Research on bond portfolio with index call options?

[dandan14]

As I get close and closer to my FIRE number, I'm thinking a lot about ways to avoid any big down years. As Wade Pfau points out, it is the few years leading up to and out of "retirement" that can have the biggest impact on success.

I'm currently at a 50/50 allocation with some call options on the index to model the upside of a 75/25 portfolio. The cost of that this year was 1% of my portfolio -- and it has worked out well.

I've been searching for some research / models that use a nearly 100% bond portfolio paired with some call options on the broad equity index.
Does anyone know of something that shows some historical returns and research using that model? I've not been successful and finding this sort of thing on google.

[dandan14]

following up on my own post -- I believe I read this in a Zvi Bodie book.

[randomizer]

If you are young I wouldn't bother trying to control this risk. You have human capital. You can go back to (some amount of) work. You can adjust your withdrawal rate. Just keep it simple, I say (but I'm allergic to complexity).

[SlowMovingInvestor]

I believe there are funds like PIMCO StockPlus that do something similar -- a combination of futures on equity index + Bonds. The fund goal is to use it's bond research expertise to get a slight excess return on the index.

So you see how that fund has done, as well as it's composition.

[lack_ey]

I believe there are funds like PIMCO StockPlus that do something similar -- a combination of futures on equity index + Bonds. The fund goal is to use it's bond research expertise to get a slight excess return on the index.

So you see how that fund has done, as well as it's composition.

I don't think so. That's extremely different in terms of risk exposure compared to what the OP is asking for. PIMCO StocksPlus runs an equity market beta of around 1. It's passively exposed to both the upside and downside of the equity market. It's similar to DFA's Enhanced US Large Co. Portfolio (DFELX) except more expensive and more aggressively managed. The active return comes from managing a portfolio of bonds to get an excess return over the costs, the expense ratio, and the effective cash rate (borrowing cost) on the synthetic long stocks exposure.

Going long out-of-the-money equity calls would give some effective stock exposure, but not symmetrically at all. This is more of barbell strategy, with a heavy weighting in the relatively safe bonds and then a small portion of an extremely volatile, potentially high-return asset. The advantage here is in reducing the left tail—a similar but more extreme version of a "Larry [Swedroe] Portfolio" construction.

The issue here I think is that the expected return on equity index calls is not that high. It should be a low Sharpe ratio investment, lower than stocks directly, if you look generally at how volatility is priced and particularly at what downside and upside participation cost.

All that said, I'm useless here and don't know of a source of data on this type of strategy. I've seen more on covered calls, which would be selling rather than buying the options.

[SlowMovingInvestor]

lack_ey, thanks for correcting me. I misread the OP's strategy.