Dan Hess posted an interesting options technique he uses on the Manifest Investing discussion list. He uses it to protect gains in stocks he wants to hold but which he feels may have run up a bit high. It is an example of purchasing rather than selling PUT options and it is using them as insurance (which is a dirty word to Paul). I can understand both sides. Here is Dan's post:
However there is another portion of my portfolio that is invested in
what I view as high quality core companies I see these having a bright
future and I prefer to hold them while their current price has simply
gotten too far ahead of the fundamentals or company value. For these in a
taxable account I prefer to buy Put Options. I see this simply as
insurance against as sharp market decline. Remember you pay insurance
for your house and then hope it does not burn down and you will never
collect on your insurance.
There are two basic possibilities when buying Puts. First the stock
price will continue to rise above the strike price I select at
expiration in which case the stock I still own will continue to rise and
I will lose the premium (insurance) paid. In this case Uncle Sam will
share in my premium loss, at least about 22% of it in my state. This is
the house does not burn down case.
The other possibility is the stock price will decline below my strike
price at expiration. In this case my stock will decline in price while
my Put Option will increase in price partially offsetting the stock
price decline. This is the house burns down case and I will largely
collect on my insurance to offset the loss.
I use this being appropriate for stocks or ETFs that have had large
increases and now are 10 baggers or so. The challenge is knowing at
what price to enter the Puts and selecting the strike price and
expiration dates. I do note at this time with the market being rather
bullish the Put premiums are not very high. i.e. Cheap insurance.
Anybody else have thoughts on using options to protect gains in the current market?
Laurie Frederiksen
Invest with your friends! www.bivio.com
Well, since I don’t have any 10 baggers, I guess this doesn’t apply to me
J.
--Ron
From: cool_club@bivio.com [mailto:cool_club@bivio.com]
On Behalf Of Laurie Frederiksen Sent: Thursday, August 08, 2013 7:28 AM To: COOL_Club@bivio.com Subject: [cool_club] Using Options to Protect Gains
Hi Cool Clubbers,
Dan Hess posted an interesting options technique he uses on the Manifest Investing discussion list. He uses it to protect gains in stocks he wants to hold but which he feels may have run up a bit high. It is an example of purchasing rather than selling PUT
options and it is using them as insurance (which is a dirty word to Paul). I can understand both sides. Here is Dan's post:
However there is another portion of my portfolio that is invested in what I view as high quality core companies I see these having a bright future and I prefer to hold them while their current price has simply gotten too far ahead of the fundamentals or
company value. For these in a taxable account I prefer to buy Put Options. I see this simply as insurance against as sharp market decline. Remember you pay insurance for your house and then hope it does not burn down and you will never collect on your insurance.
There are two basic possibilities when buying Puts. First the stock price will continue to rise above the strike price I select at expiration in which case the stock I still own will continue to rise and I will lose the premium (insurance) paid. In this
case Uncle Sam will share in my premium loss, at least about 22% of it in my state. This is the house does not burn down case.
The other possibility is the stock price will decline below my strike price at expiration. In this case my stock will decline in price while my Put Option will increase in price partially offsetting the stock price decline. This is the house burns down case
and I will largely collect on my insurance to offset the loss.
I use this being appropriate for stocks or ETFs that have had large increases and now are 10 baggers or so. The challenge is knowing at what price to enter the Puts and selecting the strike price
and expiration dates. I do note at this time with the market being rather bullish the Put premiums are not very high. i.e. Cheap insurance.
Anybody else have thoughts on using options to protect gains in the current market?
Laurie Frederiksen
Invest with your friends! www.bivio.com
I would add that I use Paul's EXCEL SS for selling puts to help
better understand how the put premium I am paying compares to what
the put seller is receiving. i.e. The reverse of what the SS is
providing for the put seller. I used to do the calculation by
hand and the SS sure makes this much easier.
Sorry insurance is a dirty word to Paul but I would bet he has
some on his home and car. (bg)
I should also state my buying of puts is heavily influenced by my
view the current stock market prices have gotten ahead of the US
economy and company fundamentals especially the top line revenue.
I also expect to eventually see the Fed back off its Quantitative
Easing policy that I expect will have a major negative impact on
the bullishness of short term traders and thus I see this as a
time to raise cash to better be able to participate in future
lower stock price opportunities.
Waiting to hear others views on what I am sure will be viewed
differently by many folks. So don't be bashful and I promise not
to be offended by opposing views.
Dan
On 8/8/2013 8:27 AM, Laurie Frederiksen wrote:
Hi Cool Clubbers,
Dan Hess posted an interesting options technique he uses on the
Manifest Investing discussion list. He uses it to protect gains
in stocks he wants to hold but which he feels may have run up a
bit high. It is an example of purchasing rather than selling PUT
options and it is using them as insurance (which is a dirty word
to Paul). I can understand both sides. Here is Dan's post:
However there is another portion of my portfolio that is
invested in what I view as high quality core companies I see
these having a bright future and I prefer to hold them while
their current price has simply gotten too far ahead of the
fundamentals or company value. For these in a taxable account
I prefer to buy Put Options. I see this simply as insurance
against as sharp market decline. Remember you pay insurance
for your house and then hope it does not burn down and you
will never collect on your insurance.
There are two basic possibilities when buying Puts. First the
stock price will continue to rise above the strike price I
select at expiration in which case the stock I still own will
continue to rise and I will lose the premium (insurance) paid.
In this case Uncle Sam will share in my premium loss, at least
about 22% of it in my state. This is the house does not burn
down case.
The other possibility is the stock price will decline below
my strike price at expiration. In this case my stock will
decline in price while my Put Option will increase in price
partially offsetting the stock price decline. This is the
house burns down case and I will largely collect on my
insurance to offset the loss.
I use this being appropriate for stocks or ETFs that have had
large increases and now are 10 baggers or so. The challenge is
knowing at what price to enter the Puts and selecting the
strike price and expiration dates. I do note at this time with
the market being rather bullish the Put premiums are not very
high. i.e. Cheap insurance.
Anybody else have thoughts on using options to protect gains
in the current market?
