So I bought S&P 500 2500 puts

[corn18]

The FED raising rates yesterday is going to go down as being oblivious to mounting issues I fear.

True dat. May we live in interesting times.

 

[ERD50]

This was the thread where the reasons behind why I thought a major market correction had a high likelihood, reason for starting the thread, was considered by many as irrelevant if they did not have the exact particulars of my trade, which I am not about to reveal....

OK, catching up - but that wasn't my thinking.

Stating your position about the risks in the market was fine, I appreciated it.

My only 'beef' was the people who jumped in at the first dip and were declaring your call 'genius' and such. And I think it's a bit disingenuous of you to do anything close to crowing about the trade, when you didn't give specifics. Your puts could have expired already, and we won't know if the drop was greater than what you paid. There simply is no way to rate your put purchase w/o that.

But I view that separate from your overall market outlook at the time.

-ERD50

 

[RAE]

The FED raising rates yesterday is going to go down as being oblivious to mounting issues I fear.

+1. I think both the rate hike yesterday and the continuation of the QE unwind will eventually be seen as bad decisions by the Fed. The so-called strong economy has been artificially propped up for a while now (due to the QE, tax cuts, etc).

 

[NW-Bound]

The problem with buying protective puts is that if the stock does not drop a lot below the strike price, you still lose the money on the stock, and you lose on the put premium too. In the best case, say the stock drops to 1/2, you still lose money, but lose less than if you did nothing.

To bet on a market decline, the best way would be to sell all of your stocks, or to buy more puts than the stocks you own, if you still own any. This means you are net short the market.

The guys who made out like bandits in the mortgage meltdown, as Michael Lewis described in his book The Big Short, bought CDS for mortgages that they did not even own.

 

[NYEXPAT]

IIRC, at the time he was 75-80% cash and the balance in SPY. He bought enough puts to cover his exposure and on that Sunday he was thinking of buying more. I do not use options but was also 80%+ cash and buy a reverse index to hedge my stock position. I do play with the hedge as I am a trader(but that is another issue). The key thing for some of us was to go to cash at least or buy the dips and sell the rallies using a index ETF

 

[Running_Man]

Sharpshooters all, aren't we.

On CNBC they had a money manager come on, talk about how all the worry is overdone and that in 10 years this will be a blip and of no concern. That people are selling with no understanding of the long term value they are giving up. He was then asked how his clients were impacted and stated "not even 1 in 100 are even giving this drop a thought, if they are they are only buying because of the value". I think that is a pretty accurate summation of what the average person in the market is thinking as they run their Firecalc Simulations and are sure of a great 10 year return.

 

[NW-Bound]

IIRC, at the time he was 75-80% cash and the balance in SPY. He bought enough puts to cover his exposure and on that Sunday he was thinking of buying more. I do not use options but was also 80%+ cash and buy a reverse index to hedge my stock position. I do play with the hedge as I am a trader(but that is another issue). The key thing for some of us was to go to cash at least or buy the dips and sell the rallies using a index ETF

I also prefer the use of reverse index to "cancel out" your long positions which you may not want to sell for different reasons.

Could have done that, but I did not. Oh well, not selling or buying much now.

Still waiting for a bounce, which has not come.

 

[Running_Man]

The problem with buying protective puts is that if the stock does not drop a lot below the strike price, you still lose the money on the stock, and you lose on the put premium too. In the best case, say the stock drops to 1/2, you still lose money, but lose less than if you did nothing.

To bet on a market decline, the best way would be to sell all of your stocks, or to buy more puts than the stocks you own, if you still own any. This means you are net short the market.

The guys who made out like bandits in the mortgage meltdown, as Michael Lewis described in his book The Big Short, bought CDS for mortgages that they did not even own.

As an example if you look at the price Clif mentioned the Jan 250 are selling about 4 times more than his purchase price. If he held 25% equities that would be 12% of the value of the all equities held that would be offset by a one percent holding of puts. As I stated previously I was concerned and remain concerned that inflation is a way out of the present situation and so need equities to mitigate that risk.

