the boglehead bias against options

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world2steven
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the boglehead bias against options

Post by world2steven » Fri Apr 08, 2011 9:14 pm

There appears to be a bias against options amoung Bogleheads. I'm assuming the argument is that buying or even selling options is gambling - not investing. Given all the crooked accounting, the financial suicide being committed by US and other firms in outsourcing - and thus impoverishing their employees, etc, I would argue that it is no longer possible to 'invest', at least without the safety offered by using options to hedge.

I'm not even sure at least selling them reduces your returns. I have limited experience but so far it looks like if you sell out-of-the-money calls and the underlying security increases in value, you can buy the call back in for a small fraction of the increase - and then turn around and sell another out-of-the-money call. True, if you guess right - and that's what it is, a guess, you get to keep it all if you don't mess with options. But in my book that's gambling, not investing. And if you really want to cover your bases, you can use the proceeds from a covered call write to purchase a put.

This, I believe, is hedging and it has made a lot of people a lot of money recently. What am I missing?

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Post by exeunt » Fri Apr 08, 2011 9:18 pm

Few people understand options. And those who do rarely use them as long-term investments or risk-control tools, but rather as ways to gain leverage and speculate.

I think it's telling that you mention options have "made a lot of people a lot of money recently", which suggests you have more of a speculator's personality. I could just as justifiably say that options lost a lot of money for a lot of people, because the options market is a zero-sum game.

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world2steven
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who's the speculator?

Post by world2steven » Fri Apr 08, 2011 9:32 pm

"which suggests you have more of a speculator's personality" - them's fighting words! I am a retired govt. bureaucrat. Risk is SIN! The way the hedgers were making money as I understand it was a LOT of nickle and dime trades. The options seller can do this because there are a lot of fools out there who will pay you big time for the use of your money. The omniscient market, however, will pay them virtually nothing until their options are in the money. It is a lot of work selling the same bet over and over again for not much money. But as they say, there's no such thing as a free lunch.

I still say holding an equity position is speculation / gambling - at least one not protected by a put option or two.

"a speculator"! I know you meant well, but !!!

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Re: who's the speculator?

Post by fishnskiguy » Fri Apr 08, 2011 9:54 pm

world2steven wrote:"which suggests you have more of a speculator's personality" - them's fighting words! I am a retired govt. bureaucrat. Risk is SIN! The way the hedgers were making money as I understand it was a LOT of nickle and dime trades. The options seller can do this because there are a lot of fools out there who will pay you big time for the use of your money. The omniscient market, however, will pay them virtually nothing until their options are in the money. It is a lot of work selling the same bet over and over again for not much money. But as they say, there's no such thing as a free lunch.

I still say holding an equity position is speculation / gambling - at least one not protected by a put option or two.

"a speculator"! I know you meant well, but !!!
Options Trading For Dummies- Cliff Notes version:

Make a nickle, make a dime, make a nickle, make a nickle, make a penny, make a dime, make a nickle, make a penny, make a dime, make a nickle, lose five hundered dollars. :shock:

Don't do it.

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Re: who's the speculator?

Post by Lumpr » Fri Apr 08, 2011 9:58 pm

world2steven wrote:. . . Risk is SIN!
Then one has to question why you are investing to begin with. Do you believe there is a way to earn a return in excess of the risk-free rate of return without taking risk?
The way the hedgers were making money as I understand it was a LOT of nickle and dime trades. The options seller can do this because there are a lot of fools out there who will pay you big time for the use of your money. The omniscient market, however, will pay them virtually nothing until their options are in the money.
This is inconsistent. DUCY?

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world2steven
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cliff notes

Post by world2steven » Fri Apr 08, 2011 10:00 pm

So when do I lose my $500? When I buy and hold with a covering put option? When I don't pay attention and the covered call I wrote goes seriously in the money? We need to get beyond works of fiction here, beyond dogmatism.

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Post by lazyday » Fri Apr 08, 2011 10:01 pm

exeunt wrote:And those who do rarely use them as long-term investments or risk-control tools, but rather as ways to gain leverage and speculate.
world2steven wrote:there are a lot of fools out there who will pay you big time for the use of your money.
Are you two sure of this? I've seen many posts over the years about selling covered calls. There's people out there selling advice on how to do it. I've run into a couple people IRL who do it. I think it's been written about in financial websites/magazines. There's closed end funds and open end funds using the strategy.

If anything, I'd think that with so much call selling, instead of speculators paying a premium buying your calls to gamble, you may have to find a professional or amateur speculator to be paid a premium by you, to buy the call from you.

I know little about options, so don't know if there's ways to begin to test this, such as what % of calls lately are initiated by sellers vs buyers. Is there data on that? Is price closer to bid vs ask a good indicator?

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Post by fishnskiguy » Fri Apr 08, 2011 10:18 pm

Cliff Notes Version II:

Protecing your portfolio with covered calls: make a nickle, lose a nickle, make a dime, lose a nickle, make a dime, lose out on the next 1000 point jump in the Dow.

Don't do it.

Chris
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Re: who's the speculator?

Post by zellballen » Fri Apr 08, 2011 10:21 pm

world2steven wrote: I still say holding an equity position is speculation / gambling - at least one not protected by a put option or two.
Yup. When Bogleheads trade a few stocks here and there it is speculation/gambling (and a very small piece of the total portfolio.)

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Post by NAVigator » Fri Apr 08, 2011 10:26 pm

You are probably right that there is a bias against options here. Look at the heading of this forum which states "Investing Advice Inspired by Jack Bogle". That should explain why.

Why come to a group with a focus on low cost buy and hold investing in (mostly) index mutual funds and accuse us of bias against something far removed from our our investing methods? You call it dogmatism when in fact it is following a method we feel is superior.

