Author Topic: Poke holes in this Options strategy to leg into the market  (Read 14427 times)

Squeak825

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Poke holes in this Options strategy to leg into the market
« on: April 06, 2016, 05:38:24 PM »
Background that my wife and I are 40ish with $1M in retirement accounts that are fully invested in 2040 Target funds. We max contribute our 401ks and our Roth's. Not market timing here.

We also have about $350k that are in taxable accounts: $25k in checking account, $75k in our "savings" accounts in muni funds, and $250k in our "investment account". Monthly draws from our checking accounts goes into the investment account.

Ideally we will fully invest the $250k, but my thesis right now is that the markets are a little high, and over the next 12-18 months I will get an option for an entry point closer to what I would feel comfortable with (SPX of 1700-1850). Because this is our non-retirement account, I am a little bit more risk averse and willing to miss a little upside if I am completely wrong, but I am fairly confident it will happen.

As such, I want to structure my account like this:

1) Dump all $250k in TLT -- capture the ~2.5% dividend.
2) Sell covered calls against TLT at 3-4 strikes above monthly (maybe around .70-.80 credit)
3) Sell naked puts against SPY monthly -- but these are really covered puts because I would never sell more contracts than the total dollar value of the account.

With this, I am getting the dividend payment of TLT, plus the premiums of selling both sides of the options.

If TLT goes on a tear and my shares get called away -- that is ok. I made some capital gains, and I can start it over again. If TLT dies, I have a problem.

If SPY goes on a tear or is flat, I keep selling new puts every month until it backs down to where I want (risk here is I never actually buy SPY). If SPY dies, and I get assigned, then all is good -- I get my entry plus a whole bunch of premiums (I would sell the TLT to cover the assignment, and have to buy back by short calls).

Any major holes or gaps or risks that I am missing? My ultimate goal is to get a long-term position in SPY/ITOT at a price I like, but until then I can capture dividends and premiums.

forummm

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Re: Poke holes in this Options strategy to leg into the market
« Reply #1 on: April 06, 2016, 06:17:27 PM »
I suppose you could do this. But you also have enough money that you don't need to play games. Why not just buy the 500 index fund with your $250k and hold it forever? What does this all really gain you? I don't know what your spending is like, but with that much money you could just have a reasonable spending and retire with your money safe in index funds (even if they do dip at some point).

Personally, I think the likelihood of SPY going down to 170 is very low. And 185 is still not that likely. It's much more likely to hit 300 than 170.

ScarElbow

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Re: Poke holes in this Options strategy to leg into the market
« Reply #2 on: April 06, 2016, 06:29:22 PM »
That is one dandy strategy you got going on there good sir. I'm not here to poke holes, just giving my own input. If you want to long something, why not sell puts to leg into it at a lower price. Collecting premiums to buy at a more favorable price is the best way, I believe, to buy anything.  By selling short premium to potentially going long acts just like collecting dividends. But even better, you can just roll it if the strike price gets too close being in the money and you don't want to own it at that price.
« Last Edit: April 06, 2016, 06:31:12 PM by ScarElbow »

Squeak825

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Re: Poke holes in this Options strategy to leg into the market
« Reply #3 on: April 06, 2016, 06:36:36 PM »
I suppose you could do this. But you also have enough money that you don't need to play games. Why not just buy the 500 index fund with your $250k and hold it forever? What does this all really gain you? I don't know what your spending is like, but with that much money you could just have a reasonable spending and retire with your money safe in index funds (even if they do dip at some point).

I tried to explain this in my post -- this is not my retirement money. This is my savings, and as such I am little bit more risk adverse. Plus I am believe I will get a better entry point to be long the market, but don't to not just sit and wait.

My spending is high right now as we have two kids that won't graduate for awhile. This taxable account will ultimately help augment my kids college 529 plans (in 6 and 9 years) and is my overall FU money as it exceed my mortgage on my house.

Quote
Personally, I think the likelihood of SPY going down to 170 is very low. And 185 is still not that likely. It's much more likely to hit 300 than 170.

