Are your transaction costs really that low? From what I can see, the spread between the bid and the ask for the SPY options is over 2%. Add in some trading costs and I would expect a minimum of 3% for a non-professional.
Originally Posted by clifp
Excellent example Hamlet. I was going to use exactly the same analysis with Dec 80 puts on the S&P 500. Options are a negative sum game (although my transaction costs for options average about 1-2% so it isn't huge drag on performance and professionals costs are even lower)
I think there can be a case for the use of options for people in or near retirement, but primarily as a writer of options. Especially covered calls as way of reducing the volatility of portfolio performance. In this bear market I have taken advantage of the fear premium priced into put options, and written many puts on companies that I wanted to own (Wells Fargo, GE, Apple) at lower prices. Obviously in many cases I regretted writing these puts when the stock dropped well below the put price. There maybe even a time to be purchaser of options especially for tax reasons. Although I won't do so other than in stock specific condition or when the VIX index drops into the teens again.
If you are concerned about future drops in the market, I think the simplest and probably lowest cost solution, is to reduce your asset allocation to a level which you are comfortable.
Of course my caveat is that having all of your money in safe investments (T Bills, CDs) makes it very hard to save enough for retirement or sustain an existing one.