 

[FIRE'd@51]

As an example if you look at the price Clif mentioned the Jan 250 are selling about 4 times more than his purchase price. If he held 25% equities that would be 12% of the value of the all equities held that would be offset by a one percent holding of puts.

So the increase in value of the puts more than offset the decline of his equities (assuming he spent 1% of the value of his portfolio to buy the puts and was 25% in equities at the time he bought them). Very nice trade! I wonder if he sold the puts yesterday.

 

[ERD50]

Originally Posted by Running_Man
As an example if you look at the price Clif mentioned the Jan 250 are selling about 4 times more than his purchase price. If he held 25% equities that would be 12% of the value of the all equities held that would be offset by a one percent holding of puts.

So the increase in value of the puts more than offset the decline of his equities (assuming he spent 1% of the value of his portfolio to buy the puts and was 25% in equities at the time he bought them). Very nice trade! I wonder if he sold the puts yesterday.

Maybe it's not the case, but it kinda looks like Running_Man is diverting the topic from whether his trade was successful or not, and his reluctance to discuss the details, to clifp's trade, with details on clifp's trade?

-ERD50

 

[bobandsherry]

Maybe it's not the case, but it kinda looks like Running_Man is diverting the topic from whether his trade was successful or not, and his reluctance to discuss the details, to clifp's trade, with details on clifp's trade?

-ERD50

And he did take position that S&P would be 2500 or less, so give him cred for that. But whether he profited remains to be seen. No sure why his reluctance to at least share highlights of the trade, but it's his prerogative.

 

[ERD50]

And he did take position that S&P would be 2500 or less, so give him cred for that. But whether he profited remains to be seen. No sure why his reluctance to at least share highlights of the trade, but it's his prerogative.

Once again, I have no problem with his 'call'. He expressed himself well in the OP.

My issue is with other people claiming it was a great call, based on that initial dip, and now anyone claiming it was a great trade, when we don't know what the trade is/was.

It's pretty simple, some people seem to try to make it bigger than it is.

And I wouldn't be critical of OP if we didn't see a drop. If you re-read his OP, he was concerned that we could see a drop, and he bought insurance (puts) based on that chance of a drop. That's different than predicting it, and he was ready for them to expire worthless. From his post #41:

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.

-ERD50

 

[bobandsherry]

Once again, I have no problem with his 'call'. He expressed himself well in the OP.

My issue is with other people claiming it was a great call, based on that initial dip, and now anyone claiming it was a great trade, when we don't know what the trade is/was.

It's pretty simple, some people seem to try to make it bigger than it is.

And I wouldn't be critical of OP if we didn't see a drop. If you re-read his OP, he was concerned that we could see a drop, and he bought insurance (puts) based on that chance of a drop. That's different than predicting it, and he was ready for them to expire worthless. From his post #41:

-ERD50

Agree with ya on your points. The smallest drop, and still well out of the money, people were giving big kudo's. Didn't understand why and feel they didn't understand what the trade even was. And agree with ya, if RM felt that strongly on downside he would have come out ahead unloading his equities, so he was more taking a gamble, though perhaps calculated.

 

[Running_Man]

Maybe it's not the case, but it kinda looks like Running_Man is diverting the topic from whether his trade was successful or not, and his reluctance to discuss the details, to clifp's trade, with details on clifp's trade?

-ERD50

Agree with ya on your points. The smallest drop, and still well out of the money, people were giving big kudo's. Didn't understand why and feel they didn't understand what the trade even was. And agree with ya, if RM felt that strongly on downside he would have come out ahead unloading his equities, so he was more taking a gamble, though perhaps calculated.

I believe I have a far different take on the stock market and what place in a portfolio equities holds for me, than most on this board are viewing the market. 25% is the bottom I ever want to drop to because of the possibility of inflation getting out of hand, which I talked about in the first post.

The purchase of the put was because I did feel the market was very likely going to take a large drop, as a matter of fact I said I was more sure than I was in 2007, when I posted extensively on this forum and urged everyone to sell all their stocks, or at least their banking stocks and did sell all of my stocks, getting back in March 2009. I take there is more interest on how to optimize my trade and portfolio rather than the issues I forsee with the market itself.

