Options Strategies to Protect Portfolio

[yabking]

Longtime member, rare poster.

We are 4.5 years away from ER.

We have a fairly balanced AA between stocks, bonds, cash, and real estate, and are on a glide path that all models I have run and even a financial advisor say will allow us a comfortable retirement.

Without getting into the politics or specifics of it, I believe that the next four years may be extremely volatile for securities, and I am trying to figure out how to protect the securities portion of our assets.

I do not want to sell because that would lead to a very significant tax hit.

Basically, I am looking for advice on an options strategy that would protect our portfolio between a 15% and a 50% decline in value. I also recognize that this insurance will not be cost free.

I have very little experience in options trading, but am willing to try it out a bit over the next couple months to get a feel for what it is like.

Many thanks for any ideas.

 

[Fermion]

Not quite enough information in your post.

If you can give me the exact date of the market decline and how much (% is ok) it will decline, I can devise a very good option strategy to protect your accounts.

 

[Senator]

You can buy a put option. That gives you the right to sell a security at a specified price at a specified date (or before) in the future. If you have mixed equities, an S&P put might cover your risk. Otherwise, you have to buy a put on each security.

You can sell a call option. That give the buyers the right to buy, but does not give you the right to sell, at a specified date in the future. It may not protect you as much, but would bring in income in the meantime. That income may offset any downsides of your security.

With you buy calls and puts, you are paying for time and volatility - and commissions. Generally a poor way to make money. Selling calls or puts, and letting the options expire, lets you make money on time and saves commissions.

No worries though, this guy says to go all in.
http://www.cnbc.com/2016/11/15/value-investor-bill-miller-says-35-year-bond-bull-market-is-over-stocks-should-benefit.html

 

[pb4uski]

Each time I have looked at options strategies in the past, I concluded that it was fairly expensive insurance. Since this is long term money and you just expect some volatility for the next four years or so, you may be best off to just ride it out. Those who stayed the course during the great recession profited handsomely... as an example.

 

[NW-Bound]

Buying puts is expensive, as noted above, so I do not use it. I do sell out-of-the-money puts and calls. It is not the same as insurance for my stocks, but rather an attempt to improve the return a bit over not doing anything.

This year, the above activity got me an additional 1% of portfolio return. I could have gotten more, but then would be taking more risk and also more time to watch it. I do not do this on all stocks, just the ones that are the most volatile like biotechs and EMs.

PS. If the market goes up like crazy, I may trail it because of my covered calls. If the market is flat, I beat it. If the market goes down, I still lose money, but may lose less.

PPS. The 1% may not seem like much, but is still a big percentage of a typical 3 to 4% WR. And doing this gives me something to do, rather than jumping in/out of the market in a wholesale manner. That is just too risky.

 

[medved]

I like the idea of selling covered calls, as a way to juice returns a bit and for stocks that I want to sell anyway, for re-balancing or other purposes (I either get to sell the stock that I want to sell anyway, or I get some money for "free" and then I can still sell the stock that I want to sell). But I don't think it really offers the type of insurance that the OP is looking for.

I have thought about this "insurance" issue too, recently, since I share the OP's concerns. But I have not come up with any efficient way to deal with it. I think I may just sell some stocks and take the capital gains hit (or in my case, first use NOLs). This is just accelerating a bit my multi-year risk reduction strategy a big. Event that is not an easy decision, especially because capital gains tax rates may go down. But everything is a trade off...

 

[yabking]

pb4uski:

"Each time I have looked at options strategies in the past, I concluded that it was fairly expensive insurance. Since this is long term money and you just expect some volatility for the next four years or so, you may be best off to just ride it out. Those who stayed the course during the great recession profited handsomely... as an example."

That is what scares me, actually. When you recall what happened during the Great Recession, the markets basically looked at concerted domestic and international financial and fiscal actions and took a deep sigh of relief, calmed by the certainty of rational government action. I honestly am not seeing that happen going forward.

[Mod Edit]

Years ago I used to practice international trade law, and know what a trade war on multiple fronts would do to our economy, as well as other economies around the world which provide markets for our goods and services.

Thanks, though, for the thoughtful reply.

 

[DrRoy]

Each time I have looked at options strategies in the past, I concluded that it was fairly expensive insurance. Since this is long term money and you just expect some volatility for the next four years or so, you may be best off to just ride it out. Those who stayed the course during the great recession profited handsomely... as an example.

I also find that protection with puts would be expensive insurance. If you are that worried, maybe you would want to put some $ in an annuity, although that is expensive too.

 

[Senator]

Years ago I used to practice international trade law, and know what a trade war on multiple fronts would do to our economy, as well as other economies around the world which provide markets for our goods and services.

I am curious as to what trade wars have happened in recent times, and what their effect was. I know there is speculation as to what happened in the depression, but I see no correlation to today's markets.

Perhaps a Trade war, or the possibility of a trade war, could actually be good for the markets? Maybe better for international stocks? Or USA Stocks?

As long as my portfolio goes up, I do not care what kind of war is waging...