Using Options To Protect a Large Portfolio

[taowave]

He answered my questions..

He is obviously risk averse and well aware of it.He could live with a 5 percent drawdown on the full notional..

He's not quite sure what risk reward works for him..

Due to his parameters,it clear he can't sell puts naked.

My question was asked to see what his tolerance was for buying premium,I.e spreads, be one leg ITM/ATM/OTM

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Why does your risk-tolerance depend on what the market does?

 

[Eikfe]

OP, this is an example of how to hedge.

It showed me with my "tastytrade" knowledge, that the OPTION world is very big and I could barely follow him as to how and why he hedged the portofolio like this

 

[2rosy]

Is 2 million even remotely feasible? I’d like to believe it but can’t imagine that with my conservative mindset.

yes, because in 10 years your 400k will have been eaten up quite a bit by inflation. I once read somewhere that being in a cash position is the hardest. attack or retreat

 

[ET180]

He answered my questions..

He is obviously risk averse and well aware of it.He could live with a 5 percent drawdown on the full notional..

He's not quite sure what risk reward works for him..

Due to his parameters,it clear he can't sell puts naked.

My question was asked to see what his tolerance was for buying premium,I.e spreads, be one leg ITM/ATM/OTM

I'm probably more risk-averse than most people on this forum. However, I try to balance the risk of losing money with the risk of losing opportunity. He made this post because he feels that he is missing the upside the bull market of the last 10 years has delivered. I don't think it would be responsible of me to tell him that he should just plow it all in, give into the FOMO, he's got 20 years before he needs the money anyways, market has always gone up, just do it...the "how would I like to tell my son, daughter, wife someday that their inheritance could have been 8x larger, but I was too scared to invest it". But on the other hand, I think it's necessary to take some risks. Even if one has more money than they will ever need...why not try to grow it? I think what could happen, especially if you live in a high tax state and the money is not in a tax-sheltered account, once you have a large gain on a stock or ETF, you won't think of selling it because you won't want to pay the taxes.

 

[lindq]

I'm not selling puts on my whole nest egg. Many of the ideas here are very interesting, but also very complex for an options newbie. I do some low-risk cash secured puts, here and there, but likely will just dollar-cost average into some things while doing the occasional CSP and/or covered calls.

Twenty years ago I was in precisely your position, with precisely the same questions, and at precisely the same market levels near all time highs. I asked an experienced options broker if it would be a good idea for me to sell puts. No, he replied. Because shit happens.

I didn't listen then, and shit happened, as in time it always will.

It has also been my experience that threads like this, with traders advising a newbie to engage in selling puts, is a good sign that we are at or near a market top.

Good luck.

 

[taowave]

While I fully agree that selling ATM 1 year S and P vol for Apx 5 percent of Spot is revolting, I think your broker was off base in his assessment of selling puts when he said it..

Chek out Goldman's study,The art of put selling ,a 10 year study...

Regardless,the OP wants to limit his drawdown so naked vol is out..

Twenty years ago I was in precisely your position, with precisely the same questions, and at precisely the same market levels near all time highs. I asked an experienced options broker if it would be a good idea for me to sell puts. No, he replied. Because shit happens.

I didn't listen then, and shit happened, as in time it always will.

It has also been my experience that threads like this, with traders advising a newbie to engage in selling puts, is a good sign that we are at or near a market top.

Good luck.

 

[Saltynuts]

That might actually be a disadvantage. When you follow something closely and invest time into it, you might start to take outcomes personally as a reflection of ability that could affect your confidence. At some point it turns into a game or competition. I think people who blindly invest passively have an advantage in the sense that they never take investing as a reflection on their own performance or ability. So it might be best to simply allow time to work in your favor and blindly invest in an index fund. But I know how you feel. Pull up finviz.com S&P500 heatmap and select P/E ratio. It's mostly a sea of red. Current S&P 500 P/E is over 25 (https://www.wsj.com/market-data/stocks/peyields) and there's a lot of optimism priced into this market. One solution follow a system. This might work for you although it's not what I do:

https://sixfigureinvesting.com/2013/09/modified-davis-method/

Frank is a smart guy and his system seems to have worked well for him. Based on his rules, he limits his risk and posts his entire track record.



That's basically what I do. Since I'm very cautious about the upside left in this market, I want to be paid to take risk. I generally sell puts and calls before earnings, and then manage the position by selling more options to hedge risk.

Dang, that sixfigureinvesting link is very interesting ET180! Any reason to doubt his numbers? Seems to be CRUSHING the S&P at much less overall risk. I thought edges were hard to come by!?!

 

[ET180]

I think he's legit. He has been continuously updating that page with all his trades for years. His system is fairly simple and based on Ned Davis 4% rule (although he uses a different percentage that he does not disclose). I exchanged several e-mails with him on another forum and I think he's honest an honest person, not trying to sell anything, but willing to help others out which is why he made the post.

 

[Daal]

Let’s say 5% for the sake of discussion.

Sorry, there is no portfolio that will have a max long-term drawdown of 5%. I'm talking in real terms here. 100% t-bills had a -48% dd in real terms during 1933 all the way to 40's period. 100% bonds were down in real terms during the 1940 to 1980 period (-57% max dd). Thats 40's years without real gains. You think you are being defensive sitting on cash, but its an illusion due not taking into account inflation as well as the tail risk of even more inflation not coming back to bite you.

A defensive portfolio like 20% stocks, 60% 10y bonds and 20% gold has an historical max real drawdown of -25% and it recovered from that drawdown 10 years later. You would think that by decreasing equities and adding stuff like T-bills or more bonds, that would help but no, it doesnt. 10% stocks, 70% bonds and 20% gold has a max dd of -30%. I would advise you to learn more about investing, perform historical tests and portfolio design because your mistake is very common. People think having equities is risky but sitting on cash is even riskier

 

[ironchef]

Sorry, there is no portfolio that will have a max long-term drawdown of 5%. I'm talking in real terms here. 100% t-bills had a -48% dd in real terms during 1933 all the way to 40's period. 100% bonds were down in real terms during the 1940 to 1980 period (-57% max dd). Thats 40's years without real gains. You think you are being defensive sitting on cash, but its an illusion due not taking into account inflation as well as the tail risk of even more inflation not coming back to bite you.

A defensive portfolio like 20% stocks, 60% 10y bonds and 20% gold has an historical max real drawdown of -25% and it recovered from that drawdown 10 years later. You would think that by decreasing equities and adding stuff like T-bills or more bonds, that would help but no, it doesnt. 10% stocks, 70% bonds and 20% gold has a max dd of -30%. I would advise you to learn more about investing, perform historical tests and portfolio design because your mistake is very common. People think having equities is risky but sitting on cash is even riskier

Excellent comments.

Can you run the numbers to include real estates and collectables?

Thanks.