Laurie Frederiksen
Invest with your friends! www.bivio.com
Thank you for sharing. It makes a lot of sense. I too feel the prices have gotten ahead and have sold some stocks to raise cash. Unfortunately, I didn’t know Dan’s new technique yet.
Ivan
From: cool_club@bivio.com [mailto:cool_club@bivio.com] On Behalf Of Dan Hess Sent: Thursday, 8 August, 2013 8:05 PM To: cool_club@bivio.com Subject: Re: [cool_club] Using Options to Protect Gains
Laurie and other Cool Clubbers
I would add that I use Paul's EXCEL SS for selling puts to help better understand how the put premium I am paying compares to what the put seller is receiving. i.e. The reverse of what the SS is providing for the put seller. I used to do the calculation by hand and the SS sure makes this much easier.
Sorry insurance is a dirty word to Paul but I would bet he has some on his home and car. (bg)
I should also state my buying of puts is heavily influenced by my view the current stock market prices have gotten ahead of the US economy and company fundamentals especially the top line revenue. I also expect to eventually see the Fed back off its Quantitative Easing policy that I expect will have a major negative impact on the bullishness of short term traders and thus I see this as a time to raise cash to better be able to participate in future lower stock price opportunities.
Waiting to hear others views on what I am sure will be viewed differently by many folks. So don't be bashful and I promise not to be offended by opposing views.
Dan
On 8/8/2013 8:27 AM, Laurie Frederiksen wrote:
Hi Cool Clubbers,
Dan Hess posted an interesting options technique he uses on the Manifest Investing discussion list. He uses it to protect gains in stocks he wants to hold but which he feels may have run up a bit high. It is an example of purchasing rather than selling PUT options and it is using them as insurance (which is a dirty word to Paul). I can understand both sides. Here is Dan's post:
However there is another portion of my portfolio that is invested in what I view as high quality core companies I see these having a bright future and I prefer to hold them while their current price has simply gotten too far ahead of the fundamentals or company value. For these in a taxable account I prefer to buy Put Options. I see this simply as insurance against as sharp market decline. Remember you pay insurance for your house and then hope it does not burn down and you will never collect on your insurance.
There are two basic possibilities when buying Puts. First the stock price will continue to rise above the strike price I select at expiration in which case the stock I still own will continue to rise and I will lose the premium (insurance) paid. In this case Uncle Sam will share in my premium loss, at least about 22% of it in my state. This is the house does not burn down case.
The other possibility is the stock price will decline below my strike price at expiration. In this case my stock will decline in price while my Put Option will increase in price partially offsetting the stock price decline. This is the house burns down case and I will largely collect on my insurance to offset the loss.
I use this being appropriate for stocks or ETFs that have had large increases and now are 10 baggers or so. The challenge is knowing at what price to enter the Puts and selecting the strike price and expiration dates. I do note at this time with the market being rather bullish the Put premiums are not very high. i.e. Cheap insurance.
Anybody else have thoughts on using options to protect gains in the current market?
Laurie Frederiksen Invest with your friends! www.bivio.com
Good to hear from you again and I hope you are doing well in
Singapore. Or is your main business still in Indonesia?
I am unclear of the Singapore taxes and since tax rates do affect
this I suggest you consider this ahead of time. In the US the
loss on a short term (less than 1 year) put option is taxed at the
ordinary income tax rate that can vary from 10% to 39.6% for a
married taxpayer, depending upon other income, plus any additional
state taxes. Long term capital gains are taxed at 15% for most
people plus whatever additional state tax that may apply. So for
a highly appreciated stock, I said 10 bagger or so, you have to
consider the taxes on selling the stock as opposed to buying a put
option and being subject to short term capital gains or loss on
the option. In my case it seems to work out favorably when the
stock in question has risen over 100% to 200% or so, that also
depends upon the pricing of the Put Option.
As an example if I have a 10 bagger that has a tax basis of $1000
and is now valued at $10000, if sold would result in a LTCG
(assume held over 1 year) tax of $9000 times 15% plus state tax in
my state of 7% or a tax of $1980. On the other hand if the put
option I buy appreciates (stock price declines) in value and I
sell it the result is a short term capital gain that is taxed at
one's ordinary income tax rate.
So I suggest before buying a Put Option to consider the after tax
result if the stock were to rise x% and if it were to decline x%.
The point here is real wealth accumulation is only real after
paying taxes while pretax gains are simply a loan from the taxing
agency in the US case of the IRS.
In the US we have deferred investing alternatives like IRA's where
this put selling approach is not applicable and only applies to
taxable accounts.
Dan
On 8/8/2013 9:38 AM, Ivan Hodiny wrote:
Hi
Laurie and Dan,
Thank
you for sharing. It makes a lot of sense. I too feel the
prices have gotten ahead and have sold some stocks to raise
cash. Unfortunately, I didn’t know Dan’s new technique yet.
I would add that I use Paul's EXCEL SS for selling puts to
help better understand how the put premium I am paying
compares to what the put seller is receiving. i.e. The
reverse of what the SS is providing for the put seller. I
used to do the calculation by hand and the SS sure makes
this much easier.
Sorry insurance is a dirty word to Paul but I would bet he
has some on his home and car. (bg)
I should also state my buying of puts is heavily influenced
by my view the current stock market prices have gotten
ahead of the US economy and company fundamentals especially
the top line revenue. I also expect to eventually see the
Fed back off its Quantitative Easing policy that I expect
will have a major negative impact on the bullishness of
short term traders and thus I see this as a time to raise
cash to better be able to participate in future lower stock
price opportunities.
Waiting to hear others views on what I am sure will be
viewed differently by many folks. So don't be bashful and I
promise not to be offended by opposing views.
Dan
On 8/8/2013 8:27 AM, Laurie Frederiksen wrote:
Hi Cool
Clubbers,
Dan Hess posted an interesting options technique he uses on
the Manifest Investing discussion list. He uses it to
protect gains in stocks he wants to hold but which he feels
may have run up a bit high. It is an example of purchasing
rather than selling PUT options and it is using them as
insurance (which is a dirty word to Paul). I can understand
both sides. Here is Dan's post:
However there is another portion of my portfolio that is
invested in what I view as high quality core companies I see
these having a bright future and I prefer to hold them while
their current price has simply gotten too far ahead of the
fundamentals or company value. For these in a taxable
account I prefer to buy Put Options. I see this simply as
insurance against as sharp market decline. Remember you pay
insurance for your house and then hope it does not burn down
and you will never collect on your insurance.