If you are convinced that trading options is better, then I suggest you find a group with that focus. It won't benefit you to try to convert us to your methods.

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Post by rob » Fri Apr 08, 2011 10:32 pm

Sure the general group would be against them and so am I generally but like most things that is throwing the baby out with the bath water. I think there can be a role for some types of options when a person is heavily compensated with stock in order to reduce the short term risk - but it comes at a price.
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Re: the boglehead bias against options

Post by sschullo » Fri Apr 08, 2011 10:37 pm

world2steven wrote:There appears to be a bias against options amoung Bogleheads. I'm assuming the argument is that buying or even selling options is gambling - not investing. Given all the crooked accounting, the financial suicide being committed by US and other firms in outsourcing - and thus impoverishing their employees, etc, I would argue that it is no longer possible to 'invest', at least without the safety offered by using options to hedge.

I'm not even sure at least selling them reduces your returns. I have limited experience but so far it looks like if you sell out-of-the-money calls and the underlying security increases in value, you can buy the call back in for a small fraction of the increase - and then turn around and sell another out-of-the-money call. True, if you guess right - and that's what it is, a guess, you get to keep it all if you don't mess with options. But in my book that's gambling, not investing. And if you really want to cover your bases, you can use the proceeds from a covered call write to purchase a put.

This, I believe, is hedging and it has made a lot of people a lot of money recently. What am I missing?
Bias? Probably, goes with the culture here.
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Re: cliff notes

Post by bhmlurker » Fri Apr 08, 2011 10:43 pm

world2steven wrote:So when do I lose my $500? When I buy and hold with a covering put option? When I don't pay attention and the covered call I wrote goes seriously in the money? We need to get beyond works of fiction here, beyond dogmatism.
1. In my personal experience, options tend to be less liquid than their underlying equities. Some have downright wide spreads and are only made available by market makers. Novice traders often think they see an inefficiency and decide to place a trade despite the poor prices. It's hard to make money when one is screwed off the bat by high commission and poor price at entry.

2. Regarding selling out-of-money covered calls, the problem isn't PPS turning it into in-the-money and forcing one to roll it forward. A current month or near-dated out-of-money call often is worth too little to sell. A far-dated out-of-money call is virtually all time value, so if PPS go up you already gave up those gains, and if PPS drops it's not much cheaper to buy-to-close. Essentially a lose-lose situation unless if share price stays flat for a long time.

3. Novices often get a case of the rose-colored hindsight glasses: "wow, if I bought calls/puts instead of going long/short in equities directly, I could've made 20x as much!". Subsequently the novice trader buys calls/puts. PPS moves against the novice, and what does the kid do? Buy more and average down! Problem is that options will expire before the underlying equity's pricing becomes rational again.

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Re: the boglehead bias against options

Post by grabiner » Fri Apr 08, 2011 10:45 pm

world2steven wrote:And if you really want to cover your bases, you can use the proceeds from a covered call write to purchase a put.

This, I believe, is hedging and it has made a lot of people a lot of money recently. What am I missing?
What you are missing is that the prices of options incorporate the risk adjustments involved. If you hold a stock, and buy a put at $100, and write a call at $100, then you have essentially agreed to sell the stock for $100 when the options expire. Since you have created a risk-free position (in which you are guaranteed to receive $100 on a future date), you won't be paid anything for creating the position; you could sell the stock today and buy a Treasury bill instead to collect the same $100. This principle is known as put-call parity.

If you are hedged only on one side, you reduce your returns from that side. If you own a stock with a put, you have protection against the downside risk, but you had to pay for the put; effectively, you paid a premium to reduce the risk. If you write a call, you give up the upside of the stock. Either of these may be a good strategy, but only if you have a specific reason for modifying your risk; otherwise, the transaction costs on the options mean that you will get lower returns for the same level of risk than if you just bought and held a portfolio.

Most investors on this forum prefer to reduce the risk in other ways which have lower tax and transaction costs. If you have a $100K portfolio and don't want to lose more than $15K if the market drops by 25% next year, then you would be better off with $60K in stock and $40K in bonds than with $100K in stock and paying for put options at $85K on the stock.
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Post by MWCA » Fri Apr 08, 2011 10:46 pm

Sounds complicated and easy to screw up. Ill pass. Maybe there is a forum that specializes in options and those things. :moneybag
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Re: the boglehead bias against options

Post by grabiner » Fri Apr 08, 2011 10:50 pm

world2steven wrote:There appears to be a bias against options amoung Bogleheads. I'm assuming the argument is that buying or even selling options is gambling - not investing. Given all the crooked accounting, the financial suicide being committed by US and other firms in outsourcing - and thus impoverishing their employees, etc, I would argue that it is no longer possible to 'invest', at least without the safety offered by using options to hedge.
Options are often used speculatively, and most people looking to trade options are using them that way.

I often post recommendations on this forum, and I have only once posted a recommendation that an investor buy options, because there was a clear advantage in his situation. This was an investor who had a large part of his portfolio in a few stocks, and who had a life expectancy of one year. If you can understand the reason for that recommendation, you may be able to appreciate when hedging with options (as opposed to reducing your risk by holding some of your portfolio in less risky investments) makes sense.
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Post by aja8888 » Fri Apr 08, 2011 10:56 pm

Here ya go: All you ever wanted to know about options:

http://www.optionmonster.com/about/prod ... jqgCFQla7A odvVMHDQ :!:

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Post by bmb823 » Fri Apr 08, 2011 11:23 pm

I'm pretty new to the Bogleheads' way of thinking and this forum, but it's pretty surprising to me how many people I've seen post threads trying to convince others to enable their thinking about investing concepts that are not part of the core Boglehead philosophy.

