Deep out of Money Puts and LEAP Puts- What am I overlooking?

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MetaPhysician
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Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by MetaPhysician » Sun Jun 09, 2019 10:39 am

Bogleheads,

I invite constructive critiques and welcome honest feedback about buying deep out of the money puts and LEAPS puts.

Why am I writing this?
- To see if I am overlooking anything

What are the specifics?
- Very small part of portfolio (1-5%), commonly traded funds
- Similar to a part of Nassim Taleb's portfolio but different because the rest of my portfolio I am invested in a reasonable equity/bond indexed portfolio (vs his which is ultra safe instruments like long term treasury bonds etc)
- Already max out retirement accounts yearly + save extra for 529. No debt. Strong work + personal insurance. Stable career.

What do I already know about the downsides?
- will likely expire worthless
- may take a significant time to purchase each few months/years
- can be a hassle tax-wise
- the complexity exceeds my knowledge base
- behaviorally not intuitive nor comfortable losing money every month/year
- I am viewing this as as a separate part of my overall portfolio which is not recommended

Why I am interested in this?
- In my mind it is a lottery ticket that may pay off if the market moves a certain way.
- It has large upside potential with small known downside (ie I can't lose more than I put in)
- I am not using it as 'insurance' meaning it is not meant to limit the downside on my larger portfolio

Questions for you:
1. What are the downsides of this that I am overlooking?

2. If I were to do it, how could I do it in a cost conscious way and also automate it? For example, is there a website or broker you'd recommend?

3. What should I have 'checked off' before going down this road (ie no credit card debt, have adequate insurance etc)?

Thanks

epeterson1970
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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by epeterson1970 » Sun Jun 09, 2019 10:50 am

Buying puts is a strategy that has a low probability of profit. Why do you want to use this strategy?

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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by livesoft » Sun Jun 09, 2019 10:54 am

I really like the presentation of Q & A. I cannot add to the analysis, but from my experience using options in the distance past I can write that no one will sell you an option that they think will lose them money.
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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by JoMoney » Sun Jun 09, 2019 11:24 am

MetaPhysician wrote:
Sun Jun 09, 2019 10:39 am
...
What do I already know about the downsides?
...
- the complexity exceeds my knowledge base
That should be a red flag right there.
MetaPhysician wrote:
Sun Jun 09, 2019 10:39 am
...
...
- I am viewing this as as a separate part of my overall portfolio which is not recommended
...
- In my mind it is a lottery ticket that may pay off if the market moves a certain way.
...
There's nothing inherently wrong with a bucket approach. Depending on your goals and preferences it may be the better way to go about it. Viewing everything as "one big portfolio" makes a compelling story to rationalize selling people things that they might otherwise view as to risky on their own, or to convince people to move more of their assets to a particular money manager, but it's not always the right way of looking at things. Understanding that there are behavioral aspects to finance sometimes means recognizing and working within those. If you were literally buying lottery tickets (and it's not a stretch to say you are) I would encourage you to NOT confuse it with your investment portfolio, and certainly don't "rebalance" your investment money into feeding your gambling habit.
Even if you were considering this as part of your "overall portfolio" the way MPT advocates do, would you seriously be doing the math calculating the standard deviation, volatility, etc.. ? What would you even compare this portfolio relative to, is the "volatility" really a higher order concern to you?

If you want to gamble, I'm not going to tell you not to, but I will encourage you to disassociate it from your savings and investment and keep it contained to a small part of your entertainment budget.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by 2commaBH » Sun Jun 09, 2019 11:33 am

MetaPhysician wrote:
Sun Jun 09, 2019 10:39 am
...
What do I already know about the downsides?
...

If you want to gamble, I'm not going to tell you not to, but I will encourage you to disassociate it from your savings and investment and keep it contained to a small part of your entertainment budget.
+1, and consider whether you might get more entertainment gambling on something more enjoyable - your team winning the game, etc - than a worldwide financial meltdown. :P

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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by scout1 » Sun Jun 09, 2019 11:37 am

I think you’re missing the fact that it’s much cheaper and easier to just reduce your equity exposure than going long equities and buying otm puts on them.

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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by JBTX » Sun Jun 09, 2019 11:43 am

Seems like you fundamentally understand the issues.