There are two basic possibilities when buying Puts. First
the stock price will continue to rise above the strike price
I select at expiration in which case the stock I still own
will continue to rise and I will lose the premium
(insurance) paid. In this case Uncle Sam will share in my
premium loss, at least about 22% of it in my state. This is
the house does not burn down case.
The other possibility is the stock price will decline below
my strike price at expiration. In this case my stock will
decline in price while my Put Option will increase in price
partially offsetting the stock price decline. This is the
house burns down case and I will largely collect on my
insurance to offset the loss.
I use this being appropriate for stocks or ETFs that have
had large increases and now are 10 baggers or so. The
challenge is knowing at what price to enter the Puts and
selecting the strike price and expiration dates. I do note
at this time with the market being rather bullish the Put
premiums are not very high. i.e. Cheap insurance.
Anybody else have thoughts on using
options to protect gains in the current market?
Laurie
Frederiksen
Invest with your friends! www.bivio.com
Interesting discussion. First I agree that at times insurance is a necessary evil. But I have always focused on minimizing what I spend for insurance as it really is just an expense. In that vein, I especially try not to buy insurance where the exposure or downside risk is really fairly insignificant to my lifestyle, such as extended product warranties (just another form of insurance). If my gadget breaks I probably can afford to replace it without standing in the breadline.
I understand that PUTs can be used as downside insurance. Based on the jump in the VIX and the buying interest in PUTs today I would say lots of others understand that too. The problem I see with buying puts as insurance is predicting when the market is going to fall. As an example, I can remember being concerned the market was well ahead of itself at the end of '96 and I moved a significant portion of the portfolio to cash. Had I started buying puts to protect my positions I would have been buying premiums for some 4 to 5 years. That would have been very expensive. Instead my cash paid pretty decent money market returns. Of course, today, money market returns are pathetic and it requires you to be more creative with your cash.
One potential way to generate return on cash is to sell PUTs rather than to buy them. I would rather weather the "valley" for my stocks. I believe any downturn will more than likely be short lived. When there is a stock that I am interested in buying below where we are today, I will be standing at the front of the line selling you PUTs. I will gladly accept your premiums as return on my cash that is getting ready to buy in.
Glad to know the SS is useful for you, even if you are using it a little differently than how it was intended.
I would add that I use Paul's EXCEL SS for selling puts to help
better understand how the put premium I am paying compares to what
the put seller is receiving. i.e. The reverse of what the SS is
providing for the put seller. I used to do the calculation by
hand and the SS sure makes this much easier.
Sorry insurance is a dirty word to Paul but I would bet he has
some on his home and car. (bg)
I should also state my buying of puts is heavily influenced by my
view the current stock market prices have gotten ahead of the US
economy and company fundamentals especially the top line revenue.
I also expect to eventually see the Fed back off its Quantitative
Easing policy that I expect will have a major negative impact on
the bullishness of short term traders and thus I see this as a
time to raise cash to better be able to participate in future
lower stock price opportunities.
Waiting to hear others views on what I am sure will be viewed
differently by many folks. So don't be bashful and I promise not
to be offended by opposing views.
Dan
On 8/8/2013 8:27 AM, Laurie Frederiksen wrote:
Hi Cool Clubbers,
Dan Hess posted an interesting options technique he uses on the
Manifest Investing discussion list. He uses it to protect gains
in stocks he wants to hold but which he feels may have run up a
bit high. It is an example of purchasing rather than selling PUT
options and it is using them as insurance (which is a dirty word
to Paul). I can understand both sides. Here is Dan's post:
However there is another portion of my portfolio that is
invested in what I view as high quality core companies I see
these having a bright future and I prefer to hold them while
their current price has simply gotten too far ahead of the
fundamentals or company value. For these in a taxable account
I prefer to buy Put Options. I see this simply as insurance
against as sharp market decline. Remember you pay insurance
for your house and then hope it does not burn down and you
will never collect on your insurance.
There are two basic possibilities when buying Puts. First the
stock price will continue to rise above the strike price I
select at expiration in which case the stock I still own will
continue to rise and I will lose the premium (insurance) paid.
In this case Uncle Sam will share in my premium loss, at least
about 22% of it in my state. This is the house does not burn
down case.
The other possibility is the stock price will decline below
my strike price at expiration. In this case my stock will
decline in price while my Put Option will increase in price
partially offsetting the stock price decline. This is the
house burns down case and I will largely collect on my
insurance to offset the loss.
I use this being appropriate for stocks or ETFs that have had
large increases and now are 10 baggers or so. The challenge is
knowing at what price to enter the Puts and selecting the
strike price and expiration dates. I do note at this time with
the market being rather bullish the Put premiums are not very
high. i.e. Cheap insurance.
Anybody else have thoughts on using options to protect gains
in the current market?
Laurie Frederiksen
Invest with your friends! www.bivio.com
It does seem we have somewhat similar thoughts on this topic.
I fully agree insurance is an expense and I prefer to use it only
for major unforeseen events and keep its cost as low as possible.
Thus I try to keep deductibles high and only insure things that
would be major hits if they were entirely lost. I follow a
similar approach in buying puts for protection. By this I mean
buying puts that would only be in the money if the price drops in
the stock would be rather severe. This results in the put premium
being paid rather relatively low if I am wrong. No one is right
100% of the time.
I also agree trying to predict when a stock or market is going to
severely decline is quite difficult. I try to address this by
first doing the best fundamental analysis of a company I can do to
identify stocks that are by this measure overly highly priced.
However stocks can continue to rise beyond what fundamentals would
dictate by things like investor sentiment. i.e There needs to be
a catalyst to start the decline in a stock that is an unknown as
to when or what if may be. For this reason after finding a
fundamentally over priced stock I own I then apply technical
analysis to try to determine when the decline may have started. An
example here is when RSI moves above 70 indicating over priced but
may stay above 70 for long periods and thus one must have patience
to await in buying puts until an indicator such as RSI actually
has fallen below 70 and a downtrend has started. RSI of course in
only one indicator to help in making the decision to use puts to
limit losses.
