Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Old 07-19-2008, 07:42 PM   #81
Full time employment: Posting here.
 
Join Date: Jan 2008
Posts: 798
Quote:
Originally Posted by haha View Post
There are 100s of these available right now. Go to your broker's website and search under "structured investments" or "structured products". Then you need to develop the ability to evaluate them for yourself, because they are often quite complex.

But they are there, in many different forms.

Ha
Yes but those are too complicated. I have looked at them, there's always a catch. QuantumOnline has most of them.

I just want something simple like, I put in my money, they invest it in a mutual fund which hold a diversified portfolio. I get all of the upside but pay a 3% fee (which they use to hedge) and they protect me 100% on the downside. The plans you mentioned are never that simple. I think that type of plan could be constucted if the amount of money in the fund was large enough to employ option/futures cheap enough. (Maybe only 75% of the upside with no downside and only a 1% fee, I'd have to think what would be my bottom line. Something simple so I and the fund would both fully understand our risk/reward.)
__________________

__________________
RockOn is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 07-19-2008, 07:49 PM   #82
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 11,615
T A N S T A A F L
__________________

__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is offline   Reply With Quote
Old 07-19-2008, 08:09 PM   #83
Full time employment: Posting here.
 
Join Date: Jan 2008
Posts: 798
Quote:
Originally Posted by samclem View Post
T A N S T A A F L
Ok, what is that again? Something like quit trying to get lower returns with less risk, it isn't possible?
__________________
RockOn is offline   Reply With Quote
Old 07-19-2008, 08:23 PM   #84
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 11,615
If you hear someone saying that they want to benefit from all (or maybe 1/2) of the upside potential, but want to be protected from all of the downside potential, but they don't want to pay very much for this protection, and they want a product that's not very complicated --you might just remind them that "There Ain't No Such Thing As A Free Lunch. (A phrase popularized by the individual quoted in my sig block, BTW)"
__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is offline   Reply With Quote
Old 07-19-2008, 08:36 PM   #85
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,288
Quote:
Originally Posted by RockOn View Post
I think there are quite a few of us out there. I keep looking for ideas to get some exposure yet limit risk.
Quote:
Originally Posted by samclem View Post
T A N S T A A F L
So I'm thinking through a detailed reply, and samclem comes up with that 'succinct' thing that I'm so bad at!

Oh well, I'll go anyway

RockOn, I admire you for thinking through these concerns and searching for solutions. I've done some of it myself, and I seemed to learn that it all boils down to samclem's acronym.

Look at it this way - if you are trying to buy something that can limit risk, there is someone on the other side very willing to sell it to you - at a premium. It really is that simple - they are not going to take on your risk w/o charging you a price that they think is fair. Otherwise, they would find another place to invest their funds.

So, as HaHa says - there are products out there. I'd bet that if you spent years evaluating them you would discover one thing - the market has priced them fairly accurately.

I remember reading through (OK, I skimmed a great deal of it) McMillan's book on options shortly after I RE'd. There are an almost unlimited number of ways to structure options and the underlying investment. You can 'engineer' your risk profile for any shape you want. But it all comes down to one thing (and samclam said it).

You seem bright, so I think you already know that. So yes, you can limit risk - at a price. That price is not going to vary much, unless you get into some snake oil 'promise', and that price will vary to the high side.

For example, you can buy Puts to limit risk. Except for special circumstances (holding for long term cap gains vs short term, protecting an employee stock option position, or just wanting to hold during a volatile period that you *think* is over reaction), I think that just owning less equities is a better way to hedge risk than buying puts on those equities. No one charges a premium for that.

Full disclosure: I tend to sell puts for the premium - I am a seller of risk.

Fuller disclosure: It's only working out so-so .

But hey, the day you stop looking for a way to squeak out a little extra from life is probably the day you die a little. I try to keep my mind open to new ideas, but I also have a long history of seeing the ideas wither down to...

T A N S T A A F L T

-ERD50
__________________
ERD50 is offline   Reply With Quote
Old 07-19-2008, 08:38 PM   #86
Full time employment: Posting here.
 
Join Date: Jan 2008
Posts: 798
Quote:
Originally Posted by samclem View Post
If you hear someone saying that they want to benefit from all (or maybe 1/2) of the upside potential, but want to be protected from all of the downside potential, but they don't want to pay very much for this protection, and they want a product that's not very complicated --you might just remind them that "There Ain't No Such Thing As A Free Lunch. (A phrase popularized by the individual quoted in my sig block, BTW)"
I'm want to benefit from upside, be protected from downside, pay a reaasonable amount for the protection, and want it to be simple.