At a basic level if you're putting in 1-5% every year, you are losing 1-5% every year off of your portfolio return, which greatly diminishes your returns, unless of course the market tanks then your losses will be less.

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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by Godot » Sun Jun 09, 2019 11:45 am

epeterson1970 wrote:
Sun Jun 09, 2019 10:50 am
Buying puts is a strategy that has a low probability of profit. Why do you want to use this strategy?
OP said he sees it as a "lottery ticket," not a strategy.
Estragon: I can't go on like this. | Vladimir: That's what you think. | ― Samuel Beckett, Waiting for Godot

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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by jbranx » Sun Jun 09, 2019 11:57 am

One way to think about this is that you are "buying' insurance at a pretty steep price. Every time I have ever done the calculations on this strategy and similar ones, I have concluded that they are not a good deal. And every time I think I am Taleb, I decide I'm rather mimic his exercise in the gym rather than his exercising in the options market! If the market makes you uncomfortable, just change your allocations per your IPS.

Fyi, here's his physical exercise recommendations to be anti-fragile: https://medium.com/@nntaleb/strength-tr ... a2c074569d

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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by MetaPhysician » Sun Jun 09, 2019 12:18 pm

Thank you for the balanced and thoughtful comments.
epeterson1970 wrote:
Sun Jun 09, 2019 10:50 am
Buying puts is a strategy that has a low probability of profit. Why do you want to use this strategy?
Yes, I acknowledge it has a very low probability. I would expect near 0%. However, if something does 'pay off' then I feel that I may the upside would be great.
JBTX wrote:
Sun Jun 09, 2019 11:43 am
At a basic level if you're putting in 1-5% every year, you are losing 1-5% every year off of your portfolio return, which greatly diminishes your returns, unless of course the market tanks then your losses will be less.
Thanks. I appreciate framing it this way. Makes me want to lean more towards the 1% side of things. And at that point perhaps the 'pay off' wouldn't be that large anyway. Meaning, if I did something which I did have more control over - ie spent less on going out to eat, got paid more at work, saved on cable bill etc- then it may pay off in the long run. I might be leaning towards an unnecessarily complex approach. I'll have to think about that more.
scout1 wrote:
Sun Jun 09, 2019 11:37 am
I think you’re missing the fact that it’s much cheaper and easier to just reduce your equity exposure than going long equities and buying otm puts on them.
To play devil's advocate - increasing my bond exposure doesn't provide the same upside as this method, correct? I'm open to hear other perspectives. Perhaps I'm framing it incorrectly.
JoMoney wrote:
Sun Jun 09, 2019 11:24 am
If you want to gamble, I'm not going to tell you not to, but I will encourage you to disassociate it from your savings and investment and keep it contained to a small part of your entertainment budget.
Well said. I do consider this as part of my entertainment. And it is also in my 'insurance' bucket. Personal, auto, home, disability, malpractice etc. I don't 'expect' those to make me money. But if *it* hits the fan then I won't be wiped out.
livesoft wrote:
Sun Jun 09, 2019 10:54 am
but from my experience using options in the distance past I can write that no one will sell you an option that they think will lose them money.
Well said. Those guys/gals know much more about it than I do. I'll keep this in mind. I'm hoping that I can stay solvent longer than they can. I imagine they have a boss to report to whereas my primary and secondary sources of income allow me to ride out the losses much longer. This could be wishful thinking, though. I have no evidence to support this thought.
JoMoney wrote:
Sun Jun 09, 2019 11:24 am
That should be a red flag right there.
Thanks for calling me out on that one. However, respectfully, I don't fully agree with the notion of 'invest only what you understand.' I interpret the sentiment of that as 'don't invest in something without knowing the risks'.

For example, every day we urinate. Now, does everyone know how the kidneys work? Do we know how our vessels optimize the delivery of blood to the kidneys? How about the balance between sodium, potassium, and bicarbonate? Not all of us 'understand' that. But that is ok! Why? Because we all understand the risks. Meaning what we do understand is how all of this could be wrecked. We all know we must drink water throughout the day and not to drink pure salt or ingest poisons.

So what I am looking for is if there are any risks I am not recognizing. Going with the example above - one may *not* know that she would have to drink additional fluids when exercising or being out on a hot summer day.

