So I bought S&P 500 2500 puts

[gauss]

I hope that you have a stop loss order in place

AND

that you don't get whip-sawed out.

Did you say how much of your portfolio would be lost if this trade goes against you?

I have heard rules of thumb not to bet more than 2% of your capital on any one transaction.

Godspeed to you.

edit: oops - I thought he sold a naked option when I wrote my above comments. See below for my revised comments.
-gauss

 

[Fedup]

It’s so out of money, I don’t think it’s expensive.
As of this morning April 2019 voo 220 put has gone up .40c from $2.20. So it’s about 18% gain. I’m not sure sp2500 is the same as voo 220 or not.

 

[gauss]

Well since he is buying a put, at least his maximum loss will be bounded by the amount of the premium paid for the put option.

before FIREing, I played in the options market - then I progressed to the futures market (both long and short sides). During this time, I still had a steady W-2 paycheck coming in.

After FIRE'ing, I consciously decided that I had won the game and moved everything into balanced funds. To do otherwise risked destroying my perfectly good retirement.

Balanced funds - "always buying low and selling high so you don't have to worry about doing it!"

-gauss
"content with market average returns going forward"

 

[bobandsherry]

Maybe I missed it, but what was the month that you bought the put for?

 

[LOL!]

The stock market would have to drop

Duh! I realize that. It would have to drop by at least 13% to have this option in the money, but by when?

Sure, you could sell it before expiration, but that's two commissions for this trade. Sometimes when one wants to sell an option, there are no buyers, too, since the buyers know they will not make any money on their purchase.

And you would have to put some decent money into this option to make any money from this buy, then sell.

 

[aja8888]

Duh! I realize that. It would have to drop by at least 13% to have this option in the money, but by when?

Sure, you could sell it before expiration, but that's two commissions for this trade. Sometimes when one wants to sell an option, there are no buyers, too, since the buyers know they will not make any money on their purchase.

And you would have to put some decent money into this option to make any money from this buy, then sell.

Maybe he has a crystal ball?

 

[OldShooter]

@Old, You did time the market. ...

Yup. Although any equity sale or purchase is in a sense an attempt to time the market, this was a more egregious mistake. Not proud of it either, and I paid the price for violating the rule.

 

[kgtest]

I thought about unloading and timing, but I decided against. I feel like we still have runway and we will end the year higher than today.

Although apparently Jack Bogle is recommending a 10% equity reduction

https://humbledollar.com/2018/10/jack-of-hearts/

What about lightening up on stocks? “It all depends on your financial ability and emotional ability to withstand a market decline,” he says. “It’s probably wise to sell to the sleeping point.”

Jack suggests “you might do a five or 10 percentage point reduction” in your stock exposure. But he adds: “There’s no certainty in this, so you never want to do anything too big.”


SO Like anyone, still uncertainty when even Bogle says there is no certainty. Good Luck R_M

 

[Hamlet]

If one jumps 100% in/out of the market on a hunch, yes, it's foolish to do so, and success is not guaranteed to repeat as it is all about luck.

However, if one says, "the market has crashed so bad, I think the chance of it being higher 5 years from now is better than it going lower", then it's not a bad gamble, oui?

Conversely, when everything is going so great, and you think "the chance of good news keeps coming to propel the market up and up to unprecedented P/E despite rising interest rate is not that good, so maybe I should reduce my stock AA", it is not the same thing as saying the market is going to crash and I am going to all cash.

Kelly criterion makes a lot of sense, and does not contradict common sense. It is proven that if the chance of winning is 100%, then you bet all that you've got. If the chance is 50/50, then there is no point in betting. The chance of the market being up, not tomorrow but 5 years, 10 years from now is usually better than 50/50. Maybe it is 60/40 or something, I don't know, but usually better than 50/50. Hence people including myself buy stock.

But once in a while, I think it is worthwhile to sit back and think of the backdrop economic condition. Is that chance still 60/40, or something closer to 50/50? If so, perhaps I should cut back my stock AA. I think that's still common sense.