We were at 185 not more than 8 weeks ago. If I got assigned at 185, I would be ok with that.
« Last Edit: April 06, 2016, 06:40:50 PM by Squeak825 »

Squeak825

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Re: Poke holes in this Options strategy to leg into the market
« Reply #4 on: April 06, 2016, 06:39:08 PM »
That is one dandy strategy you got going on there good sir. I'm not here to poke holes, just giving my own input. If you want to long something, why not sell puts to leg into it at a lower price. Collecting premiums to buy at a more favorable price is the best way, I believe, to buy anything.

That is why I am doing. I want to be long SPY, and so I am selling puts on it (collect premium). But there is no reason to let that "cash" to cover those puts just sit there in the account -- put it into a dividend stock and also sell the covered calls (collect premium).


ScarElbow

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Re: Poke holes in this Options strategy to leg into the market
« Reply #5 on: April 07, 2016, 09:16:33 AM »
But it just doesn't sit there. It's there in the account serving as trading margin and training soldiers waiting for opportunities to strike. Patience is best.

Squeak825

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Re: Poke holes in this Options strategy to leg into the market
« Reply #6 on: April 07, 2016, 09:57:06 AM »
But it just doesn't sit there. It's there in the account serving as trading margin and training soldiers waiting for opportunities to strike. Patience is best.

Yeah, I get what your saying. In fact, I have a similar trade on right now with AGG as the bond ETF and sold contracts on the May SPY. The only difference is I have not sold any covered calls on AGG due to almost zero market for those options.

My question was because I was thinking about rotating into TLT instead (because of highly liquid options) and putting on the covered call part, but I am now second-guessing that because TLT is highly volatile compared to AGG (-.5 beta vs -.03).

So in fact, I am doing exactly what you mentioned: it is sitting there as trading margin waiting for when I get get SPY at the price I want (with a little bit of dividend and premium capture).

forummm

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Re: Poke holes in this Options strategy to leg into the market
« Reply #7 on: April 07, 2016, 10:00:13 AM »
I suppose you could do this. But you also have enough money that you don't need to play games. Why not just buy the 500 index fund with your $250k and hold it forever? What does this all really gain you? I don't know what your spending is like, but with that much money you could just have a reasonable spending and retire with your money safe in index funds (even if they do dip at some point).

I tried to explain this in my post -- this is not my retirement money. This is my savings, and as such I am little bit more risk adverse. Plus I am believe I will get a better entry point to be long the market, but don't to not just sit and wait.

My spending is high right now as we have two kids that won't graduate for awhile. This taxable account will ultimately help augment my kids college 529 plans (in 6 and 9 years) and is my overall FU money as it exceed my mortgage on my house.

Quote
Personally, I think the likelihood of SPY going down to 170 is very low. And 185 is still not that likely. It's much more likely to hit 300 than 170.

We were at 185 not more than 8 weeks ago. If I got assigned at 185, I would be ok with that.

Other than a few grand in checking, I think of all my money as retirement money, regardless of whether it's in a "retirement" account or a taxable investment account. If you have earmarked certain funds for college savings and don't want to lose them, that's a little different. But not much.

Generally, my thoughts are that you have enough money that you don't need to be playing these games. And that buying and holding has historically worked best in the long run. I don't think your idea is a terrible one. But you are trading off one risk for another. Someone else is on the other side of those trades and is evaluating things in the opposite way from you. Which one of you is right? Good luck!

Squeak825

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Re: Poke holes in this Options strategy to leg into the market
« Reply #8 on: April 07, 2016, 11:46:15 AM »
Other than a few grand in checking, I think of all my money as retirement money, regardless of whether it's in a "retirement" account or a taxable investment account. If you have earmarked certain funds for college savings and don't want to lose them, that's a little different. But not much.

Generally, my thoughts are that you have enough money that you don't need to be playing these games. And that buying and holding has historically worked best in the long run. I don't think your idea is a terrible one. But you are trading off one risk for another. Someone else is on the other side of those trades and is evaluating things in the opposite way from you. Which one of you is right? Good luck!