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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by David Jay » Sun Jun 09, 2019 5:20 pm

MetaPhysician wrote:
Sun Jun 09, 2019 12:18 pm
JBTX wrote:
Sun Jun 09, 2019 11:43 am
At a basic level if you're putting in 1-5% every year, you are losing 1-5% every year off of your portfolio return, which greatly diminishes your returns, unless of course the market tanks then your losses will be less.
Thanks. I appreciate framing it this way. Makes me want to lean more towards the 1% side of things. And at that point perhaps the 'pay off' wouldn't be that large anyway. Meaning, if I did something which I did have more control over - ie spent less on going out to eat, got paid more at work, saved on cable bill etc- then it may pay off in the long run. I might be leaning towards an unnecessarily complex approach. I'll have to think about that more.
This is a thoughtful response. Keep thinking.
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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by stlutz » Sun Jun 09, 2019 5:42 pm

MetaPhysician wrote:
Sun Jun 09, 2019 10:39 am

Why I am interested in this?
- In my mind it is a lottery ticket that may pay off if the market moves a certain way.
What you're proposing isn't a lottery ticket. If you are otherwise long the stock market, then buying a put option on the same investment is a form of insurance to limit your potential losses.

As with a prior poster, I've also tried to waterboard the various scenarios and always ended up with the result that just owning more bonds is a cheaper/more effective way to limit my downside exposure.

If you want a lottery ticket, then buy something that is completely unrelated to what you are investing in. Maybe deep out of the money puts on hog futures? Or if you want a lottery ticket there is always the real thing. :D

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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by SovereignInvestor » Sun Jun 09, 2019 5:45 pm

The expected value of index options generally matches that of the historical past so the idea OP would be wasting money on lotto ticket is off base.

The expected return of puts converges to risk free rate so it is no different than selling equity and putting in treasurys.

In fact when the VIX is low like under 15 buying long term puts out of money can have positive expected returns in excess of risk free rate.

Personally I'd keep it simple and reduce equities to hedge rather than use puts but many are overstating the harm in puts.

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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by nisiprius » Sun Jun 09, 2019 8:45 pm

1) I think you're overlooking the likelihood of being in a situation of information asymmetry, i.e. you are betting against someone who likely has much more information about the situation than you do.

2) If the only quantitative judgement you can make is that a) you can easily afford the maximum possible loss, and b) there is a possibility of a big payoff--it is "a lottery ticket that may pay off if the market moves a certain way"--then there is no obvious difference between this and an actual lottery ticket. And the actual lottery ticket is free from many of the downsides you note.

You really ought to have a quantitative model of what you believe to be the range of outcomes and the probability of each outcome. Without that, it's not clear why this proposition is any better than betting on a long-shot horse at a racetrack, or betting on 26 at a roulette wheel... or even the state lottery.
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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by crystalbank » Sun Jun 09, 2019 9:13 pm

I remember reading that Taleb himself thought that this strategy worked so well for him in 1987 (or in those days in general) because of how clueless options markets were back in the day. Today, options are a lot more expensive to buy and Taleb himself seemed to have moved on from this strategy. In one his recent videos he explained that he now holds a combination of treasuries and other derivative instruments (which he declined to elaborate) instead.

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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by Chan_va » Sun Jun 09, 2019 9:36 pm

MetaPhysician wrote:
Sun Jun 09, 2019 10:39 am

- Similar to a part of Nassim Taleb's portfolio but different because the rest of my portfolio I am invested in a reasonable equity/bond indexed portfolio (vs his which is ultra safe instruments like long term treasury bonds
You lottery ticket philosophy doesn’t jive with the above. If you ‘hit the lottery’ that means that the equity portion of your portfolio would have nosedived. So not only do your options expire worthless 99 times out of a 100, the one time they pay off, the rest of your portfolio has taken a giant hit.

