Easy to say that now and on March 24, 2000. On March 24, 2000, QQQ was 118 / share. Now it's 221 / share and pays a 0.75% dividend. ~20 years is a long time to wait for not even double the share price. Then it went to 22 something in 2002, just 2 years later. Fewer people would be saying buy QQQ in 2002 than now.
Using Options To Protect a Large Portfolio
- Thread starter LaxFan
- Start date
Easy to say that now and on March 24, 2000. On March 24, 2000, QQQ was 118 / share. Now it's 221 / share and pays a 0.75% dividend. ~20 years is a long time to wait for not even double the share price. Then it went to 22 something in 2002, just 2 years later. Fewer people would be saying buy QQQ in 2002 than now.
The hardest part of investing is what you do when you are losing a lot of money.
Rather than coming up with an options strategy (especially since you admit you have a rudiamentary understanding of finance), spend time with a financial advisor to determine the right investment strategy for someone with your risk profile.
Don’t worry about missing the bull run. We all have missed opportunities to make money. You have another 30 years. Done reasonably right, at your stated risk levels you can double or triple that.
1-Uses much less capital than purchasing underlying & buying puts. End result the same.
2-Simpler set-up than buy underlying & buying puts to protect.
Buying puts will have the same "carry costs" as buying calls. If not you could do an arbitrage trade.
Preferred choice would be call spreads with NO premium.
Actually, they won't.
http://www.nooptionantics.com/blog/?p=77
Look at the cost of ATM call vs. ATM put going out a year. Even a month or two, the calls will be priced higher. And as I mentioned above, I occasionally do that arbitrage whenever I have spare cash in my account that I don't think I will need for a while as my broker, IB, only pays 1.05% (currently) on cash sweep given current Fed Funds rate.
Don't over optimize.
If you want full participation in the market, you have to take on the risk. Here are some more conservative strategies with varying degrees of risk:
1) Buy investment grade preferred stocks which currently pay about 5.5% on average. Rising interest rates is the risk. Flip them for cap gains to increase return.
2) Sell OTM short puts on stocks/ETFs that you're willing to own. If not assigned, you'll collect an income (the premium) and if assigned, you'll buy your desired stocks at a lower price. This isn't without risk because you'll have full exposure below the strike price (less premium received) should the market collapse.
3) Buy high delta call LEAPs instead of stock ("Stock Replacement Strategy"). Initially you'll have similar risk to owning the stock but diminished risk if the stock drops (call delta decreases) and you can't lose more than the call's cost
4) Add low/no cost collars to you equity positions. You'll have a ceiling of profit (the covered call component) and a floor of against loss (the long put). This is synthetically equivalent to a vertical spread which would make more sense if opening a new position (less slippage and less commissions if still paying them). Though the reward is less than selling short puts, this is a big R/R improvement on short puts.
5) Here's an out of the box idea. Combine with several option positions in order to synthetically duplicate a structured index annuity product (in this case, one that offers 10% downside protection and a 7% annual profit cap on the SPY).
Here's a random example for a one year Dec 2020 DIY position where you buy the SPY at $322. You'll have about a 7.5% cap with about 20% of downside protection (twice as much).
IOW, if the SPY drops from 322 to 255, you'll lose about $1 per hundred shares. Below $255 you lose $ for $ for whatever the SPY drops. If it rises, you can make up to 24 points.
You can vary the strikes in order to get more reward or less risk (more reward means more risk and less reward means less risk) and you can vary the months in order to get a better annualized return but that entails more risk.
1) Buy investment grade preferred stocks which currently pay about 5.5% on average. Rising interest rates is the risk. Flip them for cap gains to increase return.
2) Sell OTM short puts on stocks/ETFs that you're willing to own. If not assigned, you'll collect an income (the premium) and if assigned, you'll buy your desired stocks at a lower price. This isn't without risk because you'll have full exposure below the strike price (less premium received) should the market collapse.
3) Buy high delta call LEAPs instead of stock ("Stock Replacement Strategy"). Initially you'll have similar risk to owning the stock but diminished risk if the stock drops (call delta decreases) and you can't lose more than the call's cost
4) Add low/no cost collars to you equity positions. You'll have a ceiling of profit (the covered call component) and a floor of against loss (the long put). This is synthetically equivalent to a vertical spread which would make more sense if opening a new position (less slippage and less commissions if still paying them). Though the reward is less than selling short puts, this is a big R/R improvement on short puts.
5) Here's an out of the box idea. Combine with several option positions in order to synthetically duplicate a structured index annuity product (in this case, one that offers 10% downside protection and a 7% annual profit cap on the SPY).
Here's a random example for a one year Dec 2020 DIY position where you buy the SPY at $322. You'll have about a 7.5% cap with about 20% of downside protection (twice as much).
IOW, if the SPY drops from 322 to 255, you'll lose about $1 per hundred shares. Below $255 you lose $ for $ for whatever the SPY drops. If it rises, you can make up to 24 points.
You can vary the strikes in order to get more reward or less risk (more reward means more risk and less reward means less risk) and you can vary the months in order to get a better annualized return but that entails more risk.