Yeah, I will admit that we are not as aggressive with our after-tax money as we could be, but when it is only about 20% of total portfolio, it is not a crisis.

I keep that much money in bucket 1 because our normal ins and outs of the checking account is about ~$11k a month (that is including pulling extra out for investment savings), and we like to have an extra buffer in case huge expenses come up (we do not have a HELOC and refuse to due to being pissed they closed ours during the 2008 crisis). Bucket 2 probably should be invested more.


forummm

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Re: Poke holes in this Options strategy to leg into the market
« Reply #9 on: April 07, 2016, 12:34:38 PM »
What expense could possibly be $250k that would just come up? And that you would have no other way of paying for (credit card, short term loan, etc)? If something big did come up you could always just sell some index fund to get cash for it.

Squeak825

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Re: Poke holes in this Options strategy to leg into the market
« Reply #10 on: April 07, 2016, 12:39:42 PM »
What expense could possibly be $250k that would just come up? And that you would have no other way of paying for (credit card, short term loan, etc)? If something big did come up you could always just sell some index fund to get cash for it.

Huh? I was just talking about my checking account ($25k) being used for emergencies. I already agree that I am being more risk adverse then I should be with the $250k and it should be invested -- just trying to find that right balance of when to put it in there because that is 10-year money, and not 30-year money.

forummm

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Re: Poke holes in this Options strategy to leg into the market
« Reply #11 on: April 07, 2016, 12:49:27 PM »
What expense could possibly be $250k that would just come up? And that you would have no other way of paying for (credit card, short term loan, etc)? If something big did come up you could always just sell some index fund to get cash for it.

Huh? I was just talking about my checking account ($25k) being used for emergencies. I already agree that I am being more risk adverse then I should be with the $250k and it should be invested -- just trying to find that right balance of when to put it in there because that is 10-year money, and not 30-year money.

Your use of undefined terms was confusing. 10-year money is generally a heavy stock allocation. And I'd be willing to bet that the market return will be positive during the next 10 years (in fact, I have bet my life savings on that). You may never get another chance to buy in at today's price. Waiting for a dip that may never come can cost you.
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eudaimonia

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Re: Poke holes in this Options strategy to leg into the market
« Reply #12 on: April 07, 2016, 12:52:44 PM »
Seems like a solid strategy.

In general most of the investors on this forum are not interested in anything more complicated than buy and hold. Therefore, you might consider asking a different audience if you really want an answer other than "buy and hold".

Squeak825

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Re: Poke holes in this Options strategy to leg into the market
« Reply #13 on: April 07, 2016, 12:54:50 PM »
Seems like a solid strategy.

In general most of the investors on this forum are not interested in anything more complicated than buy and hold. Therefore, you might consider asking a different audience if you really want an answer other than "buy and hold".

yeah...I am figuring that out! :D

Any good recommendations? Bogleheads was a bust as well, and thought there might be more active traders here that use it as a tool for long-biased portfolio.

Any recommendations?

tarheeldan

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Re: Poke holes in this Options strategy to leg into the market
« Reply #14 on: April 07, 2016, 01:28:18 PM »
Aren't both positions:
1. Selling Call on treasuries                    and
2. Selling Put on SPY
     Essentially long SPY positions (by nature of TLT/SPY inverse relationship)? And you want to get a lower strike/entry for SPY right?

If you were confident there will be some downside, why wouldn't you just hold TLT and put on a SPY Call spread (write ATM or little bit OTM call, buy further OTM call to cap losses). Or, hold TLT and put on a TLT Put spread. All of these positions reflect your market view.

I don't get having a bearish view but then writing Put options.

That being said, 2 people said your idea makes sense, so I might learn something here.

ScarElbow

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Re: Poke holes in this Options strategy to leg into the market
« Reply #15 on: April 07, 2016, 01:42:45 PM »
Actually , selling puts is generally a valuation play with a bullish outlook because the his idea is to go long at a lower price. As far as spreads, I believe his idea is to buy the whole spy not capping limit on losses or profit with spreads.