There is no free lunch. If you want this to work, then you have to commit all the way like Taleb and have have portfolio mostly of treasuries. Otherwise you are playing a game you are guaranteed to lose. (Not that I think that Taleb’s strategy is a winning one, but at least it has a chance)

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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by unclescrooge » Sun Jun 09, 2019 10:48 pm

Chan_va wrote:
Sun Jun 09, 2019 9:36 pm
MetaPhysician wrote:
Sun Jun 09, 2019 10:39 am

- Similar to a part of Nassim Taleb's portfolio but different because the rest of my portfolio I am invested in a reasonable equity/bond indexed portfolio (vs his which is ultra safe instruments like long term treasury bonds
You lottery ticket philosophy doesn’t jive with the above. If you ‘hit the lottery’ that means that the equity portion of your portfolio would have nosedived. So not only do your options expire worthless 99 times out of a 100, the one time they pay off, the rest of your portfolio has taken a giant hit.

There is no free lunch. If you want this to work, then you have to commit all the way like Taleb and have have portfolio mostly of treasuries. Otherwise you are playing a game you are guaranteed to lose. (Not that I think that Taleb’s strategy is a winning one, but at least it has a chance)
+1

This is a futile exercise with only 5% of your portfolio.

Put that allocation in Long term treasuries or gold instead. Much easier to keep track of and probably have a better return.

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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by MetaPhysician » Thu Jun 13, 2019 9:39 pm

stlutz wrote:
Sun Jun 09, 2019 5:42 pm
As with a prior poster, I've also tried to waterboard the various scenarios and always ended up with the result that just owning more bonds is a cheaper/more effective way to limit my downside exposure.

If you want a lottery ticket, then buy something that is completely unrelated to what you are investing in. Maybe deep out of the money puts on hog futures? Or if you want a lottery ticket there is always the real thing. :D
It is like a lottery ticket - but it is a lottery ticket :sharebeer

Perhaps I should look for something 'completely unrelated' which has an enormous upside and limited downside. Does anything come to mind? I'm curious. Maybe starting a business, private equity, investing in start ups?
Chan_va wrote:
Sun Jun 09, 2019 9:36 pm
There is no free lunch. If you want this to work, then you have to commit all the way like Taleb and have have portfolio mostly of treasuries. Otherwise you are playing a game you are guaranteed to lose. (Not that I think that Taleb’s strategy is a winning one, but at least it has a chance)
That makes sense to me. Essentially I have one foot on the gas and another on the brake. And at this point I wouldn't be willing to go into mainly treasuries.
unclescrooge wrote:
Sun Jun 09, 2019 10:48 pm
This is a futile exercise with only 5% of your portfolio.

Put that allocation in Long term treasuries or gold instead. Much easier to keep track of and probably have a better return.
I am guilty of making things overly complicated. This might be one of those instances. Perhaps I can have LTT or gold as 5% and still a) satisfy mentally separating this part of my portfolio and b) gain when my larger portfolio tanks
crystalbank wrote:
Sun Jun 09, 2019 9:13 pm
I remember reading that Taleb himself thought that this strategy worked so well for him in 1987 (or in those days in general) because of how clueless options markets were back in the day. Today, options are a lot more expensive to buy and Taleb himself seemed to have moved on from this strategy. In one his recent videos he explained that he now holds a combination of treasuries and other derivative instruments (which he declined to elaborate) instead.
Thanks for sending that link to the video. It is revealing that the man I am trying to emulate myself isn't even into this idea anymore.

Thanks to the comments I've come to question the reason why I am attracted to this strategy. If I were to be honest I would say that objectively I would like to continue to keep my job, take a temporary hit on the portfolio (the 95% of it) and then get a nice pay day on the 5% so I could take advantage of distressed entities (business, real estate or put back in the 95% of the portfolio). If there is a better way to do this then I'm all ears.
nisiprius wrote:
Sun Jun 09, 2019 8:45 pm
You really ought to have a quantitative model of what you believe to be the range of outcomes and the probability of each outcome. Without that, it's not clear why this proposition is any better than betting on a long-shot horse at a racetrack, or betting on 26 at a roulette wheel... or even the state lottery.
Good point. I don't have a quantitative model. I imagine smarter people in this realm like Mr. Taleb and others 'on the other side of the table' most certainly have this information. If I were to muster a response I would say that even I did win on 26 at the roulette wheel that it wouldn't change my buying power per se. But if I hit it lucky on one of the above mentioned strategies then I will have some money when some other sectors are taking a hit. I am hoping then that I could go in and make some purchases. Of course, a sinking ship may not recover, and this is an entirely different thought experiment. It is my hope, meaning without any data, that things would bounce back.
SovereignInvestor wrote:
Sun Jun 09, 2019 5:45 pm
In fact when the VIX is low like under 15 buying long term puts out of money can have positive expected returns in excess of risk free rate.
Interesting. Just for my learning why wouldn't other people commit to this if it is known? Genuine question.