Need validation much?

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Post by world2steven » Fri Apr 08, 2011 11:47 pm

@All - My apologies if the bit about "dogmatic" came across wrong. I'm just guessing that the Jack Bogle philosophy recommends real investing, like buy-and-hold, balance your portfoilio, etc. And when he developed it, my guess is that it made sense. It might still now. I would love to BE converted back to the old-time religion of just investing for the long term. But my posts were intended to be questions not acccusations; questions like:
1- with rigged markets and looking for a greater fool (i.e. capital gains), with government manipulation of the markets, with crooked accounting and currencies at risk because of inept economic management, can you really INVEST anymore?
2- seems to me all the traditional rules like balancing your portfolio have been underminding by the Fed's manipulation of interest rates and money. I sure as hell wouldn't want to hold bonds if / when the Fed is forced to raise interest rates to keep the dollar from going down the crapper!

So how do Bogleheads deal with all this???

@grabiner - Thanks for your to the point response. I was less than thrilled with the commissions I had to pay for some recent Vanguard options trade. But even with them, I was able to make a litttle money. Maybe I'm doing the math wrong but when I can buy a covered call back in for little more than what I realized as a capital gain and then turn around and sell another out of the money covered call for another 7 or 8% premium, I'm happy.

@bmb823 - So you like to run with the pack, eh? "Need validation much?"

I don't want to end on that note. What I really want to know is:
So how do Bogleheads deal with all the crooked markets, thoroughly screwed globalization / outsourcing policies, etc? Some specific techniques or references to where they can be found please, not vague platitudes.

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Re: the boglehead bias against options

Post by billjohnson » Sat Apr 09, 2011 12:00 am

world2steven wrote:There appears to be a bias against options.
The only reason you don't have a bias against options is because you've never seriously traded options. (I bold "seriously" because selling a covered call, etc now and again won't affect things one way or another)

Anyway, been there, done that. Good luck paying transaction costs, competing against people probably smarter than you, who probably have more inside information than you, and definitely have a room full of computers crunching all the option numbers. It's like they say at the poker tables, if you don't know who the fish are....
Last edited by billjohnson on Sat Apr 09, 2011 12:36 am, edited 1 time in total.

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Re: the boglehead bias against options

Post by fundtalker123 » Sat Apr 09, 2011 12:01 am

Go for it. The most likely net result will be a lot of money flowing from your pocket into finance companies and a little into buy-and-hold index fund investors' pockets. I won't complain.

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Post by zellballen » Sat Apr 09, 2011 12:19 am

[quote="world2steven"
I don't want to end on that note. What I really want to know is:
So how do Bogleheads deal with all the crooked markets, thoroughly screwed globalization / outsourcing policies, etc? Some specific techniques or references to where they can be found please, not vague platitudes.[/quote]

Own thousands of stocks, large and small, through indexing, including foreign and EM exposure. Buy bonds/bond funds over the course of years so I don't have to bother thinking about predicting interest rates, and then hold said bonds to maturity. Adjust ratio of stocks /bonds to fit risk tolerance.

I don't know think any of the BH writers have discussed strategies specifically dealing with "screwed globalization." Please give some examples of techniques you have heard from other sources dealing with these concerns, so we can get an idea of the kind of information you are looking for.

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Post by GlennC » Sat Apr 09, 2011 12:33 am

Having traded a lot of options...

1- The transaction costs are much higher than you think, sometimes several times that of stocks. There are various shenanigans that go on (e.g. price improvement front running, picking off slow quotes, etc.). That is a huge hurdle to overcome.

2- Taxes. The strategy you describe may be extremely tax inefficient and that's a huge hurdle to overcome.

3- If you sell options, you are vulnerable to adverse selection. Oftentimes there is unusual options activity (e.g. purchasing of calls/out) before a takeover or whatnot. Though the big picture is that this will not affect you much.

----

As far as your strategy goes... you will probably underperform the market after transaction costs.
Options are almost always a zero sum game. The only possible way the options buyers and sellers can come out ahead collectively is if they have different cost structures... e.g. [a] taxes retail brokers don't pass on short borrowing costs [c] margin borrowing rates. In these limited situations, options could make sense. But in practice [a] auditors can find rules to screw you if they don't like what you're doing... so grey-area tax dodges aren't a great idea you're probably an idiot if you own stocks that are heavily shorted [c] borrowing on margin is not a good idea.
So ignoring those situations, options are a zero sum game.

2- Almost all of your stock's returns will come from a handful of up days. If you take away the 10 best days, your returns will be something like a quarter or something like that.
So by selling call options, you may not really come out ahead.

This, I believe, is hedging and it has made a lot of people a lot of money recently.

I don't think so.

If you want to make crazy insane gains, you have to buy options.

The most successful option market makers are long volatility (they lean towards buying options). The ones who short volatility (sell options) make money for a while before blowing up spectacularly. So not successful in the long run.

Any strategy that is hedged typically limits the return on capital. It's because the hedge eats up capital/margin and may have negative expected return. e.g. shorting indexes has a negative expected return.
I am one of those dirty active management people.

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Post by Jacobkg » Sat Apr 09, 2011 2:31 am

I'm sorry that you feel that the equity and bond markets are rigged. One of the ways to avoid the effects of market "shenanigans" is to be a buy and hold investor and to stay away from the more complex financial instruments (like structured products and, sorry to say it, options). By buying for the long term you will skip over all the short term fluctuations and instead reap the benefits of the world's continued economic growth. It is really the short term traders that should worry about being screwed over by the big guys.