Squeak825

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Re: Poke holes in this Options strategy to leg into the market
« Reply #16 on: April 07, 2016, 01:45:24 PM »
Actually , selling puts is generally a valuation play with a bullish outlook because the his idea is to go long at a lower price. As far as spreads, I believe his idea is to buy the whole spy not capping limit on losses or profit with spreads.

That's right. I ultimately want to long SPY, hopefully at a price I like, and one that will be defined by the strike price I sell on the puts. All while capturing time premium and dividends.


tarheeldan

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Re: Poke holes in this Options strategy to leg into the market
« Reply #17 on: April 07, 2016, 02:24:14 PM »
Of course selling Put is a long position, that's my point. Thinking spy is overvalued is a short term bearish view and that's inconsistent.

If it's a theta play, that only works if the market is flat or moves OTM and I didn't see any argument for that view.

With the call spread I mentioned, you'd exit that position once the market has dropped to your entry point, which would be very cheap, in effect reducing your entry point further.

What I'm trying to say is if you have a short term bearish view then you would trade that way. You can add any complexity you like on top of that.


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ScarElbow

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Re: Poke holes in this Options strategy to leg into the market
« Reply #18 on: April 07, 2016, 02:54:59 PM »
With the spy bear call spread, what do you do if market moves against it (up)? Just take the limited loss or hedge it somehow? To me, bear call spread on long spy is a need for it to come down for premium purposes. Whereas selling put is wanting for it to come down, with an option to roll.

eudaimonia

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Re: Poke holes in this Options strategy to leg into the market
« Reply #19 on: April 07, 2016, 03:50:08 PM »

yeah...I am figuring that out! :D

Any good recommendations? Bogleheads was a bust as well, and thought there might be more active traders here that use it as a tool for long-biased portfolio.

Any recommendations?

Let me know if you find somewhere online that is good. I usually discuss these ideas with fellow investors I know in my area. Many of them made their money in real estate or business and now just manage their portfolio.

One other suggestion for you if you really want to know whether you have a solid strategy is to backtest it. Yes, backtesting is relying on the past. So is the buy and hold model (that the gains of the future will be similar to the past). It isn't perfect but it is a lot better than guessing. There are numerous tools out there to do this with (TOS, OptionNet Explorer, etc.)

tarheeldan

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Re: Poke holes in this Options strategy to leg into the market
« Reply #20 on: April 07, 2016, 05:22:25 PM »


With the spy bear call spread, what do you do if market moves against it (up)? Just take the limited loss or hedge it somehow? To me, bear call spread on long spy is a need for it to come down for premium purposes.

Exactly, if I think SPY is overvalued it's a relatively low risk way to pocket some premium in the event that I'm right, and have limited losses if I'm wrong. Time value works in your favor too. Personally I would just short SPY if I held that view though.

I don't understand why you would sell Put esp atm if you think the market is going to come down. By nature the position has a limited gain and downside risk all the way to 0 price, which is contrary to the market view.

In other words, what do you do if the market tanks right after you write the puts? You owe there, and while your treasury holdings might appreciate, you were writing calls there which is also adverse.
...Probably here is where I'm missing something and look forward to learning.


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forummm

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Re: Poke holes in this Options strategy to leg into the market
« Reply #21 on: April 07, 2016, 05:32:42 PM »
I suppose you could do this. But you also have enough money that you don't need to play games. Why not just buy the 500 index fund with your $250k and hold it forever? What does this all really gain you? I don't know what your spending is like, but with that much money you could just have a reasonable spending and retire with your money safe in index funds (even if they do dip at some point).

I tried to explain this in my post -- this is not my retirement money. This is my savings, and as such I am little bit more risk adverse. Plus I am believe I will get a better entry point to be long the market, but don't to not just sit and wait.

My spending is high right now as we have two kids that won't graduate for awhile. This taxable account will ultimately help augment my kids college 529 plans (in 6 and 9 years) and is my overall FU money as it exceed my mortgage on my house.