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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by countdrak » Thu Jun 13, 2019 9:58 pm

No offense but the whole “buy vix” as protection sounds like the advice I hear on CNBC everyday. All the so called gurus talk about it on their shows.

The issue I have had with put protection as described by these “gurus” is that I can never offset my loss because majority of my portfolio is in equities. I’d have to buy a lot of protection. Secondly I can never time the market so the puts just expire worthless. Lastly as you may understand the LEAPS will cost a lot these days due to the time value.

Like someone else said if you want to play the lottery why not buy some options on something crazy like Tesla, beyond meat or one of the high fliers 😊.

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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by unclescrooge » Fri Jun 14, 2019 12:24 am

MetaPhysician wrote:
Thu Jun 13, 2019 9:39 pm
SovereignInvestor wrote:
Sun Jun 09, 2019 5:45 pm
In fact when the VIX is low like under 15 buying long term puts out of money can have positive expected returns in excess of risk free rate.
Interesting. Just for my learning why wouldn't other people commit to this if it is known? Genuine question.
Double line founder, Gundlach, recommended buying the VIX in advance of last years decline.

Not to say that he is always right (he isn't), but rather to point out that there is still a lot of strategies that may be common, just not commonly known to everyone.

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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by unclescrooge » Fri Jun 14, 2019 12:30 am

MetaPhysician wrote:
Thu Jun 13, 2019 9:39 pm
unclescrooge wrote:
Sun Jun 09, 2019 10:48 pm
This is a futile exercise with only 5% of your portfolio.

Put that allocation in Long term treasuries or gold instead. Much easier to keep track of and probably have a better return.
I am guilty of making things overly complicated. This might be one of those instances. Perhaps I can have LTT or gold as 5% and still a) satisfy mentally separating this part of my portfolio and b) gain when my larger portfolio tanks
I am definitely guilty of over complicating things.. But I am a maximizer by nature, not a satisficer.

I slice and dice my portfolio and I'm happy with the results.

But I've been following the markets for 29 years and investing my own capital for 20.

It works for me, but it is not for everyone.

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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by Valuethinker » Fri Jun 14, 2019 7:28 am

MetaPhysician wrote:
Thu Jun 13, 2019 9:39 pm
stlutz wrote:
Sun Jun 09, 2019 5:42 pm
As with a prior poster, I've also tried to waterboard the various scenarios and always ended up with the result that just owning more bonds is a cheaper/more effective way to limit my downside exposure.

If you want a lottery ticket, then buy something that is completely unrelated to what you are investing in. Maybe deep out of the money puts on hog futures? Or if you want a lottery ticket there is always the real thing. :D
It is like a lottery ticket - but it is a lottery ticket :sharebeer

Perhaps I should look for something 'completely unrelated' which has an enormous upside and limited downside. Does anything come to mind? I'm curious. Maybe starting a business, private equity, investing in start ups?
Chan_va wrote:
Sun Jun 09, 2019 9:36 pm
There is no free lunch. If you want this to work, then you have to commit all the way like Taleb and have have portfolio mostly of treasuries. Otherwise you are playing a game you are guaranteed to lose. (Not that I think that Taleb’s strategy is a winning one, but at least it has a chance)
That makes sense to me. Essentially I have one foot on the gas and another on the brake. And at this point I wouldn't be willing to go into mainly treasuries.
unclescrooge wrote:
Sun Jun 09, 2019 10:48 pm
This is a futile exercise with only 5% of your portfolio.