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Post by cjackson0 » Sat Apr 09, 2011 9:47 am

world2steven wrote:@All - My apologies if the bit about "dogmatic" came across wrong. I'm just guessing that the Jack Bogle philosophy recommends real investing, like buy-and-hold, balance your portfoilio, etc. And when he developed it, my guess is that it made sense. It might still now. I would love to BE converted back to the old-time religion of just investing for the long term. But my posts were intended to be questions not acccusations; questions like:
1- with rigged markets and looking for a greater fool (i.e. capital gains), with government manipulation of the markets, with crooked accounting and currencies at risk because of inept economic management, can you really INVEST anymore?
2- seems to me all the traditional rules like balancing your portfolio have been underminding by the Fed's manipulation of interest rates and money. I sure as hell wouldn't want to hold bonds if / when the Fed is forced to raise interest rates to keep the dollar from going down the crapper!

So how do Bogleheads deal with all this???

@grabiner - Thanks for your to the point response. I was less than thrilled with the commissions I had to pay for some recent Vanguard options trade. But even with them, I was able to make a litttle money. Maybe I'm doing the math wrong but when I can buy a covered call back in for little more than what I realized as a capital gain and then turn around and sell another out of the money covered call for another 7 or 8% premium, I'm happy.

@bmb823 - So you like to run with the pack, eh? "Need validation much?"

I don't want to end on that note. What I really want to know is:
So how do Bogleheads deal with all the crooked markets, thoroughly screwed globalization / outsourcing policies, etc? Some specific techniques or references to where they can be found please, not vague platitudes.
There has been crooked accounting, currency risk, and inept management since before the days of stocks. Stocks have always been risky, and that's why they have a higher expected return.

Contrary to what some others prefer, I welcome a civil discussion on the Boglehead principles and alternatives. I doubt I can be swayed, but try to keep an open mind since I know I don't "know it all" and try to avoid being dogmatic :lol:
Sent from my iphone

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Post by KyleAAA » Sat Apr 09, 2011 10:00 am

Certainly options CAN be used intelligently and can hedge risk, but there is a cost involved. Over the long term, an unhedged strategy is almost always going to outperform a hedged strategy if the bias over time is up. Hedging costs are a drag on returns just like tax costs, expense ratios, bid/ask spreads, etc. Hedging is probably best used strategically in certain limited situations. It's too expensive to use all the time for everything. Of course, most bogleheads would argue that you have almost no chance of being able to consistently recognize those certain limited situations so you're better off not trying, but that's a different discussion.

Now if you are in a situation where you received a ton of stock from an employer and/or are forced to hold a concentrated position in just one stock and aren't confident about its future for whatever reason, then by all means hedge away. Something like this happened to a few of my coworkers when a company I was working for went public. I forget the details because it was 5 or 6 years ago, but they were relatively high up in the organization and received a large amount of stock at the IPO but weren't allowed to sell for (I think) 6 months out. The value of the stock undoubtedly made up the largest portion of their net worth. I think you would be a fool not to hedge in that specific situation. Of course, there's probably not a very deep options market for a new issue.

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Post by whitefish » Sat Apr 09, 2011 10:14 am

KyleAAA wrote:Certainly options CAN be used intelligently and can hedge risk, but there is a cost involved. Over the long term, an unhedged strategy is almost always going to outperform a hedged strategy if the bias over time is up.
Take a look at the CBOE's experiment: the BXM. Since the late 1980's, it has resulted in the same return as the SPX but with 30% less volatility. A buy-and-holder's dream. Simple. It fits perfectly with the Boglehead philosophy. Just add this as another asset class to your portfolio.

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Re: the boglehead bias against options

Post by gasman » Sat Apr 09, 2011 10:18 am

world2steven wrote:There appears to be a bias against options amoung Bogleheads. I'm assuming the argument is that buying or even selling options is gambling - not investing. Given all the crooked accounting, the financial suicide being committed by US and other firms in outsourcing - and thus impoverishing their employees, etc, I would argue that it is no longer possible to 'invest', at least without the safety offered by using options to hedge.

I'm not even sure at least selling them reduces your returns. I have limited experience but so far it looks like if you sell out-of-the-money calls and the underlying security increases in value, you can buy the call back in for a small fraction of the increase - and then turn around and sell another out-of-the-money call. True, if you guess right - and that's what it is, a guess, you get to keep it all if you don't mess with options. But in my book that's gambling, not investing. And if you really want to cover your bases, you can use the proceeds from a covered call write to purchase a put.

This, I believe, is hedging and it has made a lot of people a lot of money recently. What am I missing?
There is a bias on this board against anything that the data don't show as a useful portfolio tool. By that standard options certainly qualify. This board is about trying to take the emotion out of investing and doing what has historically shown to be most effective for accumulating wealth. Should the data on options change, I suspect that they will be embraced by many on this board.

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Options - the end

Post by world2steven » Sat Apr 09, 2011 10:43 am

Thanks to all those who replied to my questions. Perhaps I should state again that with the exception of put options, purchased using the proceeds from the sale of out-of-the-money covered call options, for some down-side protection I don’t believe in BUYING options. I concur with everything everyone has said about “competing against people probably smarter than you, who probably have more inside information than you, and definitely have a room full of computers crunching all the option numbers”, etc. I’m not sure I agree with the assertion that options are a zero-sum game. If as a seller of calls I MIGHT have to give up some of the gains from share price appreciation, for the purchaser of the call the premium is a guaranteed loss. If that premium allows me to purchase some down-side protection and enter a market I otherwise wouldn’t touch, it looks to me like we both win.