Quote
Personally, I think the likelihood of SPY going down to 170 is very low. And 185 is still not that likely. It's much more likely to hit 300 than 170.

We were at 185 not more than 8 weeks ago. If I got assigned at 185, I would be ok with that.

If you like SPY at 185, why did you put your $250k into it 8 weeks ago when it dipped?

bacchi

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Re: Poke holes in this Options strategy to leg into the market
« Reply #22 on: April 07, 2016, 09:48:01 PM »
This strategy will lose money in an increasing market. As SPY increases and TLT decreases, your TLT strike will start to get nearer and nearer your TLT buy price until you're selling TLT calls at a strike for less than what you paid. When the market turns, even if only temporarily, your TLT losses might negate any gains made from the call premiums.

There's also the possibility that a large market drop will cause the TLT calls to spike in price due to vol, forcing you to pay a premium (ha!) to cover the call in order to cover the SPY puts. Since you'll likely be using American style options, you could also get an early exercise in high-vix situations, again forcing your hand at an inopportune time.

Too many ways for this to go badly. Just do a debit spread instead.

Fwiw, I hold actual T-bonds and use that as the "margin" for options trading.


Eta: The TLTs are covered so this won't happen. The early exercise is possible and would pin you -- you can't sell any TLTs because they're needed for the short calls. Until you get near expiry, the calls would have some vol so it'd be painful to buy them back to sell the TLT to cover the put assignment. Eek.
« Last Edit: April 07, 2016, 10:10:47 PM by bacchi »

arebelspy

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Re: Poke holes in this Options strategy to leg into the market
« Reply #23 on: April 08, 2016, 01:47:45 AM »
Seems like a solid strategy.

In general most of the investors on this forum are not interested in anything more complicated than buy and hold. Therefore, you might consider asking a different audience if you really want an answer other than "buy and hold".

It's true we're not interested, but we're not interested not because it's complicated, but because it's likely to underperform.  The risk-adjusted return is worse.  Pass.
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Squeak825

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Re: Poke holes in this Options strategy to leg into the market
« Reply #24 on: April 08, 2016, 07:18:58 AM »
I suppose you could do this. But you also have enough money that you don't need to play games. Why not just buy the 500 index fund with your $250k and hold it forever? What does this all really gain you? I don't know what your spending is like, but with that much money you could just have a reasonable spending and retire with your money safe in index funds (even if they do dip at some point).

I tried to explain this in my post -- this is not my retirement money. This is my savings, and as such I am little bit more risk adverse. Plus I am believe I will get a better entry point to be long the market, but don't to not just sit and wait.

My spending is high right now as we have two kids that won't graduate for awhile. This taxable account will ultimately help augment my kids college 529 plans (in 6 and 9 years) and is my overall FU money as it exceed my mortgage on my house.

Quote
Personally, I think the likelihood of SPY going down to 170 is very low. And 185 is still not that likely. It's much more likely to hit 300 than 170.

We were at 185 not more than 8 weeks ago. If I got assigned at 185, I would be ok with that.

If you like SPY at 185, why did you put your $250k into it 8 weeks ago when it dipped?

Fair question. I was in the middle of rethinking my entire portfolio structure, and did some TLH around that point, but wasn't sure what to rotate it into -- and made a mistake of just letting it sit there. I was betting I could wait 30 days without issue. I was wrong and the market took off on me and I don't feel like chasing it right now as I am pretty sure that I should get another entry point similar to that in the near future.

I could very well be wrong, and if I am wrong, I am losing some appreciation on a minor part of my total portfolio.

Squeak825

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Re: Poke holes in this Options strategy to leg into the market
« Reply #25 on: April 08, 2016, 07:23:05 AM »
This strategy will lose money in an increasing market. As SPY increases and TLT decreases, your TLT strike will start to get nearer and nearer your TLT buy price until you're selling TLT calls at a strike for less than what you paid. When the market turns, even if only temporarily, your TLT losses might negate any gains made from the call premiums.

