<p>Ok, I see dstark is back. So I thought that I would pick his brain and that of the other smart guys.</p>
<p>This comes under the heading of “if it seems to good to be true, it almost certainly is.” I was looking one year leaps for SPY and the at the money premium is less than 6%. So I thought, why not take 10% of what you have invested in SPY, buy the leap, and take the remainder and put it in VFIIX, with a completely secure yield of a little less than 3% and almost no volatility (actually, since I have access to TIAA, I can do better than that, but I wanted to make this an example with general applicability). If x is the gain in SPY over the year, and SPY yields 2% (actually, it yields a little less), your percentage gain from the strategy is 1.67(x-2)-7 if x-2 is greater than zero, and -7 if x-2 is less than or equal to zero. Your maximum loss is 7%, and you will outperform SPY if x is less than -7 or greater than 15% over a one year period, which happens about 60% of the time, and the big advantage for us old guys is that you miss the big downside moves.</p>
<p>Seems too good to be true. What am I missing?</p>
<p>Some people have don’t have an issue investing in spies just like some don’t have an issue in investing in tobacco or gambling stocks. Some people do which limits the liquidity opportunities thus placing an inverted hurdle on the option spread. </p>
<p>In my whole life, I only understand 3 investment options: Saving Account, SP 500, and, in my early years, the “balanced” (60% stock and 40% bond, as I was told.) I also have never invested any money outside of my retirement account.</p>
<p>For the first stock crash (2001 or 2002?), I think all of my investment money was in savings accounts or something similar (is there such an investment called stable value?) For the second stock crash (2008?), I think none of my investment was in stock (or only 2-3% of it was in SP 500.) When the stock goes down, I do not lose much; when it goes up, I do not gain much either. (Occasionally I gained by investing on SP500. But the percentage of it was not much so I did not gain much.)</p>
<p>But I still saved enough money to put my child through college (but not after college.) The only trick I had was to start saving before my child was born.</p>
<p>I am moving to get more of our money into index mutual funds and index ETFs, as those have the lowest earnings ratios. I will only invest in things I understand. I have been reading bogleheads.org, at the recommendation of folks who seem pretty well informed on CC, and it has been very interesting. I wish I was aware of it much earlier. My S is way ahead of me in investing prudently in index funds for all his retirement assets.</p>
<p>Sadly, it is tough to stay above inflation for most people if there isn’t at least some equity/stocks, real estate, or other assets that keep up with or hopefully exceed inflation (after taxes). Diversification via buying a well-diversified index fund with low expense ratio that tracks the entire stock market will allow you to make the average gains of the whole market, which in our lifetime has been pretty good. For balance, it is good to have some percentage of your funds in fixed income (bonds, money market, CDs, etc.) The asset allocation between stocks and fixed income is a major decision and generally based on your age, tolerance for risk, and ability to “hold the course,” if the investment goes down in value.</p>
<p>My wife retired in April and I am going out in July. The market has gotten too high for me. Makes me nervous. I am going to take all the profits we have made since the market has come back and be satisfied. Made it to the two comma club. We are not dependent on this money for the majority of our retirement, which will be supported by social security and federal and state pensions. </p>
<p>Yesterday I lowered our Thrift Savings Plan (TSP, available only to Federal employees and retirees) C fund investments from 50% to 25%; dropped the S and increased the amount in the G and the 2015 L fund. I made similar changes in the deferred income investments we have with the Employee Trust Funds (ETF, available only to Wisconsin public employees). Both TSP and ETF are exceptionally well managed and with very low associated administrative expenses.</p>
<p>First, an apology. A number of the active participants in the now-dead earlier investment thread were interested in more arcane investment strategies. Most people are not interested in these strategies.</p>
<p>Igloo is correct. The theory is that by buying options (a “leap” is a long term option), you use leverage which allows you to (in effect) participate in the profit potential of a larger number of shares by paying a much lower price. The problem is that if the stock (or, in this case, the index) goes down you lose your entire investment in the options. My original question was based on the idea that you might be able to size your option position in a way that would allow you to invest most of your funds in a safe, income generating investment, thereby reducing your downside risk while still being able to participate more or less fully in any market gains.</p>
<p>You might want to ask the mods to merge this thread into the historical investment thread. Its had postings in April, May and June, so isn’t really “dead”. Might get more readership from old posters, so I bumped it.</p>