This is really my take as well. I've been investing for just under 25 years. I have spent most of that time fully invested in stocks. The exceptions to that were in 1999/2000 when the valuations were completely bonkers and the last couple of years. In 1999/2000, I ended up with a decent chunk sitting in cash because there was no way I could rationalize the price of most stocks to their expected cash flows. I found things to buy over the next 3 years as the market went down, and was fully invested through the financial crisis until about 3 years ago.

Over the last few years, I've felt that the market has gotten more than fully valued, so I have been dialing back my stock exposure as new highs are reached. I got down to about 70/30 in January. I'm about there now again because I re-balanced a little last week.

Some of this is my feeling that the market is overvalued, and some of it is simply a change in my risk tolerance do to aging, family status changes, and having more wealth to lose.

 

[NW-Bound]

I thought about unloading and timing, but I decided against. I feel like we still have runway and we will end the year higher than today.

Although apparently Jack Bogle is recommending a 10% equity reduction

https://humbledollar.com/2018/10/jack-of-hearts/

What about lightening up on stocks? “It all depends on your financial ability and emotional ability to withstand a market decline,” he says. “It’s probably wise to sell to the sleeping point.”

Jack suggests “you might do a five or 10 percentage point reduction” in your stock exposure. But he adds: “There’s no certainty in this, so you never want to do anything too big.”

SO Like anyone, still uncertainty when even Bogle says there is no certainty. Good Luck R_M

Thanks for sharing.

Good to know that Bogle also feels that the market is on the expensive side. I like the man more.

 

[kgtest]

as these thoughts continue to percolate in my brain, and I just felt obligated to purchase some.

I scoured the news, from the exchange floor to all the big talking heads, even Bogle himself. It seems everyone is subscribing to a lower return market in the future, however the FOMC sure isn't. Interest rate increases equates to volatility and it's already immediately hit us in the markets with treasuries rising and equities pulling back from a sell-off. Question is, how low will she go?

LIMBO!

 

[Hamlet]

I have in recent days given much thought on the market, the move up in interest rates and Cape 10. At it's recent 32.71 it is in the very significantly overvalued range. I have used this for a great many years as one of my gauges for over and under inflated markets. It is a very slow long term valuation gauge however, and the long period of time it has kept my stock allocation lower has had a significant opportunity cost, though my personal measure is to grow at 2-3 percent above inflation and not to be worried about market returns.

I have two concerns about using CAPE 10 as a gauge right now--

1. I think the financial crisis numbers may be artificially lowering the level of earnings beyond the normal cycle that CAPE 10 would account for. ie, since we've experienced a once in 30-40 year earnings event, it might not make sense to count that fully in CAPE 10 for valuation purposes

2. I wonder if the reduction of the corporate tax rate might be significant enough that old earnings that included much higher tax rates would no longer be representative going forward.

That said, I'm down to about 70% stocks when historically I've generally been 100% stocks. Ultimately, I think the two things I've mentioned just reduce the degree of market overvaluation that CAPE 10 shows. I still feel the market is overvalued somewhat, even with those adjustments.

 

[NW-Bound]

Here's what I have been trying to do, as I talked about it earlier.

Stocks are expensive, but bonds stink. Cash is, well, cash which has very little return. So, I find it hard to dial back from my usual stock AA which is around 70%.

But I do not think that there's a good chance of it going up like Jack's bean stalk. It most likely "fluctuates". So, I write out-of-the-money covered calls, and this is consistent with my belief. If the price really goes that high, well, I have to sell at a price so high I could not imagine, and I cannot complain about that. If the stock does not go that high, just as I thought, I pocket the option premium.

Rinse and repeat. The option premium I will collect this year will be in the 6-figure. That pays for my living expenses.

 

[LOL!]

Thanks for sharing.

Good to know that Bogle also feels that the market is on the expensive side. I like the man more.

I took his comment to be more of just stay the course. Shouldn't one ALWAYS sell equities to an allocation that lets one Sleep At Night? Since US stocks have been up more than 10% in 2018 and bonds are down, it makes perfect sense to rebalance out of US equities whether the market is on the cheap side or not.

 

[Fedup]

Here's what I have been trying to do, as I talked about it earlier.