There's also the possibility that a large market drop will cause the TLT calls to spike in price due to vol, forcing you to pay a premium (ha!) to cover the call in order to cover the SPY puts. Since you'll likely be using American style options, you could also get an early exercise in high-vix situations, again forcing your hand at an inopportune time.

Too many ways for this to go badly. Just do a debit spread instead.

Fwiw, I hold actual T-bonds and use that as the "margin" for options trading.


Eta: The TLTs are covered so this won't happen. The early exercise is possible and would pin you -- you can't sell any TLTs because they're needed for the short calls. Until you get near expiry, the calls would have some vol so it'd be painful to buy them back to sell the TLT to cover the put assignment. Eek.

Thank you...that is exactly the kind of feedback I was looking for. I have backtested this a bunch and worked through the scenarios, and have come to the same conclusion you have.  TLT has so much volatility (which is why you can actually get options premium on them) that it defeats my stated purpose of: soften the blow of reentering the market with a long-bias.

I will keep doing essentially the same thing you are, hold T-Bonds (AGG) as margin and just sell naked puts on SPY. My calculations say I can make about 5% annualized between the dividends and premiums until I get the entry point I want. 

forummm

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Re: Poke holes in this Options strategy to leg into the market
« Reply #26 on: April 08, 2016, 08:16:01 AM »
I suppose you could do this. But you also have enough money that you don't need to play games. Why not just buy the 500 index fund with your $250k and hold it forever? What does this all really gain you? I don't know what your spending is like, but with that much money you could just have a reasonable spending and retire with your money safe in index funds (even if they do dip at some point).

I tried to explain this in my post -- this is not my retirement money. This is my savings, and as such I am little bit more risk adverse. Plus I am believe I will get a better entry point to be long the market, but don't to not just sit and wait.

My spending is high right now as we have two kids that won't graduate for awhile. This taxable account will ultimately help augment my kids college 529 plans (in 6 and 9 years) and is my overall FU money as it exceed my mortgage on my house.

Quote
Personally, I think the likelihood of SPY going down to 170 is very low. And 185 is still not that likely. It's much more likely to hit 300 than 170.

We were at 185 not more than 8 weeks ago. If I got assigned at 185, I would be ok with that.

If you like SPY at 185, why did you put your $250k into it 8 weeks ago when it dipped?

Fair question. I was in the middle of rethinking my entire portfolio structure, and did some TLH around that point, but wasn't sure what to rotate it into -- and made a mistake of just letting it sit there. I was betting I could wait 30 days without issue. I was wrong and the market took off on me and I don't feel like chasing it right now as I am pretty sure that I should get another entry point similar to that in the near future.

I could very well be wrong, and if I am wrong, I am losing some appreciation on a minor part of my total portfolio.

Another issue is that even if the market did dip to 185 briefly and then jumps up again (like 8 weeks ago), there's a good chance it wouldn't coincide with your option expiration date. So you would be sitting there grinding your teeth unable to buy at 185 because that cash is tied up backing up your puts. And you would be unlikely to be assigned early because the option is more valuable unexercised and SPY options are incredibly liquid.

I will keep doing essentially the same thing you are, hold T-Bonds (AGG) as margin and just sell naked puts on SPY. My calculations say I can make about 5% annualized between the dividends and premiums until I get the entry point I want. 

This strategy still has the same potential issue mentioned above. And if SPY goes up, not only do you lose out on the gains, but your option premiums will drop as well. This isn't a guaranteed 5% return by any means.

Heckler

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Re: Poke holes in this Options strategy to leg into the market
« Reply #27 on: April 08, 2016, 08:40:58 AM »
]

It's true we're not interested, but we're not interested not because it's complicated, but because it's likely to underperform.  The risk-adjusted return is worse.  Pass.

I don't even know what he's talking about...

EarlyStart

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Re: Poke holes in this Options strategy to leg into the market
« Reply #28 on: April 10, 2016, 06:32:25 PM »
I suppose you could do this. But you also have enough money that you don't need to play games. Why not just buy the 500 index fund with your $250k and hold it forever? What does this all really gain you? I don't know what your spending is like, but with that much money you could just have a reasonable spending and retire with your money safe in index funds (even if they do dip at some point).