I chose Clif's options because he had a position that he announced on the thread and could use it for comparison and just showed how that works with a portfolio of 25% stock. As a matter of fact with today's drop today the options are up in price to $11.00 about 8.33 times the original investment or providing an offset to cover a 33 percent decline in the S&P 500. If one thinks that selling outright provides better overall coverage for a portfolio I strongly disagree. 1) you have no inflation coverage in case an inflationary tack would suddenly become a problem. 2) You have no upside in times when the market goes in the direction opposite of expected, no matter how confident one is humility is earned by anyone with a long term investment. 3) If the market does drop very dramatically, nothing returns more money than far out of the money puts that are now in the money. It is one of the easiest investments to manage. I expected the market to fall by the end of the year to between 2100 and 2200, it might get there before Christmas at this rate.

 

[MichaelB]

25% is the bottom I ever want to drop to because of the possibility of inflation getting out of hand, which I talked about in the first post.

RM, just to clarify, do you mean 25% is the lowest equity allocation you would accept for your portfolio?

 

[haha]

It seems that a number of members fall prey to jealousy. Whether this sort of trading appeals or not, it is pretty clear to me at least that when Running Man acts he is very often correct. In my book this is impressive.

Ha

 

[Running_Man]

RM, just to clarify, do you mean 25% is the lowest equity allocation you would accept for your portfolio?

That is the lowest equity allocation I want to own, despite going to 0 in 2007, when I broke my self imposed minimum. Which is what I developed after reading and agreeing with Benjamin Graham that the best an investor should do is hold between 25% and 75 % stock depending on the level of the stock market. And for the most part when I am at 25% I feel the market is in general overvalued, I have been there for a while though after 2009 I was at 50 % for a while

 

[clifp]

I chose Clif's options because he had a position that he announced on the thread and could use it for comparison and just showed how that works with a portfolio of 25% stock. As a matter of fact with today's drop today the options are up in price to $11.00 about 8.33 times the original investment or providing an offset to cover a 33 percent decline in the S&P 500. If one thinks that selling outright provides better overall coverage for a portfolio I strongly disagree. 1) you have no inflation coverage in case an inflationary tack would suddenly become a problem. 2) You have no upside in times when the market goes in the direction opposite of expected, no matter how confident one is humility is earned by anyone with a long term investment. 3) If the market does drop very dramatically, nothing returns more money than far out of the money puts that are now in the money. It is one of the easiest investments to manage. I expected the market to fall by the end of the year to between 2100 and 2200, it might get there before Christmas at this rate.

ERD I'm not sure why you care so much about the particular trades of Running_Man. All I know is he was upfront about what he expected and his timing seems pretty impressive. He wasn't the sole reason I did what I did, but it was a significant factor in me doing it now and not procrastinating. So if Running_Man is ever in Honolulu, dinner at Alan Wongs is on me!

My Jan 250 SPY Put that I bought for 1.51 last traded at $12.08
The March 260 SPY Put at bought at 8.43 are now 22.08

In the interest of full disclosure. My general philosophy is to sell options when the VIX is over 20 and buy them when is under 20 and preferably <15. (The Vix has been so low the last few years, I've pretty much stopped trading options). So I also wrote covered calls on few stocks, rather than buy puts. It doesn't provide a lot of protection but it does help. I also did one bullish trade. I sold Google 900 Jan 2020 puts at $65 they've lost money and they are now $77. I observed that during 2008, long-term put options on fundamentally sound stocks (like Apple in 2008) generated a hefty premium. I'm happy to own Google at $900 which is 34% off of its high.

But this is all for the number crunchers like ERD.

The important big picture question is how well did this strategy protect my portfolio? The answer is pretty darn well. Back in 2008 Schwab+Vanguard, was 95% of my assets (excluding house). Today its about 60%.

My Schwab portfolio was ~95% equities back in the fall because I had a lot of defensive dividends stock. The beta of my portfolio was about .9. Meaning if the S&P 500 was up 1% in a day, my portfolio would typically gain .9%, and drop .9% when the S&P lost 1%. Between selling 12% of my stocks and putting it in cash and the purchase of puts, today when the S&P was down 2%, my portfolio was down, .67%, and that been true the last few weeks, my portfolio has dropped less than 1/2 of the S&P.