Put that allocation in Long term treasuries or gold instead. Much easier to keep track of and probably have a better return.
I am guilty of making things overly complicated. This might be one of those instances. Perhaps I can have LTT or gold as 5% and still a) satisfy mentally separating this part of my portfolio and b) gain when my larger portfolio tanks
crystalbank wrote:
Sun Jun 09, 2019 9:13 pm
I remember reading that Taleb himself thought that this strategy worked so well for him in 1987 (or in those days in general) because of how clueless options markets were back in the day. Today, options are a lot more expensive to buy and Taleb himself seemed to have moved on from this strategy. In one his recent videos he explained that he now holds a combination of treasuries and other derivative instruments (which he declined to elaborate) instead.
Thanks for sending that link to the video. It is revealing that the man I am trying to emulate myself isn't even into this idea anymore.

Thanks to the comments I've come to question the reason why I am attracted to this strategy. If I were to be honest I would say that objectively I would like to continue to keep my job, take a temporary hit on the portfolio (the 95% of it) and then get a nice pay day on the 5% so I could take advantage of distressed entities (business, real estate or put back in the 95% of the portfolio). If there is a better way to do this then I'm all ears.
nisiprius wrote:
Sun Jun 09, 2019 8:45 pm
You really ought to have a quantitative model of what you believe to be the range of outcomes and the probability of each outcome. Without that, it's not clear why this proposition is any better than betting on a long-shot horse at a racetrack, or betting on 26 at a roulette wheel... or even the state lottery.
Good point. I don't have a quantitative model. I imagine smarter people in this realm like Mr. Taleb and others 'on the other side of the table' most certainly have this information. If I were to muster a response I would say that even I did win on 26 at the roulette wheel that it wouldn't change my buying power per se. But if I hit it lucky on one of the above mentioned strategies then I will have some money when some other sectors are taking a hit. I am hoping then that I could go in and make some purchases. Of course, a sinking ship may not recover, and this is an entirely different thought experiment. It is my hope, meaning without any data, that things would bounce back.
SovereignInvestor wrote:
Sun Jun 09, 2019 5:45 pm
In fact when the VIX is low like under 15 buying long term puts out of money can have positive expected returns in excess of risk free rate.
Interesting. Just for my learning why wouldn't other people commit to this if it is known? Genuine question.
Traders, Guns & Money by Sajayit Das, a former options trader, and poacher turned gamekeeper (advising corporate clients how not to get ripped off by investment banks bringing gifts... or option strategies).

Lars Krojer's 2 books may also talk about it - not sure. Andrew Lo's paper "Capital Decimation Partners" is also a salutary read - using option strategies to make a little bit of money every year, then every so often losing the lot.

Options are a good way to liberate the individual investor from his/ her money. I do recall, back in the 80s, that it was said in Chicago that 80% of trades on Futures (and presumably options as well) lost money. 1/5th was making a good living from the other 4/5th.

In essence an individual investor does not have infinite pockets - he/ she can be margin called. We run out of money and that's it, we are out of the game. In that sense, we are all short volatility. And buying VIX does not hedge that apparently (VIX does not do what most of us thinks it does).

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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by Valuethinker » Fri Jun 14, 2019 7:39 am

MetaPhysician wrote:
Thu Jun 13, 2019 9:39 pm
stlutz wrote:
Sun Jun 09, 2019 5:42 pm
As with a prior poster, I've also tried to waterboard the various scenarios and always ended up with the result that just owning more bonds is a cheaper/more effective way to limit my downside exposure.

If you want a lottery ticket, then buy something that is completely unrelated to what you are investing in. Maybe deep out of the money puts on hog futures? Or if you want a lottery ticket there is always the real thing. :D
It is like a lottery ticket - but it is a lottery ticket :sharebeer

Perhaps I should look for something 'completely unrelated' which has an enormous upside and limited downside. Does anything come to mind? I'm curious. Maybe starting a business, private equity, investing in start ups?

This does not exist.

Financial markets operate in real time with near perfect information (except inside information).

There are no free arbitrages. Greater reward comes with greater risk.

The world is full of "Capital Decimation Partners" strategies. Where you make a little bit of money every year, but every so often it blows up and you lose 100%. For a hedge fund, the principals just leave and set up other funds, or they retire. For the investor? Not so good to lose your wad.

Venture Capital - David Swensen takes you through the math. The Kaufman Foundation also published a report of their own empirical experience in VC funds. The short answer is there is a group of them (10 or so partnerships) that outperform the Nasdaq handsomely. But you have next to no chance of becoming investor in same. Meanwhile the rest underperform the Nasdaq on average.