Maybe that' T S B S A T A A F P S F P (There should be such a thing as a fairly priced simple financial product)
__________________
RockOn is offline   Reply With Quote
Old 07-19-2008, 08:44 PM   #87
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,288
Quote:
Originally Posted by samclem View Post
(A phrase popularized by the individual quoted in my sig block, BTW)"
Wow, I didn't know that was Heinlein! I've heard it since forever.

I'm not much of a sci-fi fan myself (I might be if I actually took the time to read some more of it), but I do use the 'grok' reference from time to time. Just because it seems so... perfect.

Thanks for that little tid-bit. Off to wiki 'Mrs. Grundy'


-ERD50
__________________
ERD50 is offline   Reply With Quote
Old 07-19-2008, 08:47 PM   #88
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,288
Quote:
Originally Posted by RockOn View Post
I'm want to benefit from upside, be protected from downside, pay a reaasonable amount for the protection, and want it to be simple.

Maybe that' T S B S A T A A F P S F P (There should be such a thing as a fairly priced simple financial product)
Ok, fair enough. All you need to do is purchase some highly liquid, open market traded protection.

Puts on SPY is one of them.

I should add, 'IMO'. It's not like I'm some expert or anything.

-ERD50
__________________
ERD50 is offline   Reply With Quote
Old 07-19-2008, 08:48 PM   #89
Full time employment: Posting here.
 
Join Date: Jan 2008
Posts: 798
Quote:
Originally Posted by ERD50 View Post
So I'm thinking through a detailed reply, and samclem comes up with that 'succinct' thing that I'm so bad at!

Oh well, I'll go anyway

RockOn, I admire you for thinking through these concerns and searching for solutions. I've done some of it myself, and I seemed to learn that it all boils down to samclem's acronym.

Look at it this way - if you are trying to buy something that can limit risk, there is someone on the other side very willing to sell it to you - at a premium. It really is that simple - they are not going to take on your risk w/o charging you a price that they think is fair. Otherwise, they would find another place to invest their funds.

So, as HaHa says - there are products out there. I'd bet that if you spent years evaluating them you would discover one thing - the market has priced them fairly accurately.

I remember reading through (OK, I skimmed a great deal of it) McMillan's book on options shortly after I RE'd. There are an almost unlimited number of ways to structure options and the underlying investment. You can 'engineer' your risk profile for any shape you want. But it all comes down to one thing (and samclam said it).

You seem bright, so I think you already know that. So yes, you can limit risk - at a price. That price is not going to vary much, unless you get into some snake oil 'promise', and that price will vary to the high side.

For example, you can buy Puts to limit risk. Except for special circumstances (holding for long term cap gains vs short term, protecting an employee stock option position, or just wanting to hold during a volatile period that you *think* is over reaction), I think that just owning less equities is a better way to hedge risk than buying puts on those equities. No one charges a premium for that.

Full disclosure: I tend to sell puts for the premium - I am a seller of risk.

Fuller disclosure: It's only working out so-so .

But hey, the day you stop looking for a way to squeak out a little extra from life is probably the day you die a little. I try to keep my mind open to new ideas, but I also have a long history of seeing the ideas wither down to...

T A N S T A A F L T

-ERD50
I wish it wasn't so but I have to agree with you. I went through the option ideas many times, they just don't seem to be worth it. Maybe if a financial institution really wanted to create a large volume low cost product, a few financial wizards could come up some simple reasonably priced risk limitation products. It would be a huge market for them, kind of like how Vanguard took over parts of the low cost Mutual Fund arena. Maybe it's not economically possible or maybe financial companies are still too greedy to make it possible. I will keep waiting.
__________________
RockOn is offline   Reply With Quote
Old 07-19-2008, 08:59 PM   #90
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,288
Quote:
Originally Posted by ERD50 View Post
It really is that simple - they are not going to take on your risk w/o charging you a price that they think is fair. Otherwise, they would find another place to invest their funds.
OK, it's probably *really* bad form to quote yourself, but....

1) I've just enjoyed a fairly strong 750mL bottle of some of my 'hop monster' homebrew (mmmmm)....

2) The deeper meaning of what I just wrote sunk in ( see #1) ....

Otherwise, they would find another place to invest their funds.

So, if they think taking on your risk is a better investment than anything else out there, you gotta wonder - is your risk all that bad?

OK, I'll temper that statement a bit. I understand, you are trying to limit risk, not get the highest return possible. But I still think that helps keep it all in perspective.

Oh, and to answer the recent post - yes, I think SPY puts are that product. I honestly think that is as good as it gets. And it ain't that great, it's OK.

-ERD50
__________________
ERD50 is offline   Reply With Quote
Old 07-19-2008, 09:00 PM   #91
Full time employment: Posting here.
 
