Young Investors - Buying insurance against a stock market rise

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Topic Author
Caduceus
Posts: 2773
Joined: Mon Sep 17, 2012 1:47 am

Young Investors - Buying insurance against a stock market rise

Post by Caduceus »

I'm wondering if there are any other young investors who are thinking of or who have bought call options on stocks, not as a bet that prices will rise within a certain period, but as a way of locking in a particular strike price until income comes in.

For those between ages 22 - 40, I am guessing that given the high savings rate on this forum, annual contributions still accounts for a significant part of one's retirement portfolio. And this allows one to front-load the contributions if you think the prices are compelling.

For example, let's say I expect to be able to invest $100,000 over the next two years. I want to guarantee that I can buy an investment at $35. I take out a call option with a strike price of $30 and an option premium of $5. I buy only enough call options to cover the shares I would be able to buy over the two years with $100,000. As my income comes in and I am able to buy the actual shares, I adjust the number of options I hold.

I understand there's no free lunch. The cost of this insurance is the option premium + the risk-free interest rate (currently negligible), which is also the most I can lose. If stock prices stay below $35 for two years, I will lose part or all of the option premium, but would also have been able to buy the shares I wanted at the price I wanted. On the other hand, if prices go up, the profits from the options will essentially allow me to continue deploying my income into the stocks at the stock price I have locked in.
Topic Author
Caduceus
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Joined: Mon Sep 17, 2012 1:47 am

Re: Young Investors - Buying insurance against a stock market rise

Post by Caduceus »

My slightly out-of-the-money call options got filled today in the afternoon. Covering stocks with a nominal value of $250,000 and max possible loss of $34,000 (representing option premium I've paid upfront).

I promise to update (if I forget, feel free to pull up this thread) about the results in January 2022. I fully expect the value of these options to fluctuate between $0 and some unknown number between now and 2022. If it gets to $0, I promise to be honest about it. :beer
Topic Author
Caduceus
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Joined: Mon Sep 17, 2012 1:47 am

Re: Young Investors - Buying insurance against a stock market rise

Post by Caduceus »

It's exactly a month later, and I thought I'd update because I would also appreciate some thoughts on whether I should sell these positions. All my call option trades are now deeply in the money and I've made an average of 68% on all the positions (one lot has earned about 62% and another lot 75%)

I'm not inclined to sell because the original purpose of my hedge still exists and time decay isn't much of a factor any more given how deep in the money they are now. But any thoughts to the contrary would definitely be food for thought.
Dilbydog
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Re: Young Investors - Buying insurance against a stock market rise

Post by Dilbydog »

Subscribed :beer
xraygoggles
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Joined: Sat Sep 15, 2018 3:30 pm

Re: Young Investors - Buying insurance against a stock market rise

Post by xraygoggles »

It was definitely a good idea, especially in hindsight, but even when/if the market goes back down, it would be a wise move.

Gives me something to think about for the future.

On the flip side, I sold SPY puts last and this week after reading about Fed's interventions, which coincided nicely with the market rise, and closed them yesterday for 78-94% returns. Lucky timing perhaps?
“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.”
annu
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Joined: Mon Nov 04, 2019 7:55 pm

Re: Young Investors - Buying insurance against a stock market rise

Post by annu »

What resources you all use to ramp on these, unlike boglehead wiki, I mostly end up on a site selling a system, gauranteed to make you money
bugleheadd
Posts: 372
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Re: Young Investors - Buying insurance against a stock market rise

Post by bugleheadd »

i made $5000 in puts in early march. then i lost $5000 in puts in late march. even money
Topic Author
Caduceus
Posts: 2773
Joined: Mon Sep 17, 2012 1:47 am

Re: Young Investors - Buying insurance against a stock market rise

Post by Caduceus »

bugleheadd wrote: Fri Apr 10, 2020 5:07 pm i made $5000 in puts in early march. then i lost $5000 in puts in late march. even money
How did you lose the $5000 in puts in late March. Do you mean that you bought $5000 worth of puts and they expired out of the money. Those must be some pretty short-dated puts if so.
jhsu802701
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Joined: Fri Apr 03, 2020 2:42 pm

Re: Young Investors - Buying insurance against a stock market rise

Post by jhsu802701 »

My idea of insuring against a stock market rise is to buy some stocks. I know it's rednecky, but at least stocks don't expire like options do. :)
bugleheadd
Posts: 372
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Re: Young Investors - Buying insurance against a stock market rise

Post by bugleheadd »

Caduceus wrote: Sat Apr 11, 2020 9:38 am
bugleheadd wrote: Fri Apr 10, 2020 5:07 pm i made $5000 in puts in early march. then i lost $5000 in puts in late march. even money
How did you lose the $5000 in puts in late March. Do you mean that you bought $5000 worth of puts and they expired out of the money. Those must be some pretty short-dated puts if so.
Well things turned around starting March 23. I had $10k in spy puts expiring sep. It lost around 50% in a matter of days.

Actually looking back at the transaction again.. I bought on 3/25 then sold 4/7
BV3273
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Re: Young Investors - Buying insurance against a stock market rise

Post by BV3273 »

My hats off to anyone doing this.

Between my work and family life the last thing I want to be doing is playing with options. That being said I have no ill will against those who are making money off this.
Alex GR
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Re: Young Investors - Buying insurance against a stock market rise

Post by Alex GR »

Caduceus wrote: Fri Apr 10, 2020 2:37 pm It's exactly a month later, and I thought I'd update because I would also appreciate some thoughts on whether I should sell these positions. All my call option trades are now deeply in the money and I've made an average of 68% on all the positions (one lot has earned about 62% and another lot 75%)

I'm not inclined to sell because the original purpose of my hedge still exists and time decay isn't much of a factor any more given how deep in the money they are now. But any thoughts to the contrary would definitely be food for thought.
Caduceus,
Can't really make any suggestions as I am still learning about options, but I do have a question:
So S&P was at 3300, crashed to 2300 and now back to 2800. I am *trying* to stay calm and I'm staying the course but to me this is very difficult to digest and comprehend in such a short time period.
Also, despite the stock market rise, things are looking bad for the economy.
So, how would I buy an option that would protect me against S&P going back down to 2300? And what are the risks/costs of that option if it never does? Thanks!
Topic Author
Caduceus
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Joined: Mon Sep 17, 2012 1:47 am

Re: Young Investors - Buying insurance against a stock market rise

Post by Caduceus »

Final Update: I've decided to mostly exit my options trade as detailed in the original post. The week following my original post turns out to have been a really good time to enter the position. The position is now up by more than 600% and I made slightly less than that because I sold off less than 5% of the options over the last 8 months.

I would not buy the underlying at the current market price, so the purpose of the hedge has exhausted its purpose.

It's been educational - part of it was definitely just luck. The week following my original post was the absolute lowest the underlying stock went, and also the week I was buying into the options heavily. Had I invested at any other time, I would still have made a fair bit of money, but it wouldn't have been the same.

Ironically, the lesson I've taken away from this is that it's not that easy to make money from options.
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