I do think we are in rather scary times with a slow growth
economy, FED artificially stimulating the economy, no real
actions underway by the govt to help create US jobs, an ongoing
expensive war that has no borders and seemingly no end in sight,
high debt and deficits not only in the US but also in Europe and
Japan, consumer demand low due to high unemployment along with
many middle class folks not seeing their income rising enough to
stay ahead of inflation, the Middle East continuing to be a hot
spot, a bond market providing close to zero return for retired
folks with investments like CDs, real inflation being hidden by
the way it is calculated (ask folks buying groceries or gasoline
for their cars or energy to heat their homes) etc. In such a
period it does seem some insurance for a major stock market
decline is warranted. I sense we may differ on this point but I
can understand both viewpoints.
Thank you fro your thoughts.
Dan
On 8/8/2013 2:22 PM, Paul Madison wrote:
Hi
Dan,
Interesting
discussion. First I agree that at times insurance is a
necessary evil. But I have always focused on minimizing
what I spend for insurance as it really is just an expense.
In that vein, I especially try not to buy insurance where
the exposure or downside risk is really fairly insignificant
to my lifestyle, such as extended product warranties (just
another form of insurance). If my gadget breaks I probably
can afford to replace it without standing in the breadline.
I
understand that PUTs can be used as downside insurance.
Based on the jump in the VIX and the buying interest in PUTs
today I would say lots of others understand that too. The
problem I see with buying puts as insurance is predicting
when the market is going to fall. As an example, I can
remember being concerned the market was well ahead of itself
at the end of '96 and I moved a significant portion of the
portfolio to cash. Had I started buying puts to protect my
positions I would have been buying premiums for some 4 to 5
years. That would have been very expensive. Instead my cash
paid pretty decent money market returns. Of course, today,
money market returns are pathetic and it requires you to be
more creative with your cash.
One
potential way to generate return on cash is to sell PUTs
rather than to buy them. I would rather weather the
"valley" for my stocks. I believe any downturn will more
than likely be short lived. When there is a stock that I am
interested in buying below where we are today, I will be
standing at the front of the line selling you PUTs. I will
gladly accept your premiums as return on my cash that is
getting ready to buy in.
Glad
to know the SS is useful for you, even if you are using it a
little differently than how it was intended.
I would add that I use Paul's EXCEL SS for selling puts
to help better understand how the put premium I am
paying compares to what the put seller is receiving.
i.e. The reverse of what the SS is providing for the put
seller. I used to do the calculation by hand and the SS
sure makes this much easier.
Sorry insurance is a dirty word to Paul but I would bet
he has some on his home and car. (bg)
I should also state my buying of puts is heavily
influenced by my view the current stock market prices
have gotten ahead of the US economy and company
fundamentals especially the top line revenue. I also
expect to eventually see the Fed back off its
Quantitative Easing policy that I expect will have a
major negative impact on the bullishness of short term
traders and thus I see this as a time to raise cash to
better be able to participate in future lower stock
price opportunities.
Waiting to hear others views on what I am sure will be
viewed differently by many folks. So don't be bashful
and I promise not to be offended by opposing views.
Dan
On 8/8/2013 8:27 AM, Laurie Frederiksen wrote:
Hi Cool Clubbers,
Dan Hess posted an interesting options technique he
uses on the Manifest Investing discussion list. He
uses it to protect gains in stocks he wants to hold
but which he feels may have run up a bit high. It
is an example of purchasing rather than selling PUT
options and it is using them as insurance (which is
a dirty word to Paul). I can understand both
sides. Here is Dan's post:
However there is another portion of my
portfolio that is invested in what I view as
high quality core companies I see these having a
bright future and I prefer to hold them while
their current price has simply gotten too far
ahead of the fundamentals or company value. For
these in a taxable account I prefer to buy Put
Options. I see this simply as insurance against
as sharp market decline. Remember you pay
insurance for your house and then hope it does
not burn down and you will never collect on your
insurance.
There are two basic possibilities when buying
Puts. First the stock price will continue to
rise above the strike price I select at
expiration in which case the stock I still own
will continue to rise and I will lose the
premium (insurance) paid. In this case Uncle Sam
will share in my premium loss, at least about
22% of it in my state. This is the house does
not burn down case.
The other possibility is the stock price will
decline below my strike price at expiration. In
this case my stock will decline in price while
my Put Option will increase in price partially
offsetting the stock price decline. This is the
house burns down case and I will largely collect
on my insurance to offset the loss.
I use this being appropriate for stocks or ETFs
that have had large increases and now are 10
baggers or so. The challenge is knowing at what
price to enter the Puts and selecting the strike
price and expiration dates. I do note at this
time with the market being rather bullish the
Put premiums are not very high. i.e. Cheap
insurance.
Anybody else have thoughts on using options to
protect gains in the current market?
Laurie Frederiksen
Invest with your friends! www.bivio.com
Yes, I’m doing well, thank you and yes, my business is still in Indonesia. I hope you are well too.
We don’t have such advanced tax structure like in USA. Fortunately, we do not have capital gain tax either. Neither do we get tax benefits when making a loss. However, we get taxed 30% for US stocks’ dividends received.
Ivan
From: cool_club@bivio.com [mailto:cool_club@bivio.com] On Behalf Of Dan Hess Sent: Thursday, 8 August, 2013 9:27 PM To: cool_club@bivio.com Subject: Re: [cool_club] Using Options to Protect Gains
Ivan
Good to hear from you again and I hope you are doing well in Singapore. Or is your main business still in Indonesia?
I am unclear of the Singapore taxes and since tax rates do affect this I suggest you consider this ahead of time. In the US the loss on a short term (less than 1 year) put option is taxed at the ordinary income tax rate that can vary from 10% to 39.6% for a married taxpayer, depending upon other income, plus any additional state taxes. Long term capital gains are taxed at 15% for most people plus whatever additional state tax that may apply. So for a highly appreciated stock, I said 10 bagger or so, you have to consider the taxes on selling the stock as opposed to buying a put option and being subject to short term capital gains or loss on the option. In my case it seems to work out favorably when the stock in question has risen over 100% to 200% or so, that also depends upon the pricing of the Put Option.