Join Date: Jan 2008
Posts: 798
Quote:
Originally Posted by ERD50 View Post
Ok, fair enough. All you need to do is purchase some highly liquid, open market traded protection.

Puts on SPY is one of them.

I should add, 'IMO'. It's not like I'm some expert or anything.

-ERD50
Buying straight puts on SPY is simple, it costs an arm and a leg though. Probably quite a bit more than the average SP % upside in an average year, depending on how tight the strike price is.

Think of it this way, If I said to you, I will give you all my money and all you have to do is pay me 5% (or whatever) a year guaranteed and give me my money back if I want it back (with maybe on few restrictions on the timing of returning principle). You can keep every single dime you make over my guaranteed amount. From what I read in many places, that should be a great deal for you and a very bad deal for me. Yet nobody is offering anything like that.

I might be wrong but I see products like that coming out in the future.
__________________
RockOn is offline   Reply With Quote
Old 07-19-2008, 09:05 PM   #92
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2003
Location: Kansas City
Posts: 7,409
Quote:
Originally Posted by RockOn View Post
I wish it wasn't so but I have to agree with you. I went through the option ideas many times, they just don't seem to be worth it. Maybe if a financial institution really wanted to create a large volume low cost product, a few financial wizards could come up some simple reasonably priced risk limitation products. It would be a huge market for them, kind of like how Vanguard took over parts of the low cost Mutual Fund arena. Maybe it's not economically possible or maybe financial companies are still too greedy to make it possible. I will keep waiting.
1929 Wellington, 1970 DRUM ROLL Please pssst - Wellesley, 1976 500Index, 1992 Balanced Index, etc, etc, etc.

They keep trying.

heh heh heh - You need to read a little Angus Madison on how long various Nations/stock markets have lasted over the last century. 'Rich as an Argentine and I heard before 1949 The Egyption market was 'the place to be'. . Inflation indexed Icelandic bonds?? .
__________________
unclemick is offline   Reply With Quote
Old 07-19-2008, 09:09 PM   #93
Full time employment: Posting here.
 
Join Date: Jan 2008
Posts: 798
Quote:
Originally Posted by unclemick View Post
1929 Wellington, 1970 DRUM ROLL Please pssst - Wellesley, 1976 500Index, 1992 Balanced Index, etc, etc, etc.

They keep trying.

heh heh heh - You need to read a little Angus Madison on how long various Nations/stock markets have lasted over the last century. 'Rich as an Argentine and I heard before 1949 The Egyption market was 'the place to be'. . Inflation indexed Icelandic bonds?? .
I might just have to put all of my money in pssst Wellesley, it has a strong following and that can't be all bad. When will I learn.
__________________
RockOn is offline   Reply With Quote
Old 07-19-2008, 09:13 PM   #94
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,288
Quote:
Originally Posted by RockOn View Post
Buying straight puts on SPY is simple, it costs an arm and a leg though. Probably quite a bit more than the average SP % upside in an average year, depending on how tight the strike price is.

Think of it this way, If I said to you, I will give you all my money and all you have to do is pay me 5% (or whatever) a year guaranteed and give me my money back if I want it back (with maybe on few restrictions on the timing of returning principle). You can keep every single dime you make over my guaranteed amount. From what I read in many places, that should be a great deal for you and a very bad deal for me. Yet nobody is offering anything like that.

I might be wrong but I see products like that coming out in the future.
I'll disagree. SPY puts don't cost an arm and a leg, they cost what they are 'worth'. It's a liquid, free market. If they truly cost an arm and a leg, I'd be making a killing by selling them, and I'm not.

Here's a little exercise for you, one that I inadvertently did many times in my quest - Use options to create a totally 'risk-free' investment. It is 100% do-able with options. What I think you will find, is that the best you can get from your 'risk-free' investment, is something close to what a 'risk-free' investment (treasuries) for that same time period would give you ( minus the transaction and spread costs).

What did samclem say? T A N S T A A F L T

-ERD50

PS - but if you find it, PM me!
__________________
ERD50 is offline   Reply With Quote
Old 07-19-2008, 09:21 PM   #95
Full time employment: Posting here.
 
Join Date: Jan 2008
Posts: 798
Quote:
Originally Posted by ERD50 View Post
I'll disagree. SPY puts don't cost an arm and a leg, they cost what they are 'worth'. It's a liquid, free market. If they truly cost an arm and a leg, I'd be making a killing by selling them, and I'm not.

Here's a little exercise for you, one that I inadvertently did many times in my quest - Use options to create a totally 'risk-free' investment. It is 100% do-able with options. What I think you will find, is that the best you can get from your 'risk-free' investment, is something close to what a 'risk-free' investment (treasuries) for that same time period would give you ( minus the transaction and spread costs).

