.8%.

-Puts are usually more expensive than calls, given their distance OTM or ITM. This is skew, and it's a factor in favor of this switching from a protective put to a calls and cash strategy.



« Last Edit: December 11, 2019, 07:41:04 PM by ChpBstrd »

jim555

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Re: Cash and Calls: talk me out of it
« Reply #56 on: December 11, 2019, 11:19:21 PM »
If you buy puts and are long stock it is identical to owning calls from a risk reward perspective.