As an example if I have a 10 bagger that has a tax basis of $1000 and is now valued at $10000, if sold would result in a LTCG (assume held over 1 year) tax of $9000 times 15% plus state tax in my state of 7% or a tax of $1980. On the other hand if the put option I buy appreciates (stock price declines) in value and I sell it the result is a short term capital gain that is taxed at one's ordinary income tax rate.
So I suggest before buying a Put Option to consider the after tax result if the stock were to rise x% and if it were to decline x%. The point here is real wealth accumulation is only real after paying taxes while pretax gains are simply a loan from the taxing agency in the US case of the IRS.
In the US we have deferred investing alternatives like IRA's where this put selling approach is not applicable and only applies to taxable accounts.
Dan
On 8/8/2013 9:38 AM, Ivan Hodiny wrote:
Hi Laurie and Dan,
Thank you for sharing. It makes a lot of sense. I too feel the prices have gotten ahead and have sold some stocks to raise cash. Unfortunately, I didn’t know Dan’s new technique yet.
I would add that I use Paul's EXCEL SS for selling puts to help better understand how the put premium I am paying compares to what the put seller is receiving. i.e. The reverse of what the SS is providing for the put seller. I used to do the calculation by hand and the SS sure makes this much easier.
Sorry insurance is a dirty word to Paul but I would bet he has some on his home and car. (bg)
I should also state my buying of puts is heavily influenced by my view the current stock market prices have gotten ahead of the US economy and company fundamentals especially the top line revenue. I also expect to eventually see the Fed back off its Quantitative Easing policy that I expect will have a major negative impact on the bullishness of short term traders and thus I see this as a time to raise cash to better be able to participate in future lower stock price opportunities.
Waiting to hear others views on what I am sure will be viewed differently by many folks. So don't be bashful and I promise not to be offended by opposing views.
Dan
On 8/8/2013 8:27 AM, Laurie Frederiksen wrote:
Hi Cool Clubbers,
Dan Hess posted an interesting options technique he uses on the Manifest Investing discussion list. He uses it to protect gains in stocks he wants to hold but which he feels may have run up a bit high. It is an example of purchasing rather than selling PUT options and it is using them as insurance (which is a dirty word to Paul). I can understand both sides. Here is Dan's post:
However there is another portion of my portfolio that is invested in what I view as high quality core companies I see these having a bright future and I prefer to hold them while their current price has simply gotten too far ahead of the fundamentals or company value. For these in a taxable account I prefer to buy Put Options. I see this simply as insurance against as sharp market decline. Remember you pay insurance for your house and then hope it does not burn down and you will never collect on your insurance.
There are two basic possibilities when buying Puts. First the stock price will continue to rise above the strike price I select at expiration in which case the stock I still own will continue to rise and I will lose the premium (insurance) paid. In this case Uncle Sam will share in my premium loss, at least about 22% of it in my state. This is the house does not burn down case.
The other possibility is the stock price will decline below my strike price at expiration. In this case my stock will decline in price while my Put Option will increase in price partially offsetting the stock price decline. This is the house burns down case and I will largely collect on my insurance to offset the loss.
I use this being appropriate for stocks or ETFs that have had large increases and now are 10 baggers or so. The challenge is knowing at what price to enter the Puts and selecting the strike price and expiration dates. I do note at this time with the market being rather bullish the Put premiums are not very high. i.e. Cheap insurance.
Anybody else have thoughts on using options to protect gains in the current market?
Laurie Frederiksen Invest with your friends! www.bivio.com
I understand your "scary times" comments and I was feeling that way too.
However I am starting to actually feel optimistic as it does seem like we are slowly pulling out of our funk. Sales growth has been relatively anemic in our recovery however company balance sheets are looking much better/stronger. It seems to me that we might just be on the verge of seeing renewed capital spending. All the new US energy is going to have a nice boost to our economy and even maybe cause a resurgence in US manufacturing. It will most likely be highly automated manufacturing, using more computers than people but still good for our economy. It also seems inevitable that as things look better that money will flow out of ridiculously low fixed income markets and I think the preferred place to go will be the stock market.
Will we go straight up ...of course not. Some corrections will happen but I am starting to feel that they may be fairly short and shallow in nature. But I could be totally wrong. In particular, as you say, there are several things overseas that might be disruptive to the global economy recovery.
If you don't mind I (and I am sure others) would really like it if you would keep us posted on how the PUTs for downside protection works out for you.
It does seem we have somewhat similar thoughts on this topic.
I fully agree insurance is an expense and I prefer to use it only
for major unforeseen events and keep its cost as low as possible.
Thus I try to keep deductibles high and only insure things that
would be major hits if they were entirely lost. I follow a
similar approach in buying puts for protection. By this I mean
buying puts that would only be in the money if the price drops in
the stock would be rather severe. This results in the put premium
being paid rather relatively low if I am wrong. No one is right
100% of the time.
I also agree trying to predict when a stock or market is going to
severely decline is quite difficult. I try to address this by
first doing the best fundamental analysis of a company I can do to
identify stocks that are by this measure overly highly priced.
However stocks can continue to rise beyond what fundamentals would
dictate by things like investor sentiment. i.e There needs to be
a catalyst to start the decline in a stock that is an unknown as
to when or what if may be. For this reason after finding a
fundamentally over priced stock I own I then apply technical
analysis to try to determine when the decline may have started. An
example here is when RSI moves above 70 indicating over priced but
may stay above 70 for long periods and thus one must have patience
to await in buying puts until an indicator such as RSI actually
has fallen below 70 and a downtrend has started. RSI of course in
only one indicator to help in making the decision to use puts to
limit losses.
I do think we are in rather scary times with a slow growth
economy, FED artificially stimulating the economy, no real
actions underway by the govt to help create US jobs, an ongoing
expensive war that has no borders and seemingly no end in sight,
high debt and deficits not only in the US but also in Europe and
Japan, consumer demand low due to high unemployment along with
many middle class folks not seeing their income rising enough to
stay ahead of inflation, the Middle East continuing to be a hot
spot, a bond market providing close to zero return for retired
folks with investments like CDs, real inflation being hidden by
the way it is calculated (ask folks buying groceries or gasoline
for their cars or energy to heat their homes) etc. In such a
period it does seem some insurance for a major stock market
decline is warranted. I sense we may differ on this point but I
can understand both viewpoints.