<p>How about something simple - for example: buy the 1/17/15 168 - 210 spy call spread for 26.72. That way you are participating in the market up to spy = 210, you’re buying spy for less than the current price and you are risking only 14% of your capital even if the market goes to zero. Use this as a replacement for owning spy and don’t use the added leverage to buy more than you would have if you owned the etf. Use the rest for protection, bonds etc. Another way is to buy something like a 183 - 186 spread for 2.45. As long as spy is above 186 on 1/17, you will make 22% excluding trading costs and you will make money if the market does nothing from here, goes up and goes down until it gets to less than 186. There are zillion ways of doing this stuff that give you better than 50% odds of success.</p>
<p>I prefer higher odds than the trade in the first post. Especially when the increase in leverage doesn’t give the trader a big upside. </p>
<p>The one caveat for me in these trades is I don’t like to give up the dividends. I guess giving up the dividends are ok if you invest the money you were going invest in spy into something with higher returns. </p>
<p>That gnm fund does have some interest rate risk. Probably not a lot. The duration is over 5 years. Rates rise 1 percent and the gnm fund decreases about 5 percent. </p>
<p>If rates rise 1 percent, spy’s value could decrease slightly also. The strength of the economy, or people switching from bonds to stocks may prevent a decrease in the price of the spy. </p>
<p>Emm1, did you continue to do the xiv trade every month? </p>
<p>EMM1, I haven’t looked at the numbers yet, but I have definitely been thinking about going to an options strategy. As stocks keep climbing you want to lock in profits and reduce exposure to a big correction (or crash) but you also don’t want to miss out if the stock market keeps going up. What to do, what to do?</p>
<p>I have thought about selling a lot of my stock positions and buying longer term SPY options (maybe LEAPS, maybe just some of the longer options… 6 months? I don’t know when they start calling them LEAPS) but I would partially fund the call purchases by selling shorter term puts. If the market goes down I get back in at lower levels. If it goes sideways I can make more on my put sales than I pay for calls. </p>
<p>What are you missing? Maybe nothing. Keep in mind that if SPY is trading at 195 today, the 195 call one year out will be lower cost than the 195 put because the theoretical price is reduced for the dividends over the next year. </p>
<p>Let me give you a real live example. 9/20/14 expiration, SPY trading at 195.36 (almost halfway between 195 and 196) 195 calls 4.31 196 calls 3.75 195 puts 5.30 196 puts 5.77</p>
<p>I have been pursuing the constant value xiv strategy. Obviously there have been a couple of significant down months such as January, but overall the strategy has been very profitable. Last month was particularly good–up almost 20%. The important thing will be to keep my nerve when the inevitable vix spike comes. </p>
<p>We aren’t going to trade the same. That is ok. I like to short premium because if you get the direction correctly or the stock doesn’t move you make money.</p>
<p>I did not always trade that way. Many traders do not trade that way. Many traders are long premium. Protects them from big short term moves. There is a possiblity of making many times the initial outlay. Also…many traders are long premium and they trade to cover the time decay and make extra money…</p>
<p>For example…</p>
<p>Somebody may be long a straddle… Let’s say the stock is 50 and he is long the 50 straddle for 2 bucks. Breakeven is 48 and 52… Everything between 48 and 52 is a loser at expiration. </p>
<p>Some traders may buy this straddle because they think the stock is going below 48 or above 52… Or they want to buy the stock as it dips or sell the stock if it rises…before expiration. Maybe a trader buys the straddle and puts a bid in the stock 48 and an offer at 52. Stock drops to 48… You have no risk anymore. Stock rallies above 48 after you buy it you are a winner. There are many variations of this trade…</p>
<p>The volatility is very low right now…doesn’t mean the volatilty can’t stay low. Sometimes I look at premium these days and I think I should be buying premium, not selling premium. :)</p>
<p>EMM1… If you like the trade in your first post… That is fine. </p>
<p>One of the interesting things about volatility is that it can stay well below the mean for a very long time, but when it spikes it generally reverts pretty quickly. So if we get a big spike, the right move in theory is to double down on xiv, even though the futures will probably be in backwardation at that point. Whether I will have the guts to do that is another question.</p>
<p>I know my nerves are not as good as they used to be so I try not to get into situations where I may have to rely on my nerves. :)</p>
<p>As far as the xiv trade goes… I want to buy xiv on spikes of vol. I dont know if I will. When I say spikes, I want the volatity in the 30s. 20 used to be the mean. The downside of waiting for a reversion to a mean is it can be a very long wait. </p>
<p>I remember that the market was a buy when div yields are 6 percent and a sell when div yields are 3 percent. A person could go broke doing that trade. :)</p>
<p>I don’t like to rely on my nerves but rather probabilities which can be somewhat of an issue as most are calculated using a gaussian distribution and we know there are tail risks. I’d rather hit a lot of singles than a home run every once in a while. Since I don’t know the order flow as Dstark would say, I have no idea which way the market is going just like pretty much everybody else so I set up my trades so that I will only lose if the market goes one way a lot and even then I have ways out of the positions.</p>