I tried to explain this in my post -- this is not my retirement money. This is my savings, and as such I am little bit more risk adverse. Plus I am believe I will get a better entry point to be long the market, but don't to not just sit and wait.

My spending is high right now as we have two kids that won't graduate for awhile. This taxable account will ultimately help augment my kids college 529 plans (in 6 and 9 years) and is my overall FU money as it exceed my mortgage on my house.

Quote
Personally, I think the likelihood of SPY going down to 170 is very low. And 185 is still not that likely. It's much more likely to hit 300 than 170.

We were at 185 not more than 8 weeks ago. If I got assigned at 185, I would be ok with that.

If you like SPY at 185, why did you put your $250k into it 8 weeks ago when it dipped?

Tell me you haven't forgotten the gut-wrenching Armageddon that was S&P < 1900 .... :O





And then thread titles in our own forum near the late January / early February lows:

"About to sell everything. Talk me off the ledge (or push me off) please!"

"Many indicators indicating a recession coming in 2016"

"The Stockmarket Rollercoaster Continues"

"Just liquidated my entire portfolio..."


In all seriousness, most people here respond pretty calmly, and I can't blame anyone for getting a little nervous or having minor panics about their money. But as (I think) you're alluding to, it's a very easy behavioral trap to fall in: anxiously awaiting a "dip", and then realizing that very negative narratives accompany said dip.


Regarding the options strategy:

Including TLT in any of it introduces a new source of complexity in that you're betting on the shape of the yield curve given that TLT is the very long end.

As far as selling SPY puts, something I'm not inherently opposed to, I don't think I'd choose now to do it with so little volatility incorporated into the options prices. VIX is at about 15 right now... Here's something much simpler if you would like to take more risk, just not at current valuations:


value the S&P 500. discounted cash flow, however you want. Imagine you came up with 1750, as an example. Instead of selling SPY puts, leave your play money in cash or a conservative short term bond etf (not TLT), and if SPY falls to your level, buy it.















« Last Edit: April 10, 2016, 06:40:44 PM by EarlyStart »

MustacheAndaHalf

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Re: Poke holes in this Options strategy to leg into the market
« Reply #29 on: April 10, 2016, 07:52:42 PM »
"Not market timing here."
"... my thesis right now is that the markets are a little high ..."

The market generally goes up, so investing contrary to that does look like market timing.  I have two main things for you to consider:  what will your spouse think if this doesn't work, and a Vanguard white paper about predicting future returns.

The Vanguard white paper says that when markets are "a little high", with higher P/E ratios, that does have some predictive value... but only in the time frame of decades.  And the correlation was about 0.40, not 100%.  So to have certainty for the next 1-2 yrs over P/E would not match the data in Vanguard's white paper about predicting future returns.

Second main idea is your spouse.  If you have losses because the market has losses, point at the market.  "Look, market losses".  But if you buy puts for the market to fall, and invest in long-term treasuries rather than stocks... it's very much your choices that could determine the losses.  I think you should consider the impact of the market doing the damage, versus your choices doing the damage.

Squeak825

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Re: Poke holes in this Options strategy to leg into the market
« Reply #30 on: April 11, 2016, 10:56:03 AM »
Second main idea is your spouse.  If you have losses because the market has losses, point at the market.  "Look, market losses".  But if you buy puts for the market to fall, and invest in long-term treasuries rather than stocks... it's very much your choices that could determine the losses.  I think you should consider the impact of the market doing the damage, versus your choices doing the damage.

Couple things here in response to this:

1) My wife is completely onboard with the strategy of waiting for a better entry point at the potential of some muted growth in this account. Considering this account represents only 20% of our investments (with the other 80% actively invested), and a little over 12% of our net worth, it isn't going to make or break us one way or the other.