As bhmlurker says, “A far-dated out-of-money call is virtually all time value,”. But if you write a slightly out-of-the-money covered call and “if PPS go(es) up you DID NOT already give up those gains,”. For a nominal sum, you can roll the call forward at the new, higher share price level. “if PPS drops“ the covered call purchaser, NOT YOU, loses all. And if you use the proceeds from one or more covered call sales to roll up your downside protection you might even win big! (This is where I confess to being a bit of a gambler because it would probably make sense to dump the old put if / when you roll up your downside protection to a higher price level. But if you keep it and there is a big down-side movement, you are RICH!)

That’s probably more than enough about options. I would still like to know how to invest the ‘right’ way – buying and holding. Zellballen suggests “Own thousands of stocks, large and small, through indexing, including foreign and EM exposure. Buy bonds/bond funds over the course of years so I don't have to bother thinking about predicting interest rates, and then hold said bonds to maturity. Adjust ratio of stocks /bonds to fit risk tolerance.” There is, of course, a contradiction between the first two and last sentence unless (s)he is assuming that one’s risk tolerance remains fixed over a lifetime.

But there is another big problem with ‘buy and hold’ – business cycles and timing. I don’t have the exact years but it was something like if you bought at market highs in 1929 if would have taken until 1962 to break even, nominally or at least in inflation-adjusted dollars. I don’t know what the market P/E ratio is right now but suspect it is above the historical norm.

And then there is the evil Plunge Protection Team and the Federal Reserve pumping all that money into the economy to prop up share prices. What happens when sooner or later they are forced to stop?

Back to zellballen and "screwed globalization." When today’s profits don’t come from crooked accounting most of them now come from off-shoring employment in the US and other ‘advanced’ industrial economies – translation: lowering wages and thus reducing purchasing power. For the last 30 years prosperity has been maintained in these economies by a combination of bubble-created ‘wealth effects’ and workers going deeper in debt to sustain their living standards. Anyhow, the point is that’s where all the profits have come from – and the fiction that all that money and debt that have been and are being created to sustain those profits is about to come to an end. (I have a problem with “foreign and EM exposure”. Sending money abroad to help foreign workers become more competitive and take jobs away from US workers sounds – to say the least – counterproductive. But that’s just me.)

Again, I’m sounding anti-Bogle and that’s not the intent. There has got to be a way to buy and hold. Sector investing? Utilities? I'm all in favor of taking the emotion out of investing. Is there any data on writing out-of-the-money covered calls and/or buying puts to protect an equity investment?

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LEAPS

Post by hollowcave2 » Sat Apr 09, 2011 11:03 am

The only option strategy that may be consistent with Boglehead philosophy is purchasing deep in the money LEAPS. The LEAPS give you a stock substitute. The major ETFs on major indices have LEAPS. There's still a premium to be paid, but this is still a useful strategy, especially if you plan to actually exercise the option and acquire the ETF at the end of its term.

Covered calls, even though conservative, require some more expertise to utilize fully. There's been many threads here on covered calls. Your example in rolling calls is one scenario, but you really need experience in options to understand all of the scenarios. You can't always buy a call back profitably if the stock moves upward. But then again, if the call was written well in the first place, there's nothing wrong with letting the stock get called away and take your profit.

I would suggest actually trying some covered calls on small positions and see how you really react.

Good luck.

Steve

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Post by KyleAAA » Sat Apr 09, 2011 11:15 am

whitefish wrote:
KyleAAA wrote:Certainly options CAN be used intelligently and can hedge risk, but there is a cost involved. Over the long term, an unhedged strategy is almost always going to outperform a hedged strategy if the bias over time is up.
Take a look at the CBOE's experiment: the BXM. Since the late 1980's, it has resulted in the same return as the SPX but with 30% less volatility. A buy-and-holder's dream. Simple. It fits perfectly with the Boglehead philosophy. Just add this as another asset class to your portfolio.
BXM doesn't take into account transaction costs. I also believe it doesn't take dividends into account, but I'm not 100% on that.

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Post by bmb823 » Sat Apr 09, 2011 11:44 am

world2steven wrote: @bmb823 - So you like to run with the pack, eh? "Need validation much?"
My apologies for this comment and my reply in general. It was late and didn't think it through. I don't want to start off being "that guy". I'm just here to learn with everyone else.

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Post by yobria » Sat Apr 09, 2011 11:58 am

Bit like asking a healthful living board why they don't like donuts. I mean, nothing that tasty can be bad for you, right?

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Post by pkcrafter » Sat Apr 09, 2011 11:59 am

worldtoSteven wrote:
I would love to BE converted back to the old-time religion of just investing for the long term. But my posts were intended to be questions not acccusations; questions like:
1- with rigged markets and looking for a greater fool (i.e. capital gains), with government manipulation of the markets, with crooked accounting and currencies at risk because of inept economic management, can you really INVEST anymore?
2- seems to me all the traditional rules like balancing your portfolio have been underminding by the Fed's manipulation of interest rates and money. I sure as hell wouldn't want to hold bonds if / when the Fed is forced to raise interest rates to keep the dollar from going down the crapper!

So how do Bogleheads deal with all this???
There are two issues here and I wish you had started with your concerns about the integrity of the stock market. Something worth discussion, but this forum does not allow political threads and a discussion on this topic usually ends up political.

As to your comment about converting back to the old-time religion, I wonder how one gets to options as a better alternative, especially for a retiree.

Anyway I share your concerns not only about the market, but about corporate governance. If your concerns about the market are valid, I would think that using actively managed becomes even more unreliable. And there may be people doing options that know insider stuff you don't.
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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Post by LH » Sat Apr 09, 2011 11:59 am

I like "Frakts" (sp?) dice example (read it from him first) with covered calls, to perhaps poorly/wrongly paraphrase it:

1)owning a stock is like a 100 sided die,0-99+, with the stock being bought initially at 50.

roll the dice over a given period, it could drop to zero, or rise to 99+ or anywhere in between.