Now you could achieve the same low beta with a 35-40% stocks and the rest in bonds. It is also important to note that ~1/2 downside protection goes away when the Jan puts expire and the rest in March when those puts expire. So if the market stabilizes at this level and then drops in April, I won't have achieved much.

On the other hand, if we have the President Mike Pence rally in Jan and we are at SPY 300 by March I'll still have 80% of my money in the market and won't be too upset about losing the 1% I paid for a partial portfolio insurance.

It is also worth noting that because of the increase in VIX, doing the same trades at this level is more expensive. The roughly equivalent puts that I paid $1.50 are now $2.50 and since they only provide of 50 days protection you'd have to buy them 7 times a year, that adds up. So even though I think we have a least another 10% to go, I'm not buying any more puts.

 

[FIRE'd@51]

Clifp,

Have you looked at turning your long put position into a vertical by selling a lower strike SPY put at the same expiration? With SPY at 241, you have about 3 points of time premium in your 250 puts. Assuming your 250 puts expire Jan 18, you could sell the Jan 18, 230 puts for about 3.60 and still have another 11 points (110 SPX points) of downside protection while pocketing the time premium. It would be a shame to lose all your profits if the S&P 500 rallies above 2500 by Jan 18, not an unlikely event.

 

[clifp]

Clifp,

Have you looked at turning your long put position into a vertical by selling a lower strike SPY put at the same expiration? With SPY at 241, you have about 3 points of time premium in your 250 puts. Assuming your 250 puts expire Jan 18, you could sell the Jan 18, 230 puts for about 3.60 and still have another 11 points (110 SPX points) of downside protection while pocketing the time premium. It would be a shame to lose all your profits if the S&P 500 rallies above 2500 by Jan 18, not an unlikely event.

That's an interesting idea, I'll look into. I think between the government shutdown and the end of year tax loss selling (something we haven't seen much for last few years), I'm not worried about a big rally next week.

However, the beginning of the year is often a good time for stocks, so locking in some profits is a worthwhile idea.

 

[Dawg52]

That is the lowest equity allocation I want to own, despite going to 0 in 2007, when I broke my self imposed minimum. Which is what I developed after reading and agreeing with Benjamin Graham that the best an investor should do is hold between 25% and 75 % stock depending on the level of the stock market. And for the most part when I am at 25% I feel the market is in general overvalued, I have been there for a while though after 2009 I was at 50 % for a while

Did you forget about this? Hope I don't come across as another jealous forum member. Congrats on your purchase.

http://www.early-retirement.org/forums/f44/sold-all-my-stocks-90933.html

 

[Running_Man]

Did you forget about this? Hope I don't come across as another jealous forum member. Congrats on your purchase.

http://www.early-retirement.org/forums/f44/sold-all-my-stocks-90933.html

No and I am glad you brought that up, most of my comments from that thread extend to this thread, however the need for stocks to offset inflationary uptrend led me to reinstitute the 25% as stated in the thread as I quote below. At the start of that thread I stated if the market made a new high I would immediately get back into stocks at 25%, which would have been at the time a lost 3-4 percent opportunity cost. Instead of that particular move I bought back at 2600 the decline I expected I was premature for the US market. Most of the same issues still apply today however.

OK as of 11 AM this morning with the S&P500 at around 2600 I am back to 25% stocks as I took the simple route for now of buying the index and came back up to my minimum holding of stocks as the market was easily able to handle the bad news. While stocks do not appear cheap and debt is an issue, there is also possible increases in inflation that need to be met and that is through stock ownership, so for now the big decline I felt could be imminent I will take that risk on. Overall the market is about 100 S&P points lower than when I got out, but that is really not a factor in this decision. And I am not loading up on stocks, merely going back to what I previously had been willing to call my minimum.