Starting a business? Sure. If you can put the time and work in. I know someone whose father set up a clinical testing business while employed at a major hospital, and made a mint. Worked 7 days a week, though, for many years. Monday-Friday at his main job, Sat-Sunday at the business (plus evenings).

Commodities? As above post - 80% of commodity trades are held to lose money. You want to bet you will be in the 20%?

Private Equity. If you mean LBO funds, hard to get access unless you can write a $5-10m ticket (the standard size for a Limited Partner, minimum). Your tax will become very complicated (interest earned but accrued or paid out in more debt, changing cost bases, corporate restructurings etc.). Your commitment period will be 5 years and life of fund is 10-12 years. You will pay 2% + 20% carried interest (Performance fee). It's a very competitive area (for deals) - good luck finding the right LP.

Larry Swedroe also goes through this somewhere. The median PE fund does not outperform and equivalently leveraged S&P 500 fund. Larry also makes the point that really this is small cap value investing, so the benchmark is that much harder.

I *would* use the DFA Small Cap Value and International products. However, they have not outperformed Vanguard, I don't think. Nonetheless their approach is right.

(There are closed end funds/ investment trusts in the UK market that do all these things. However PFIC rules will kill a US investor. Maybe there is an ETF which holds them and does not trigger PFIC?).

https://seekingalpha.com/article/396521 ... wing-bones is an interesting read

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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by SovereignInvestor » Fri Jun 14, 2019 8:54 am

unclescrooge wrote:
Fri Jun 14, 2019 12:24 am
MetaPhysician wrote:
Thu Jun 13, 2019 9:39 pm
SovereignInvestor wrote:
Sun Jun 09, 2019 5:45 pm
In fact when the VIX is low like under 15 buying long term puts out of money can have positive expected returns in excess of risk free rate.
Interesting. Just for my learning why wouldn't other people commit to this if it is known? Genuine question.
Double line founder, Gundlach, recommended buying the VIX in advance of last years decline.

Not to say that he is always right (he isn't), but rather to point out that there is still a lot of strategies that may be common, just not commonly known to everyone.
Glad you had the disclaimer about him bevause he's been bearish on stocks since 2007 and called for 6% yields on 10 year note.

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unclescrooge
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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by unclescrooge » Fri Jun 14, 2019 9:11 am

SovereignInvestor wrote:
Fri Jun 14, 2019 8:54 am
unclescrooge wrote:
Fri Jun 14, 2019 12:24 am
MetaPhysician wrote:
Thu Jun 13, 2019 9:39 pm
SovereignInvestor wrote:
Sun Jun 09, 2019 5:45 pm
In fact when the VIX is low like under 15 buying long term puts out of money can have positive expected returns in excess of risk free rate.
Interesting. Just for my learning why wouldn't other people commit to this if it is known? Genuine question.
Double line founder, Gundlach, recommended buying the VIX in advance of last years decline.

Not to say that he is always right (he isn't), but rather to point out that there is still a lot of strategies that may be common, just not commonly known to everyone.
Glad you had the disclaimer about him bevause he's been bearish on stocks since 2007 and called for 6% yields on 10 year note.
I realized not to trust anyone's opinion in investing except my own after I heard Ben Stein on the radio recommending going long on the financial ETFs. Based on that I decided to close my SHORT position. This was April 2008. :oops:

Gundlach has been preaching rising rates for a few years. Meanwhile I keep refinancing my 7/1 jumbo mortgage at ridiculously low interest rates.

But I will say his CEF, DSL, has been a solid performer for me. It's only 20% of my bond allocation so 4% of portfolio.

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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by flossy21 » Fri Jun 14, 2019 9:17 am

MetaPhysician wrote:
Sun Jun 09, 2019 10:39 am
Why I am interested in this?
- In my mind it is a lottery ticket that may pay off if the market moves a certain way.
I don't know anything about options or puts and I don't expect to use them in any capacity. Having said that I wonder whether you would not be ahead just to play the Powerball with $200 a week or whatever amount you plan to use for the puts. I imagine you would have more success?