2)Selling a covered call on that stock is like renumbering the die such that you have 0-52, then every number that was higher than 52, being renumbered to 52. So a dice with 0,1,2,3,........49,50,51,52,52,52,52,52,52.......52.

Sure you get to make your little bit off the covered call, but you lose the upside potential, and KEEP the downside potential all the way to 0 potentially.

Its "dogmatic", because its old hat......

If something as simple as a covered call would actually WORK, then it would be moronically simple for a mutual fund to do it, and make money, rinse, repeat. Guess what....? It does not work. Its not like you have come up something new, or that your counterparty to this simple sort of action is going to lose money consistently to you....... In the end, after costs, its a negative sum game, because ignoring costs, its a zero sum game. You are just another in a long line of people who will try this.

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Post by LH » Sat Apr 09, 2011 12:12 pm

world2steven wrote:.... But my posts were intended to be questions not acccusations; questions like:
1- with rigged markets and looking for a greater fool (i.e. capital gains), with government manipulation of the markets, with crooked accounting and currencies at risk because of inept economic management, can you really INVEST anymore?
2- seems to me all the traditional rules like balancing your portfolio have been underminding by the Fed's manipulation of interest rates and money. I sure as hell wouldn't want to hold bonds if / when the Fed is forced to raise interest rates to keep the dollar from going down the crapper!

So how do Bogleheads deal with all this???

@
1)What has changed about the markets?????? If they are rigged now, they have always been rigged. Always inept management. Always crooked accounting. This stuff, to the extent that it is there in reality, is par for the course, and better than it was in the 1920s, 1930s I would posit. It maybe less than it ever has been to a mild degree......
2)The Fed has manipulated interest rates and money supply since its inception...... That is in fact, what it is supposed to do...... Nothing has changed.

Look, if you are investing, all the above is a given.

Its like if you are planning a vacation to the bahamas 6 months, and you say, omg, it may rain the whole time, and there is a chance of a hurricane too! How can one plan a vacation?!??

well, that stuff has always been true. Nothings changed.

I would say for you, to have a very conservative portfolio. Read some financial history books.

none of this is new.
Last edited by LH on Sat Apr 09, 2011 12:14 pm, edited 1 time in total.

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Post by whitefish » Sat Apr 09, 2011 12:13 pm

KyleAAA wrote:
whitefish wrote:
KyleAAA wrote:
BXM doesn't take into account transaction costs. I also believe it doesn't take dividends into account, but I'm not 100% on that.
For a $1MM equity portfolio, as of today, the notional would be 77 ATM contracts of the SPY, which is the equivalent of ~ 8 SPX contracts. At $1/contract, the commission costs are irrelevant. Dividends are priced into options. Make no mistake. I'm not saying this strategy is the neatest thing since sliced bread. Certainly if you are good at equity selection or market timing, have at it. I'm just pointing out that there ways to use options that reduce risk, if you measure risk as variance of periodic returns, without injuring long-term, total equity-market return. If you take a look at their PUT index, the risk-return characteristics are even better as a result of volatility skew that leans to your favor.

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Post by NightOwl » Sat Apr 09, 2011 12:26 pm

world2steven wrote:But my posts were intended to be questions not acccusations; questions like:
1- with rigged markets and looking for a greater fool (i.e. capital gains), with government manipulation of the markets, with crooked accounting and currencies at risk because of inept economic management, can you really INVEST anymore?
2- seems to me all the traditional rules like balancing your portfolio have been underminding by the Fed's manipulation of interest rates and money. I sure as hell wouldn't want to hold bonds if / when the Fed is forced to raise interest rates to keep the dollar from going down the crapper!
Hi world2steven,

These are not questions. Number 1 is a rant disguised as a question, and number 2 doesn't even bother with a question mark. The rules of the forum prohibit political discussion and economic speculation. Suffice it to say that there is room for disagreement on issues that you are stating as facts. I'd appreciate it if you would leave such rhetoric out of your future posts.

As far as options go, I simply think that Bogleheads recommend that people invest in things that they understand. I think that most people know very basic things about options (what's a call, what's a put), but don't know enough to trade against people who know far more about options. I'd posit that there are even fewer "greater fools" in the options market than there are in the broader market.

You have very strongly held opinions about the future direction of the economy and the markets -- if you are correct, you stand to make a lot of money investing in options. If you understand options well enough to engage in that speculation, I'd say go for it. But don't expect Bogleheads to put some kind of stamp of approval on your trading strategy.

NightOwl
"Volatility provokes the constant dread that some investors know more than we do, making us fearful of ignoring such powerful price movements." | Peter Bernstein, "The 60/40 Solution."

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Post by bobcat2 » Sat Apr 09, 2011 12:31 pm

There are some threads on this forum that advocate safe investing in options. Often this advice involves combining options with a safe fixed income asset or a life annuity. Such a strategy for retirement provides the investor with a safe income floor in retirement but with upside retirement income potential above the floor.