Thank you fro your thoughts.
Dan
On 8/8/2013 2:22 PM, Paul Madison wrote:
Hi
Dan,
Interesting
discussion. First I agree that at times insurance is a
necessary evil. But I have always focused on minimizing
what I spend for insurance as it really is just an expense.
In that vein, I especially try not to buy insurance where
the exposure or downside risk is really fairly insignificant
to my lifestyle, such as extended product warranties (just
another form of insurance). If my gadget breaks I probably
can afford to replace it without standing in the breadline.
I
understand that PUTs can be used as downside insurance.
Based on the jump in the VIX and the buying interest in PUTs
today I would say lots of others understand that too. The
problem I see with buying puts as insurance is predicting
when the market is going to fall. As an example, I can
remember being concerned the market was well ahead of itself
at the end of '96 and I moved a significant portion of the
portfolio to cash. Had I started buying puts to protect my
positions I would have been buying premiums for some 4 to 5
years. That would have been very expensive. Instead my cash
paid pretty decent money market returns. Of course, today,
money market returns are pathetic and it requires you to be
more creative with your cash.
One
potential way to generate return on cash is to sell PUTs
rather than to buy them. I would rather weather the
"valley" for my stocks. I believe any downturn will more
than likely be short lived. When there is a stock that I am
interested in buying below where we are today, I will be
standing at the front of the line selling you PUTs. I will
gladly accept your premiums as return on my cash that is
getting ready to buy in.
Glad
to know the SS is useful for you, even if you are using it a
little differently than how it was intended.
I would add that I use Paul's EXCEL SS for selling puts
to help better understand how the put premium I am
paying compares to what the put seller is receiving.
i.e. The reverse of what the SS is providing for the put
seller. I used to do the calculation by hand and the SS
sure makes this much easier.
Sorry insurance is a dirty word to Paul but I would bet
he has some on his home and car. (bg)
I should also state my buying of puts is heavily
influenced by my view the current stock market prices
have gotten ahead of the US economy and company
fundamentals especially the top line revenue. I also
expect to eventually see the Fed back off its
Quantitative Easing policy that I expect will have a
major negative impact on the bullishness of short term
traders and thus I see this as a time to raise cash to
better be able to participate in future lower stock
price opportunities.
Waiting to hear others views on what I am sure will be
viewed differently by many folks. So don't be bashful
and I promise not to be offended by opposing views.
Dan
On 8/8/2013 8:27 AM, Laurie Frederiksen wrote:
Hi Cool Clubbers,
Dan Hess posted an interesting options technique he
uses on the Manifest Investing discussion list. He
uses it to protect gains in stocks he wants to hold
but which he feels may have run up a bit high. It
is an example of purchasing rather than selling PUT
options and it is using them as insurance (which is
a dirty word to Paul). I can understand both
sides. Here is Dan's post:
However there is another portion of my
portfolio that is invested in what I view as
high quality core companies I see these having a
bright future and I prefer to hold them while
their current price has simply gotten too far
ahead of the fundamentals or company value. For
these in a taxable account I prefer to buy Put
Options. I see this simply as insurance against
as sharp market decline. Remember you pay
insurance for your house and then hope it does
not burn down and you will never collect on your
insurance.
There are two basic possibilities when buying
Puts. First the stock price will continue to
rise above the strike price I select at
expiration in which case the stock I still own
will continue to rise and I will lose the
premium (insurance) paid. In this case Uncle Sam
will share in my premium loss, at least about
22% of it in my state. This is the house does
not burn down case.
The other possibility is the stock price will
decline below my strike price at expiration. In
this case my stock will decline in price while
my Put Option will increase in price partially
offsetting the stock price decline. This is the
house burns down case and I will largely collect
on my insurance to offset the loss.
I use this being appropriate for stocks or ETFs
that have had large increases and now are 10
baggers or so. The challenge is knowing at what
price to enter the Puts and selecting the strike
price and expiration dates. I do note at this
time with the market being rather bullish the
Put premiums are not very high. i.e. Cheap
insurance.
Anybody else have thoughts on using options to
protect gains in the current market?
Laurie Frederiksen
Invest with your friends! www.bivio.com
I agree with you that the new low cost US energy via fracking and
horizontal drilling and advanced (or smart) manufacturing using
technology such as software and robotics positioned near low cost
natural gas sources should enable a resurgence in US manufacturing
and hopefully boost exports. Sales growth (and GDP) is anemic and
with US consumer demand flat due to an aging population along with
a lower employment rate indicates we must depend heavily upon
increased exports that will be tough for US companies due to the
tax on goods and services sold in other countries where
competitors from outside the US have a huge advantage due to lower
tax rates than the US. Washington has been talking about this
problem for years but have done nothing to solve it. Thus I see we
have US corporations cutting expenses to continue to grow earnings
despite anemic revenue growth and in the process greatly increase
the cash on their balance sheets. However unless a company sees
increasing demand they are not going to significantly expand
capacity but rather only invest in capital when the investment
results in lowering cost that usually means less workers are
required.
I also agree with you the great 30 year bond bull market is over
and interest rates must rise from the current low levels and that
will mean fixed income investors looking to sell bonds and likely
buying stocks. In fact I think this has already started but data
to verify this seems to be sparse.
Another unknown causing uncertainty is who will replace Ben
Bernanke next February? I expect the president will nominate his
candidate later this year and then the question will be what will
the new Chairman or Chairwoman policy be? It is hard to predict
but will likely change.
One thing I have learned over the years is that predicting the
future is hard to do but at some point using hindsight it will
become quite clear. But I enjoy trying despite the difficulty.
Dan
On 8/9/2013 7:46 AM, Paul Madison wrote:
Dan,
I understand your "scary times" comments and I was feeling
that way too.