What did samclem say? T A N S T A A F L T

-ERD50


PS - but if you find it, PM me!
Very good points.

Are you selling them naked? That is the best option idea out there I think, but it has it's black swan risks. It's the best idea mostly because options are overpriced IMO.

I agree with the risk-free investment return.
__________________
RockOn is offline   Reply With Quote
Old 07-19-2008, 09:30 PM   #96
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 11,615
Quote:
Originally Posted by RockOn View Post
Very good points.
How about my idea of I give you my money and you give me 5% a year guaranteed and keep the rest. You commit to do it until I want to quit, and I agree not to quit except every 10 years or so. What's wrong with that, tons of people think I would be the fool. Why can't I find that in the market?
You can do that right now, today. Get a 5 year CD and it will be insured by the government (not just ERD 50, me, or a private insurance company). They'll pay you 5% and you can stop obsessing over this.

See Discover Bank in Newcastle Delaware.

CD (Certificate of Deposit) Rates - Top 25 Highest CD Rates

There. Done. What else do you want--a chocolate sundae?
__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is offline   Reply With Quote
Old 07-19-2008, 09:36 PM   #97
Full time employment: Posting here.
 
Join Date: Jan 2008
Posts: 798
Quote:
Originally Posted by samclem View Post
You can do that right now, today. Get a 5 year CD and it will be insured by the government (not just ERD 50, me, or a private insurance company). They'll pay you 5% and you can stop obsessing over this.

See Discover Bank in Newcastle Delaware.

CD (Certificate of Deposit) Rates - Top 25 Highest CD Rates

There. Done. What else do you want--a chocolate sundae?
I figured that out and deleted the comment. You beat me to it. Ok 5% isn't enough without any inflation protection or any other upside. Sorry I need 6.5%, can you do that with a level of safety?

I want the rate guaranteed for as long as I want it also, CD's have reinvestment risk.
__________________
RockOn is offline   Reply With Quote
Old 07-19-2008, 09:39 PM   #98
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 11,615
RockOn--For the record, the part I quoted was in your post. You've subsequently edited out your stated request for a %5 guaranteed return (after provided a place where you could get it. What's the new request going to be--belly dancers on your birthday?
__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is offline   Reply With Quote
Old 07-19-2008, 09:40 PM   #99
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2004
Posts: 11,615
no mas
__________________
"Freedom begins when you tell Mrs. Grundy to go fly a kite." - R. Heinlein
samclem is offline   Reply With Quote
Old 07-19-2008, 09:42 PM   #100
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,288
Quote:
Originally Posted by RockOn View Post
Very good points.

Are you selling them naked? That is the best option idea out there I think, but it has it's black swan risks. It's the best idea mostly because options are overpriced IMO.

I agree with the risk-free investment return.

How about my idea of I give you my money and you give me 5% a year guaranteed and keep the rest. You commit to do it until I want to quit, and I agree not to quit except every 10 years or so. What's wrong with that, tons of people think I would be the fool. Why can't I find that in the market?
There is a general misunderstanding of 'naked puts'. Technically, yes I sell them 'naked', but I always have the cash to buy the stock at the strike price. I think it is more descriptive to call them 'cash covered' puts. This is in an IRA, and it is the only way you can do it in an IRA. Funny thing is, some institutions won't let you. If anyone should understand that a cash covered put is no more risky than a covered call, it *should* be a financial institution.

There is (slightly) less 'black swan' risk than holding the stocks. I generally sell the puts at a strike below the current stock price, and get a premium to boot. So my potential loss is a few % less than just holding the stock. But it ain't your grandma's money market.

I won't say that options are 'over-priced', they are priced at what the market will bear. Yes, there is a premium to pay to buy an option. But if it was 'over-priced', more people would jump in and sell them, and that would drive the price down... supply/demand.

In theory, you should be able to make good money selling options. Just like a casino makes good money selling the option to get rich. In practice, I think you need to be diversified across maybe a hundred underlyings , and I can only afford to be diversified across a dozen. So, I still get hit with the downside risk, and maybe not enough diversification to balance that out with the premiums.

But I try. 'Testosterone trading', I think unclemick calls it.

-ERD50
__________________

__________________
ERD50 is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Market Timing??? rpow53 FIRE and Money 43 06-22-2007 10:05 AM
timing markets NYCGuy FIRE and Money 20 12-17-2005 09:39 AM
Timing GIM mikew FIRE and Money 5 11-19-2005 08:32 PM

 

 
All times are GMT -6. The time now is 06:26 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.