Stocks are expensive, but bonds stink. Cash is, well, cash which has very little return. So, I find it hard to dial back from my usual stock AA which is around 70%.

But I do not think that there's a good chance of it going up like Jack's bean stalk. It most likely "fluctuates". So, I write out-of-the-money covered calls, and this is consistent with my belief. If the price really goes that high, well, I have to sell at a price so high I could not imagine, and I cannot complain about that. If the stock does not go that high, just as I thought, I pocket the option premium.

Rinse and repeat. The option premium I will collect this year will be in the 6-figure. That pays for my living expenses.

I never like to write covered calls, I don’t have the patient to wait. I like cash covered puts, premium is always guarantee to expire worthless, even if the ETF doesn’t go up. For example, I did some of that with vwo, vwo didn’t go up that much, but I made money. I made 30c out of $41 for one week. I didn’t have to buy the stock even.

 

[Running_Man]

Duh! I realize that. It would have to drop by at least 13% to have this option in the money, but by when?

Sure, you could sell it before expiration, but that's two commissions for this trade. Sometimes when one wants to sell an option, there are no buyers, too, since the buyers know they will not make any money on their purchase.

And you would have to put some decent money into this option to make any money from this buy, then sell.

Everything you state is true....

So far this year the market return on my portfolio has well exceeded my goal of exceeding inflation by 2-3 percent for the year. When I was younger before my finance days I was a resin chemist and spent days making acrylic resins, and the recent steady increase of the interest rates to me is like Vazo in an acrylic monomer being added with the temperature slowing rising. Eventually a reaction occurs and if it must be very closely monitored or the reaction gets out of hand. This market just reminds me of those times when I didn't quite have the reactions under control...

There have been 8 different times in history where the stock market has fallen 6 percent or more in the time frame of which I am concerned, and 5 of these have been in year 7 or 8 of the decade - 4 different years out of the 9 or 18 years available in the last 90 years, after a long bull move up. Typically these happen after the market begins a decline and investors react in fear to the decline. Since my thought is this is a major trend change I am putting out a feeler for a Taleb type of move, but this is more protective and conservative to my portfolio than any move to create wealth. Vix increased 6 percent today on a move of no real import after earlier increasing 20 percent in the day. Seems like the reaction is starting to bubble to me...

This is just a position of less than 1% of my portfolio to buy insurance on a major market decline. If a decline were to happen and begin occurring then two things will occur the S&P 500 will decline in price getting closer to my in the money call and the fear premium will increase dramatically increasing the value of my put. If on the other hand nothing happens or preferably the market continues to increase, then I basically will lose less than 1 percent of my portfolio and continue on my happy accretion ways and the puts will expire worthless. Worst case would be a steady slow decline into year end into the 2600 range, but even then I will have met the mark on what I am looking for in my portfolio. I am not too concerned if they expire worthless the cost to me is not that onerous relative to the potential gain should the reaction get out of hand.

Someone earlier posted about the Kelly Criterion and I do believe these puts are under priced relative to the potential for a major event. But a 5 percent chance to make 40 times your money is still 95 percent likely to lose all my money even though the odds are in my favor. But I feel I can invest in this since the risk is not very expensive.

 

[NW-Bound]

I never like to write covered calls, I don’t have the patient to wait.

One can buy call or put with expiry from a month to a year or longer out. I don't know why you have to wait with a call and do not with a put.

I like cash covered puts, premium is always guarantee to expire worthless, even if the ETF doesn’t go up. For example, I did some of that with vwo, vwo didn’t go up that much, but I made money. I made 30c out of $41 for one week. I didn’t have to buy the stock even.

In a market decline, the put premium goes up, and the strike price may get in-the-money, and you will have to buy the shares. Nothing is guaranteed.

Occasionally, my calls get exercised and I have to sell the shares. Depending on the stock, I may sell puts to buy it back at the same strike price as the call. Sometimes I get to buy the shares back. Other times, the shares keep climbing and I never get them back. And I miss out on a good strong stock.