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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by pkcrafter » Fri Jun 14, 2019 9:30 am

MetaPhysician wrote:
Sun Jun 09, 2019 10:39 am
Bogleheads,

I invite constructive critiques and welcome honest feedback about buying deep out of the money puts and LEAPS puts.

Why am I writing this?
- To see if I am overlooking anything

What are the specifics?
- Very small part of portfolio (1-5%), commonly traded funds
If you want to fool around with some of your money, don't include as part of your retirement portfolio.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by WhyNotUs » Fri Jun 14, 2019 9:39 am

"Perhaps I should look for something 'completely unrelated' which has an enormous upside and limited downside. Does anything come to mind? I'm curious. Maybe starting a business, private equity, investing in start ups?"

For people who are "smarter and better looking", I would encourage starting a new business. At the end of the day one might have created a few new jobs or solved a common problem. Always the possibility that it could go big. The downside is that it can take a lot of time, our scarcest resource.

I played options in a big way in the 80's, until 10/19/87. Poof... Found out that I was not smarter and better looking and was better for being humbled.
I own the next hot stock- VTSAX

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MetaPhysician
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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by MetaPhysician » Mon Jun 17, 2019 2:16 am

About 'just buy a lottery ticket' ...
-- Those odds are all agreed upon. The idea I am looking for here is risk that is not priced properly. The whole 'once in a lifetime storm' actually happening two or three times in a life time kind of deal.

About 'why don't you just start a business b/c you are smarter and better looking'...
-- Definitely not either one of those. And as a physician intellectual humility is part of the training. If you don't believe me, ask your physician next time for a guarantee or for him/her to commit to be 100% certain of something.

About the 'no risk no reward' part...
- Maybe I wasn't clear. The most likely statistical thing to happen is to lose money every year (not gain). Perhaps even for the entire investing cycle. So the risk would be 1-5% losing money every single year until I stop investing. I would say that is risky.

About the 'starting a business takes a lot of time and money'...
- Probably true. But if it is something that scales easily and compensation isn't tied to hours put in then it is slightly different. So I am searching for something that is disconnected in that way.

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Re: Deep out of Money Puts and LEAP Puts- What am I overlooking?

Post by Valuethinker » Mon Jun 17, 2019 4:18 am

MetaPhysician wrote:
Mon Jun 17, 2019 2:16 am
About 'just buy a lottery ticket' ...
-- Those odds are all agreed upon. The idea I am looking for here is risk that is not priced properly. The whole 'once in a lifetime storm' actually happening two or three times in a life time kind of deal.

About 'why don't you just start a business b/c you are smarter and better looking'...
-- Definitely not either one of those. And as a physician intellectual humility is part of the training. If you don't believe me, ask your physician next time for a guarantee or for him/her to commit to be 100% certain of something.
Many professions use arrogance and jargon to create the impression that their profession is special and free from public scrutiny.

If they are teaching doctors these days about fallibility and humanity, that is a good thing.

https://www.amazon.co.uk/Admissions-Bra ... 8&qid=&sr=

Admissions: A Life in Brain Surgery by Henry Marsh begins with a description of the first time he killed a patient. One wonders if in an American litigation environment a book like that could have been written?

https://www.youtube.com/watch?v=pUOG2g4hj8s "Heritage Minutes: Wilder Penfield" also known as the "Burnt Toast" video, is much parodied in Canada. But it always brings a tear to my eye.
About the 'no risk no reward' part...
- Maybe I wasn't clear. The most likely statistical thing to happen is to lose money every year (not gain). Perhaps even for the entire investing cycle. So the risk would be 1-5% losing money every single year until I stop investing. I would say that is risky.
I assume you have read everything by Nicolas Taleb and the articles about him? (I think Malcolm Gladwell did a pretty good portrait in the New Yorker)?

That's his basic strategy. Lose money consistently but make huge money when the market moves way outside of what the Normal Distribution would predict for stock returns.
About the 'starting a business takes a lot of time and money'...
- Probably true. But if it is something that scales easily and compensation isn't tied to hours put in then it is slightly different. So I am searching for something that is disconnected in that way.
Losing 1-5% p.a. compounded over say 35 years is really going to hurt. Insurance is expensive.

If you can find a business to start, great. But entrepreneurs are generally 110% and certainly any backers would expect that. One would have to leave the safety and comfort of the professional career.

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