ETF Options over ETFs?

[eatingmywords]

Hi all. I recently read 'buy and hedge' and am wondering if anyone has successfully implemented their strategy?

The premise is to purchase ETF options rather than the ETFs and maintain a leverage ratio as close to 1.0 as possible. The idea is that instead of 100% of your portfolio committed to the market, you purchase the options, which given the 100x leverage amounts to about 10-15% of your capital committed. The other 80% or so is in cash or other conservative assets (bonds, treasuries, etc).

I have a pretty high profitability rate selling options, but lower success rate buying options (mostly due to short term bets), so there's a little hesitancy. I'm an engineer rather than a finance person, so I don't have the luxury of experimenting with other people's money =) Any thoughts on using an asset allocation with long term options v. traditional vanguard etfs?

Book Review: 'Buy And Hedge: The 5 Iron Rules For Investing Over The Long Term' - Seeking Alpha

[clifp]

There are a couple of options threads that are pretty active here and here. I suggest reading them.

IMO, based both on some academic research, as well the same experience you have making money selling option writing options is more profitable than buying. I'd also say that generally speaking options on broad market ETFs (e.g. SPY) are especially overpriced. Therefore I'd be inclined to do the exact opposite of what they authors are suggesting. Either keep the cash and write puts, a strategy the Utrecht has profitably pursing for a long time, and me periodically. Or buy and hold ETFs, with occasionally writing covered calls, during times of high volatility.

[Nords]

I don't know how well that ETF-option strategy works in the real world, but I hope it earns enough to afford the tax-return preparation bills.

Quote:

Originally Posted by clifp Or buy and hold ETFs, with occasionally writing covered calls, during times of high volatility.

This has worked very well for us. We've only been exercised once in over a dozen transactions during the last couple years, it's part of a rebalancing strategy, and that one time happened because I got greedy.

[utrecht]

I will admit that my taxes are a nightmare. I don't worry about tax prep bills because I do it myself, but it takes me quite a while every year.

I haven't read that book, but I can safely say that I would never consider any strategy where my entire portfolio is options related. In my book having 80% cash and 20% options hedging strategies IS having an entire portfolio of options related activity.

My portfolio is split up 85% "normal" and 15% options trading. My "normal" portfolio consists of index funds, bond funds, REITS, etc just like just about everyone here.