 

[Fedup]

Calls usually mean I was assigned the shares, but in the past, I’ve noticed, I never hold on long enough for the calls to expire. It’s best that I sell the shares and start over with another put, probably with lower prices.

 

[NW-Bound]

Yes, in a bull market, calls tend to get assigned.

When you notice that your puts start getting assigned, then you know the tide has changed.

 

[bobandsherry]

Thanks for sharing.

Good to know that Bogle also feels that the market is on the expensive side. I like the man more.

He's interesting, he says lots of things and eventually hits a homer. But he's far from having a crystal ball. As an example, last October he said that the stock market was "fully valued", I think a year later we've seen there was still more giddy-up in that mare.

The Stock Market Is "Fully Valued," Says Vanguard's Jack Bogle

As John said back in 2009 "Beware of market forecasts, even by experts."

 

[Hamlet]

He's interesting, he says lots of things and eventually hits a homer. But he's far from having a crystal ball. As an example, last October he said that the stock market was "fully valued", I think a year later we've seen there was still more giddy-up in that mare.

The Stock Market Is "Fully Valued," Says Vanguard's Jack Bogle

As John said back in 2009 "Beware of market forecasts, even by experts."

Fully valued doesn’t mean that it can’t become overvalued for quite a long time. For example, if someone had said that the market was fully valued in the summer of 1997, they would have looked pretty foolish for a number of years, but six years later the market was right back at the same levels, and then another six years it was back there again. I’d say a call that the market was overvalued in 1997 would have been somewhat vindicated by the miniscule returns of the next decade or so, even though the next three years or so were very good for stocks.

Boggle isn’t thinking of returns over a couple of years. I think it is reasonably likely that if you measure the total return of the market over the ten years after his “Fully Valued” call, it will be in the bottom half of historical ten year returns for the market. Nine years from now we will be better able to judge his call.

 

[NW-Bound]

+1

Even so, market timing is tough. It is very easy to sell too early to miss out on a bull market. Then, having missed out, one is tempted to jump back in on a pull-back, which turns out to be a bear market, and has the pain compounded.

Or one is bullish and hangs on, then capitulates too late near a bottom, just to see the market turns around.

It is this kind of behavior that people are warned about, and it is often best to stay put.

So, I am not talking about wholesale buying or selling. I am looking to reduce my stock AA from 70%, and have been talking about it for a year. But being greedy, what I have done is to sell calls, trying to squeeze another $1 or $2 per share. And the calls were either not assigned, or if they were, I look for something else to buy. I need to stop that.

 

[ERD50]

.... So far this year the market return on my portfolio has well exceeded my goal of exceeding inflation by 2-3 percent for the year. ... .

This seems like a very strange goal for anyone who plans to hold equities as part of their portfolio.

Some years, equities will go negative. Other years, they rise far above inflation, and over the long run, they have historically exceeded inflation significantly. Measuring the long term return of the market in YTD segments is not helpful/meaningful.

-ERD50

 

[OldShooter]

This seems like a very strange goal for anyone who plans to hold equities as part of their portfolio.

Some years, equities will go negative. Other years, they rise far above inflation, and over the long run, they have historically exceeded inflation significantly. Measuring the long term return of the market in YTD segments is not helpful/meaningful.

I agree.

This really raises the whole concept of benchmarking, which probably rates a thread of its own.

I have been on investment committees where the investment manager has proposed benchmarking against the CPI, an idea which has always been quickly rejected. I like benchmarks that represent alternatives to the current portfolio. Ideally these would be mutual funds like VT, but for some reason the managers really hate that. So I compromise on benchmarks like the Russell 3000 or the ACWI All Cap.

I have no idea what action I would take if a manager exceeded the CPI or badly underran it. He/she has about as much control over the CPI as he/she does over annual rainfall.

I get it that performance vs the CPI is a useful comparison that might guide someone's spending in retirement, just as a rain gauge might help in deciding whether to water one's plants. Maybe that is how @Running_Man is looking at it. (I think he is a pretty smart guy.) But as a benchmark for measuring portfolio performance IMO it is A Bad Idea.

 

[gstillson]

Ok, OP is looking relatively lucky today.