We save our hard-earned money… invest in 401Ks and IRAs—all with hopes of having a nest egg by the time we’re ready to retire.
As a father of four, the last thing I want to do is put a burden on my children when I’m old and frail.
So, know this comes from a place of concern when I tell you…
Use options to protect your retirement!
You probably don’t even realize the risk of investing in funds… these opaque tickers that most financial advisors recommend and corporations offer as part of their benefits.
But honestly, ask yourself, how much flexibility do you really have when there are dozens of choices that are ALL pretty much the same.
That’s why the market has been so sensitive to news this year. These funds are like sheep, if the market sells hard—they will all go down with it.
Of course, that’s not something you want to hear.
After all, many of us are limited in what we can select with our 401Ks. That situation is, what it is.
You can hope that the market is strong during your golden age… or you can take steps right now to secure your future.
Even a few tweaks using options will save you during downturns, reduce your risk, and maximize your return.
Let me share with you two easy ways option strategies can improve your performance and save you during a crisis.
Most of us can’t actively trade our retirement accounts. We’re limited to a set of funds, if not trading restrictions themselves. That’s where options come in.
Options work like insurance products. You buy them to insure against upside and downside risk.
With rare exception, most investment funds hold dozens, if not hundreds of stocks. Diversification works great to reduce individual company risk.
Yet, most funds take this too far. It’s all good and well to invest in a fund that matches the S&P 500. But, do you really want to expose yourself to the bad companies and sectors?
Over the last 15 years the oil markets went through a major transformation. New technology increased production, causing a secular shift. Despite the day to day price fluctuations, most of us knew that things were changing.
If you invested in an index fund, you owned plenty of these failing companies. You took the bad and the good.
Many investors don’t have lots of cash on hand to make counter investments to match their portfolio.
For example, energy used to make up nearly 10% of the index. If you had $100,000 in a retirement account, you had $10,000 in a crashing industry.
So why spend $10,000 to protect against that portion when you could spend $100? Option leverage allows you to take control of 100 shares per contract. The cost you pay is the premium.
Yet, if you knew that 10% of your retirement portfolio was going to drop by 50%, wouldn’t a $100… even a $500 insurance policy be worth it?
One of the most popular strategies for conservative investors is the covered call. The covered call involves selling a call against every 100 shares of stock you own. You collect the premium. If the stock gets above the strike price, you lose out on any additional gains.
It’s a pretty straightforward strategy many investors use. However, there’s one tweak I want to share that beats out the S&P 500 index.
The Chicago Board of Exchange (CBOE) publishes several indices related to option strategies. One is known as the buy-write index. A buy-write is a covered call that has you buying the stock and selling the call against it at the same time. So, it works as a good proxy here.
I want to show you what the buy-write 30 delta looks like vs the S&P 500.
Note: 30 delta means you’re selling at call strikes half a standard deviation away.
Here’s how the two compare over the past year.
Both come in virtually identical. However, you can see that the buy-write does protect a bit more during the downturns.
When you look out over 5 years, the buy-write beat out the S&P 500 until more recently.
What really makes the point is the 13-year comparison that goes back through the Great Recession.
This simple strategy beat out the main index by quite a significant amount. The major benefit comes during the downturn. Collecting the premium for out-of-the-money strikes will consistently deliver you benefits during a protracted downturn.
What I like about this strategy is there isn’t much downside. You breakeven during bull markets. But during major downturns, you benefit huge.
The best method for this strategy uses an ETF like the SPY. You want to be able to collect the dividends paid out by the companies. Using an index ETF like the SPY keeps your costs low, lets you collect the dividend, and easily execute this strategy.
I should mention that the key to this strategy is the 30 delta out-of-the-money calls. If you did at-the-money calls, you would underperform the S&P 500.
For example, this chart shows how the at-the-money buy-write index significantly underperformed during the bull market.
Yes, it will do much better protecting you during major downturns like the market crash in ’08-’09. However, it’s not a great strategy for long bull runs.
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