Here is a current thread that advocates such an approach.
Retire Worry-Free with TIPS as a foundation
Link to thread:http://www.bogleheads.org/forum/viewtopic.php?t=71927

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Last edited by bobcat2 on Sat Apr 09, 2011 12:35 pm, edited 1 time in total.
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Post by KyleAAA » Sat Apr 09, 2011 12:31 pm

whitefish wrote:
KyleAAA wrote:
whitefish wrote:
KyleAAA wrote:
BXM doesn't take into account transaction costs. I also believe it doesn't take dividends into account, but I'm not 100% on that.
For a $1MM equity portfolio, as of today, the notional would be 77 ATM contracts of the SPY, which is the equivalent of ~ 8 SPX contracts. At $1/contract, the commission costs are irrelevant. Dividends are priced into options. Make no mistake. I'm not saying this strategy is the neatest thing since sliced bread. Certainly if you are good at equity selection or market timing, have at it. I'm just pointing out that there ways to use options that reduce risk, if you measure risk as variance of periodic returns, without injuring long-term, total equity-market return. If you take a look at their PUT index, the risk-return characteristics are even better as a result of volatility skew that leans to your favor.
Yes, I know dividends are priced into options. I was pointing out that I don't believe the comparison doesn't take the actual dividends paid by the S&P 500 into account.

I would also not consider the commission costs at those rates to be irrelevant.

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Post by Anon1234 » Sat Apr 09, 2011 12:45 pm

Grok87 Tip #8 proposed a 90-95% TIPS and 5-10% S&P500 LEAP portfolio for retirees.
http://www.bogleheads.org/forum/viewtopic.php?p=1008113

I've owned LEAPs and did pretty good, so I'm open to this. I'd like to see some long term back testing. It's speculative, but by using 2-3 year LEAPs plus a roll strategy can approximate long term investing.

This is not and endorsement... I'm not doing it... just interested in your thoughts.

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Re: Options - the end

Post by Imperabo » Sat Apr 09, 2011 12:54 pm

world2steven wrote:
Again, I’m sounding anti-Bogle and that’s not the intent. There has got to be a way to buy and hold. Sector investing? Utilities?

I think we're getting at the core of the issue here. Buy and hold is the product of bogleheaded thinking, not the starting point. The starting point is admitting that you don't have any special powers to identify investment opportunities that the financial community hasn't arbitraged away.

You think you know more than the market. It's as simple as that. You're looking for ways to capitalize on your special knowledge.

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Post by Imperabo » Sat Apr 09, 2011 12:57 pm

LH wrote: 1)What has changed about the markets?????? If they are rigged now, they have always been rigged. Always inept management. Always crooked accounting. This stuff, to the extent that it is there in reality, is par for the course, and better than it was in the 1920s, 1930s I would posit. It maybe less than it ever has been to a mild degree.....


Bingo. There actually was a time in this country when financial markets (and politicians) were as corrupt as the average Marketwatch reader imagines them to be. Yet, our economy survived even that, and the stock market did OK.

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Post by greg24 » Sat Apr 09, 2011 1:05 pm

Good luck with your gambling.

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Re: LEAPS

Post by grok87 » Sat Apr 09, 2011 1:35 pm

hollowcave2 wrote:The only option strategy that may be consistent with Boglehead philosophy is purchasing deep in the money LEAPS. The LEAPS give you a stock substitute. The major ETFs on major indices have LEAPS. There's still a premium to be paid, but this is still a useful strategy, especially if you plan to actually exercise the option and acquire the ETF at the end of its term.

Covered calls, even though conservative, require some more expertise to utilize fully. There's been many threads here on covered calls. Your example in rolling calls is one scenario, but you really need experience in options to understand all of the scenarios. You can't always buy a call back profitably if the stock moves upward. But then again, if the call was written well in the first place, there's nothing wrong with letting the stock get called away and take your profit.

I would suggest actually trying some covered calls on small positions and see how you really react.

Good luck.

Steve
agree see for example this thread
http://www.bogleheads.org/forum/viewtop ... highlight=
I think they could be at the money though...
cheers,
RIP Mr. Bogle.

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world2steven
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My Last last word

Post by world2steven » Sat Apr 09, 2011 2:03 pm

@ bmb823 – If in fact one was warranted, apology accepted. From my original post it would appear to be easy to conclude I was being critical of the Bogle philosophy IF it didn’t permit the use of options – a question on which there is apparently some disagreement among those who really understand that philosophy and all of its ramifications.

@LH – “Read some financial history books.” I’d be interested in your recommendations. I just finished Kindleberger’s “Manias, Panics and Crashes”, 5th edition and it only reinforced my paranoia. A few months ago I read Hyman Minsky’s “Stabilizing an Unstable Economy”.

“better than it was in the 1920s, 1930s I would posit.” - I would posit that you are wrong. Ever hear of Glass Steagall, the SEC and all the stuff FDR brought in to correct the admitted excesses of the 1920s? Did you hear it was all slowly gutted starting with Jimmy Carter and then finally put out of its misery under Clinton?

I suppose I’ve sinned again but it is not really possible to discuss investing without discussing economics. And it is not possible to discuss economics without discussing politics. If you want real capitalism to hang around a while, the markets are going to have to do better than just survive.

With any luck, no one will snare me into playing ‘last word’ again.

Regards,

Steven

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Post by leonard » Sat Apr 09, 2011 2:06 pm

Managing a Bond percentage is more straightforward for managing risk.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.

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Re: My Last last word

Post by LH » Sat Apr 09, 2011 2:52 pm

LH wrote:
world2steven wrote:.... But my posts were intended to be questions not acccusations; questions like:
1- with rigged markets and looking for a greater fool (i.e. capital gains), with government manipulation of the markets, with crooked accounting and currencies at risk because of inept economic management, can you really INVEST anymore?
2- seems to me all the traditional rules like balancing your portfolio have been underminding by the Fed's manipulation of interest rates and money. I sure as hell wouldn't want to hold bonds if / when the Fed is forced to raise interest rates to keep the dollar from going down the crapper!

So how do Bogleheads deal with all this???