However I am starting to actually feel optimistic as it does
seem like we are slowly pulling out of our funk. Sales growth
has been relatively anemic in our recovery however company
balance sheets are looking much better/stronger. It seems to me
that we might just be on the verge of seeing renewed capital
spending. All the new US energy is going to have a nice boost
to our economy and even maybe cause a resurgence in US
manufacturing. It will most likely be highly automated
manufacturing, using more computers than people but still good
for our economy. It also seems inevitable that as things look
better that money will flow out of ridiculously low fixed income
markets and I think the preferred place to go will be the stock
market.
Will we go straight up ...of course not. Some corrections
will happen but I am starting to feel that they may be fairly
short and shallow in nature. But I could be totally wrong. In
particular, as you say, there are several things overseas that
might be disruptive to the global economy recovery.
If you don't mind I (and I am sure others) would really like
it if you would keep us posted on how the PUTs for downside
protection works out for you.
It does seem we have somewhat similar thoughts on this
topic.
I fully agree insurance is an expense and I prefer to use
it only for major unforeseen events and keep its cost as
low as possible. Thus I try to keep deductibles high and
only insure things that would be major hits if they were
entirely lost. I follow a similar approach in buying puts
for protection. By this I mean buying puts that would only
be in the money if the price drops in the stock would be
rather severe. This results in the put premium being paid
rather relatively low if I am wrong. No one is right 100%
of the time.
I also agree trying to predict when a stock or market is
going to severely decline is quite difficult. I try to
address this by first doing the best fundamental analysis
of a company I can do to identify stocks that are by this
measure overly highly priced. However stocks can continue
to rise beyond what fundamentals would dictate by things
like investor sentiment. i.e There needs to be a catalyst
to start the decline in a stock that is an unknown as to
when or what if may be. For this reason after finding a
fundamentally over priced stock I own I then apply
technical analysis to try to determine when the decline
may have started. An example here is when RSI moves above
70 indicating over priced but may stay above 70 for long
periods and thus one must have patience to await in buying
puts until an indicator such as RSI actually has fallen
below 70 and a downtrend has started. RSI of course in
only one indicator to help in making the decision to use
puts to limit losses.
I do think we are in rather scary times with a slow growth
economy, FED artificially stimulating the economy, no
real actions underway by the govt to help create US jobs,
an ongoing expensive war that has no borders and seemingly
no end in sight, high debt and deficits not only in the US
but also in Europe and Japan, consumer demand low due to
high unemployment along with many middle class folks not
seeing their income rising enough to stay ahead of
inflation, the Middle East continuing to be a hot spot, a
bond market providing close to zero return for retired
folks with investments like CDs, real inflation being
hidden by the way it is calculated (ask folks buying
groceries or gasoline for their cars or energy to heat
their homes) etc. In such a period it does seem some
insurance for a major stock market decline is warranted.
I sense we may differ on this point but I can understand
both viewpoints.
Thank you fro your thoughts.
Dan
On 8/8/2013 2:22 PM, Paul Madison wrote:
Hi
Dan,
Interesting
discussion. First I agree that at times
insurance is a necessary evil. But I have
always focused on minimizing what I spend for
insurance as it really is just an expense. In
that vein, I especially try not to buy insurance
where the exposure or downside risk is really
fairly insignificant to my lifestyle, such as
extended product warranties (just another form
of insurance). If my gadget breaks I probably
can afford to replace it without standing in the
breadline.
I
understand that PUTs can be used as downside
insurance. Based on the jump in the VIX and the
buying interest in PUTs today I would say lots
of others understand that too. The problem I
see with buying puts as insurance is predicting
when the market is going to fall. As an
example, I can remember being concerned the
market was well ahead of itself at the end of
'96 and I moved a significant portion of the
portfolio to cash. Had I started buying puts to
protect my positions I would have been buying
premiums for some 4 to 5 years. That would have
been very expensive. Instead my cash paid
pretty decent money market returns. Of course,
today, money market returns are pathetic and it
requires you to be more creative with your cash.
One
potential way to generate return on cash is to
sell PUTs rather than to buy them. I would
rather weather the "valley" for my stocks. I
believe any downturn will more than likely be
short lived. When there is a stock that I am
interested in buying below where we are today, I
will be standing at the front of the line
selling you PUTs. I will gladly accept your
premiums as return on my cash that is getting
ready to buy in.
Glad
to know the SS is useful for you, even if you
are using it a little differently than how it
was intended.
I would add that I use Paul's EXCEL SS for
selling puts to help better understand how
the put premium I am paying compares to what
the put seller is receiving. i.e. The
reverse of what the SS is providing for the
put seller. I used to do the calculation by
hand and the SS sure makes this much easier.
Sorry insurance is a dirty word to Paul but
I would bet he has some on his home and car.
(bg)
I should also state my buying of puts is
heavily influenced by my view the current
stock market prices have gotten ahead of
the US economy and company fundamentals
especially the top line revenue. I also
expect to eventually see the Fed back off
its Quantitative Easing policy that I expect
will have a major negative impact on the
bullishness of short term traders and thus I
see this as a time to raise cash to better
be able to participate in future lower stock
price opportunities.
Waiting to hear others views on what I am
sure will be viewed differently by many
folks. So don't be bashful and I promise not
to be offended by opposing views.
Dan
On 8/8/2013 8:27 AM, Laurie Frederiksen
wrote:
Hi Cool Clubbers,
Dan Hess posted an interesting options
technique he uses on the Manifest
Investing discussion list. He uses it
to protect gains in stocks he wants to
hold but which he feels may have run up
a bit high. It is an example of
purchasing rather than selling PUT
options and it is using them as
insurance (which is a dirty word to
Paul). I can understand both sides.
Here is Dan's post:
However there is another portion of
my portfolio that is invested in
what I view as high quality core
companies I see these having a
bright future and I prefer to hold
them while their current price has
simply gotten too far ahead of the
fundamentals or company value. For
these in a taxable account I prefer
to buy Put Options. I see this
simply as insurance against as sharp
market decline. Remember you pay
insurance for your house and then
hope it does not burn down and you
will never collect on your
insurance.
There are two basic possibilities
when buying Puts. First the stock
price will continue to rise above
the strike price I select at
expiration in which case the stock I
still own will continue to rise and
I will lose the premium (insurance)
paid. In this case Uncle Sam will
share in my premium loss, at least
about 22% of it in my state. This is
the house does not burn down case.