As an example of how wasteful companies are of their resources, Micron Technology in 2015 lost 276 million dollars, in 2016 & 2017 Micron made a total of 19 Billion in 2018 they announced a stock buyback of 18.5 Billion and began spending billions with the stock at a all time high over 50 and continued to buy into 60. Now Micron, a capital intensive company, has endured multiple years of multi billion dollar losses so this is an incredibly ignorant company directive that benefitted only employees seeking to sell at 50-60. And since this Micron has fallen 40-50% depending on the entry point. Like GE when you spend all your resources buying a single stock you cannot do anything when the stock market turns against you, a real recession will lay waste to GE, Micron Technology, pension funds, anybody that needs money but only have equity to sell at vastly reduced prices as the debt kitty is full up and getting more expensive. Fortunately for some companies the potential supply of equity is unlimited, only the price paid is a limiting factor of issuance, though this is not true for dividends.

Think about right now how many pension managers who are responsible for the retirements of millions of Americans are spending Christmas in absolute terror that this market will continue to fall and the results on the funding level reports for their pensions. Pensions such as the one I viewed in Illinois that were at 41 percent probably will be reporting 35-36 percent funding, and these managers have no choice other than to sell stocks in 2019 to pay for the pensions, no matter what their long term view of the market may be. This is real, the impact of what this will mean to individuals who have entrusted these managers to provide for them how quickly their retirement funding can dry up or be cut 40-50%. While Warren Buffet, who continues to poo-poo naysayers on the stock market holds record high amounts of cash ready to utilize during a fall, for companies Warren views as holding a good future at a time in the future when desperate companies will be selling at massive discounts.

This is why I cannot believe the Fed raised interest rates, it seems they are oblivious to this issue. Meanwhile the average investor is extremely comfortable with 60-75% stocks, sees this as a golden opportunity, the math of that evades me, but the math of retirement calculators based on past performance of passive funds leads millions to the conclusion holding more and more stock as the absolute best investment of all. Yet in 1932 the stock market was 50% of the level 40 years previous. Despite the fact this actually occurred in US history during a time of historic explosive growth in technology, (cars, phones, electricity, radios) I would gather most people think this to be impossible to repeat.

More thorough discussion of my thoughts on pension effects on forced stock market selling I posted here http://www.early-retirement.org/forums/f44/tariff-relief-rally-95035-5.html#post2153929

But I can be wrong or the FED could make an impulsive move to defend the stock market, so that is why I am now committed to holding at least 25% stocks. And more than anyone while I try to plan for the worst case, I hope sincerely my conclusions are wrong.

 

[gstillson]

Yet in 1932 the stock market was 50% of the level 40 years previous. Despite the fact this actually occurred in US history during a time of historic explosive growth in technology, (cars, phones, electricity, radios) I would gather most people think this to be impossible to repeat.

I think we are on the edge of explosive growth now with AI, robotics, space travel.

To say that we cannot have another technology revolution is being a bit pessimistic.

 

[ERD50]

ERD I'm not sure why you care so much about the particular trades of Running_Man. All I know is he was upfront about what he expected and his timing seems pretty impressive. ....

Please re-read my earlier posts, I really don't know how much clearer I can be.

From my post #187 (the quoted parts are missing here), The underline emphasis is in the original...

http://www.early-retirement.org/forums/f44/so-i-bought-s-and-p-500-2500-puts-94093.html#post2160615

Once again, I have no problem with his 'call'. He expressed himself well in the OP.

My issue is with other people claiming it was a great call, based on that initial dip, and now anyone claiming it was a great trade, when we don't know what the trade is/was.

It's pretty simple, some people seem to try to make it bigger than it is.

And I wouldn't be critical of OP if we didn't see a drop. If you re-read his OP, he was concerned that we could see a drop, and he bought insurance (puts) based on that chance of a drop. That's different than predicting it, and he was ready for them to expire worthless. From his post #41:

-ERD50

 

[Running_Man]

I think we are on the edge of explosive growth now with AI, robotics, space travel.

To say that we cannot have another technology revolution is being a bit pessimistic.

I did not say we would not have another technology revolution? I was showing in the midst of one of the biggest technology revolutions the market average was reduced 50% over 40 years.