@
1)What has changed about the markets?????? If they are rigged now, they have always been rigged. Always inept management. Always crooked accounting. This stuff, to the extent that it is there in reality, is par for the course, and better than it was in the 1920s, 1930s I would posit. It maybe less than it ever has been to a mild degree......
2)The Fed has manipulated interest rates and money supply since its inception...... That is in fact, what it is supposed to do...... Nothing has changed.

Look, if you are investing, all the above is a given.

Its like if you are planning a vacation to the bahamas 6 months, and you say, omg, it may rain the whole time, and there is a chance of a hurricane too! How can one plan a vacation?!??

well, that stuff has always been true. Nothings changed.

I would say for you, to have a very conservative portfolio. Read some financial history books.

none of this is new.
world2steven wrote:
@LH – “Read some financial history books.” I’d be interested in your recommendations. I just finished Kindleberger’s “Manias, Panics and Crashes”, 5th edition and it only reinforced my paranoia. A few months ago I read Hyman Minsky’s “Stabilizing an Unstable Economy”.

“better than it was in the 1920s, 1930s I would posit.” - I would posit that you are wrong. Ever hear of Glass Steagall, the SEC and all the stuff FDR brought in to correct the admitted excesses of the 1920s? Did you hear it was all slowly gutted starting with Jimmy Carter and then finally put out of its misery under Clinton?
You are maintaining the current stock market regulartory condition is equal to or worse than the condition in 1920. That it is more rigged now? Or equally as "rigged"

That "all the stuff FDR brought in" is "finally put out of its misery". Far from it. The regulations are modified over time, but are largely still present, and much more put in later. For a trivially easy example on just one aspect of this, I would perhaps consult Martha Steward et al on the objective reality of stock market regulations on insider trading versus the 1920s, or anyone else more recently serving time in jail. Martha, may well have a dramatically different viewpoint than you.

http://en.wikipedia.org/wiki/Securities ... ted_States

I suggest reading that wiki link. To compare 1920 stock market to todays stock market and say they are the same in terms of being "rigged" is just wrong.
Securities Act of 1933
Securities Exchange Act of 1934
Public Utility Holding Company Act of 1935
Trust Indenture Act of 1939
Investment Company Act of 1940
Investment Advisers Act of 1940
Securities Investor Protection Act of 1970
Insider Trading Sanctions Act of 1984
Insider Trading and Securities Fraud Enforcement Act of 1988
Sarbanes-Oxley Act of 2002
You act like everyone of those regulations do not exist. Or that they have all been wiped out. Yet, people go to jail for violating them. The stock market is clearly much less "rigged" than it was in the 1920s. It is what it is, and it is undeniably better regulated than it was in the 1920s.

To say that all the stuff FDR brought in is now gone, as you do above, is simply utterly false.

here is some of "stuff" FDR brought in

Securities Act of 1933
Securities Exchange Act of 1934
Public Utility Holding Company Act of 1935
Trust Indenture Act of 1939
Investment Company Act of 1940
Investment Advisers Act of 1940

Those are FDR. They are not entirely gone. When you do your calls, and operate in the stock market, you best obey the parts that are still in force, and not function under 1920s rules would be my strong recommendation. Your theory, may well meet up with a real jail cell.

Not to mention, all the acts that came later.

1920 does not equal 2011 in terms of the market being rigged. 1920 was way worse. And again, the Fed exists to manipulate interest rates and money supply, that is its purpose.

To respond again to your post:

]
world2steven wrote:.... But my posts were intended to be questions not acccusations; questions like:
1- with rigged markets and looking for a greater fool (i.e. capital gains), with government manipulation of the markets, with crooked accounting and currencies at risk because of inept economic management, can you really INVEST anymore?
2- seems to me all the traditional rules like balancing your portfolio have been underminding by the Fed's manipulation of interest rates and money. I sure as hell wouldn't want to hold bonds if / when the Fed is forced to raise interest rates to keep the dollar from going down the crapper!

So how do Bogleheads deal with all this???

@
Nothing has changed in investing in regards to all that, and what has changed, has gotten better...........

That is how we "deal" with all that.

Holding bonds when the Feds raise interest rates is simply par for the course..... They will raise them, they will lower them...... The sun will rise, the sun will set. Wars will happen. etc. None of that is new.

Make an asset allocation, buy and hold. The theory encompasses market data for the past 100 years. The fed has raised/lowered rates many times during that period. The dollar has risen/fallen. etc. etc.

LH

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Re: LEAPS

Post by kyounge1956 » Sun Apr 10, 2011 1:31 am

hollowcave2 wrote:The only option strategy that may be consistent with Boglehead philosophy is purchasing deep in the money LEAPS. The LEAPS give you a stock substitute. The major ETFs on major indices have LEAPS. There's still a premium to be paid, but this is still a useful strategy, especially if you plan to actually exercise the option and acquire the ETF at the end of its term. (snip)
I've been reading about options lately in an effort to understand how a TIPS/LEAPS portfolio would be carried out in actual practice. On another thread there was a link to this paper, which describes a basic TIPS/LEAPS portfolio as 90% TIPS and the other 10% in two-year at-the-money call options on SPY, and goes on to describe its performance in a Monte Carlo simulation but doesn't say how the portfolio would be managed. I suppose if the underlying asset rises past the strike price you exercise the option, sell the ETF, add some more TIPS, buy some more LEAPS and do it again, but that's mighty sketchy information to go on. And if there's a prolonged down market, does one switch to buying puts instead of calls?

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Post by likegarden » Sun Apr 10, 2011 6:28 am

Morningstar has an Options newsletter, they also try to get me to sign up for an options course, but doing options seems to require a lot of attention to timing, have more risk, and I am a Boglehead index investor.

A neighbor was doing non-Boglehead stuff, then told me he is starting to do options, next he was selling his house and started to rent elsewhere.

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