The other possibility is the stock
price will decline below my strike
price at expiration. In this case my
stock will decline in price while my
Put Option will increase in price
partially offsetting the stock price
decline. This is the house burns
down case and I will largely collect
on my insurance to offset the loss.
I use this being appropriate for
stocks or ETFs that have had large
increases and now are 10 baggers or
so. The challenge is knowing at what
price to enter the Puts and
selecting the strike price and
expiration dates. I do note at this
time with the market being rather
bullish the Put premiums are not
very high. i.e. Cheap insurance.
Anybody else have thoughts on using
options to protect gains in the
current market?
Laurie Frederiksen
Invest with your friends! www.bivio.com
Does that mean for capital gains in Singapore you pay no taxes
while for US companies dividends received you pay 30% tax? If so
it would seem to benefit your investing in non (or very low) US
dividend paying stocks to avoid or minimize the taxes owed. I am
thinking of companies like Fiserv (FISV) that pay no dividends
and instead uses excess free cash flow to buy back shares and thus
increase the price of their shares. Today FISV announced another
buyback that will result in buying back 8% of their shares likely
to increase their price per share by 8% assuming no other events.
Note I am not suggesting FISV as a buy since the price has already
greatly appreciated.
Is it only on US stocks you must pay 30% on dividends? What about
dividend taxes on Singapore companies?
I wish the US had a much simpler tax structure that in my view has
grown overly complex.
Dan
On 8/9/2013 6:16 AM, Ivan Hodiny wrote:
Dan,
Yes,
I’m doing well, thank you and yes, my business is still in
Indonesia. I hope you are well too.
We
don’t have such advanced tax structure like in USA.
Fortunately, we do not have capital gain tax either. Neither
do we get tax benefits when making a loss. However, we get
taxed 30% for US stocks’ dividends received.
Good to hear from you again and I hope you are doing well in
Singapore. Or is your main business still in Indonesia?
I am unclear of the Singapore taxes and since tax rates do
affect this I suggest you consider this ahead of time. In
the US the loss on a short term (less than 1 year) put
option is taxed at the ordinary income tax rate that can
vary from 10% to 39.6% for a married taxpayer, depending
upon other income, plus any additional state taxes. Long
term capital gains are taxed at 15% for most people plus
whatever additional state tax that may apply. So for a
highly appreciated stock, I said 10 bagger or so, you have
to consider the taxes on selling the stock as opposed to
buying a put option and being subject to short term capital
gains or loss on the option. In my case it seems to work out
favorably when the stock in question has risen over 100% to
200% or so, that also depends upon the pricing of the Put
Option.
As an example if I have a 10 bagger that has a tax basis of
$1000 and is now valued at $10000, if sold would result in a
LTCG (assume held over 1 year) tax of $9000 times 15% plus
state tax in my state of 7% or a tax of $1980. On the other
hand if the put option I buy appreciates (stock price
declines) in value and I sell it the result is a short term
capital gain that is taxed at one's ordinary income tax
rate.
So I suggest before buying a Put Option to consider the
after tax result if the stock were to rise x% and if it were
to decline x%. The point here is real wealth accumulation
is only real after paying taxes while pretax gains are
simply a loan from the taxing agency in the US case of the
IRS.
In the US we have deferred investing alternatives like IRA's
where this put selling approach is not applicable and only
applies to taxable accounts.
Dan
On 8/8/2013 9:38 AM, Ivan Hodiny wrote:
Hi
Laurie and Dan,
Thank
you for sharing. It makes a lot of sense. I too feel the
prices have gotten ahead and have sold some stocks to
raise cash. Unfortunately, I didn’t know Dan’s new
technique yet.
I would add that I use Paul's EXCEL SS for selling puts to
help better understand how the put premium I am paying
compares to what the put seller is receiving. i.e. The
reverse of what the SS is providing for the put seller. I
used to do the calculation by hand and the SS sure makes
this much easier.
Sorry insurance is a dirty word to Paul but I would bet he
has some on his home and car. (bg)
I should also state my buying of puts is heavily
influenced by my view the current stock market prices
have gotten ahead of the US economy and company
fundamentals especially the top line revenue. I also
expect to eventually see the Fed back off its Quantitative
Easing policy that I expect will have a major negative
impact on the bullishness of short term traders and thus I
see this as a time to raise cash to better be able to
participate in future lower stock price opportunities.
Waiting to hear others views on what I am sure will be
viewed differently by many folks. So don't be bashful and
I promise not to be offended by opposing views.
Dan
On 8/8/2013 8:27 AM, Laurie Frederiksen wrote:
Hi Cool
Clubbers,
Dan Hess posted an interesting options technique he uses
on the Manifest Investing discussion list. He uses it to
protect gains in stocks he wants to hold but which he
feels may have run up a bit high. It is an example of
purchasing rather than selling PUT options and it is using
them as insurance (which is a dirty word to Paul). I can
understand both sides. Here is Dan's post:
However there is another portion of my portfolio that is
invested in what I view as high quality core companies I
see these having a bright future and I prefer to hold them
while their current price has simply gotten too far ahead
of the fundamentals or company value. For these in a
taxable account I prefer to buy Put Options. I see this
simply as insurance against as sharp market decline.
Remember you pay insurance for your house and then hope it
does not burn down and you will never collect on your
insurance.
There are two basic possibilities when buying Puts. First
the stock price will continue to rise above the strike
price I select at expiration in which case the stock I
still own will continue to rise and I will lose the
premium (insurance) paid. In this case Uncle Sam will
share in my premium loss, at least about 22% of it in my
state. This is the house does not burn down case.
The other possibility is the stock price will decline
below my strike price at expiration. In this case my stock
will decline in price while my Put Option will increase in
price partially offsetting the stock price decline. This
is the house burns down case and I will largely collect on
my insurance to offset the loss.
I use this being appropriate for stocks or ETFs that have
had large increases and now are 10 baggers or so. The
challenge is knowing at what price to enter the Puts and
selecting the strike price and expiration dates. I do note
at this time with the market being rather bullish the Put
premiums are not very high. i.e. Cheap insurance.
Anybody else have thoughts on using
options to protect gains in the current market?
Laurie
Frederiksen
Invest with your friends! www.bivio.com