2) "But if you buy puts for the market to fall" -- just to be clear here: I am not buying any options. I am selling them and capturing premium. If I am willing to accept that whatever strike price I write at I might get assigned, then there is no potential for a "loss" here above the same loss I would get if I held the stock. Either I never hit that price and get paid premiums monthly, or I get assigned (at a lower breakeven point because I captured those premiums).

Will I make as much? Maybe, maybe not. But I am not introducing any material additional risk beyond AGG (I have gone away from using TLT) losing value.

Financial.Velociraptor

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Re: Poke holes in this Options strategy to leg into the market
« Reply #31 on: April 11, 2016, 01:12:40 PM »
I'm arguably the biggest advocate of writing options for premium on these boards.  Have to say I don't like this plan.   I kind of get what you are doing...trying to adopt a "market neutral" approach to entry.  Thing is, it rarely pays to write options on an index.   The inherent diversification lowers volatility and thus the "vega" component of premium.  If you could write either puts on the S&P 500 or puts on the individual underlying stocks, you'd earn more premium on the underlying stock even though the risk is the same. 

Writing puts like you propose (you got this part correct) may or may not beat the index.  What it is guaranteed to do is lower your volatility as you collect cash up front.  Basically, it is another form of diversification (giving up upside for lower volatility).

I think if you like the underlying, go ahead and buy it rather than try to time it.  If you like adding options to the mix, write covered calls on the position.  It's the same profit and loss profile* as writing puts (you cap your upside while lowering volatility.)  No need to carry an offsetting bond position and introduce interest rate risk to your mix that way.

*EMH says the return on puts and calls for the same strike must be the same, else there is an arbitrage opportunity.  In practice, there is a small, usually immaterial difference, which is driven by the prevailing interest rate which is the opportunity cost of the arbitrage.  The big hedge funds ensure it is so with computer algorithm arbitrage trading.

thunderball

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Re: Poke holes in this Options strategy to leg into the market
« Reply #32 on: April 11, 2016, 05:38:26 PM »
Squeak, I'm a huge advocate of allocating a fraction of your portfolio to that kind of strategy.  Would love to compare notes.  Please PM me at your leisure.  Thanks!

KBecks

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Re: Poke holes in this Options strategy to leg into the market
« Reply #33 on: April 12, 2016, 05:42:42 AM »
Hi Squeak,

Here are a few comments that you can take them for what they are worth, from some stranger on the internet.  My experience with options trading is 2.5 years, under the guidance of paid advisors.

1.  Why are you choosing a Treasury fund vs. regular Treasuries?
2.  How juicy are the premiums for your strategies?  How would you set your strikes and expirations?  Is it worth the trouble?

With puts your biggest risk is you don't get the shares you want, ever.
With covered calls you have to be OK with selling the shares (and you might have to buy them back higher if you consider them essential)
So the question is -- is it easier and more efficient to just buy the shares, or buy them in 1/3s to take advantage of any price movement over time?  Dollar cost averaging?  You've got a lot of money to put in.

Sometimes options do have a feel like a lot of messing around for not much payoff but small gains can and do add up and enhance your overall long portfolio.

I will share that I am a member of Motley Fool Options and Motley Fool Pro and I like both services (the fees are tiny compared to your net worth).  There is also a service there called Rule Your Retirement that gets great reviews.  All have a free trial period if you are interested in checking them out.  (Call customer service if you are interested, Options and Pro take new members in 1x to 2x a year, and the deadlines are sometimes negotiable.)  I use the services because I appreciate having a team on this, and the people who run it are fantastic.

If you are looking for safe yield, I would try to find some people who are achieving what you want to accomplish.  I know at the Fool some people talk a lot about bonds and about preferred stock, but I'm not at that stage and have not dug in yet.  But you can find those people around to compare notes with.

At this stage it is more about protecting the nest egg you've built and learning to transition to living off your investments when you stop working.  Many retirees use options to generate income.  I'm still learning but I feel it's a worthwhile pursuit.

Good luck!
« Last Edit: April 12, 2016, 05:53:38 AM by KBecks »