TRADE ALERT: Put option "swap" in Core Account
And a glimpse into how I managed to make money when the S&P 500 fell 33% in 2020
Using the same amount of money already invested in the SPY 12/20/24 expiration $460 strike price puts, I swapped them for 1/2 as many contracts of the $XSP 12/20/24 $500 strike puts. A quick breakdown of this trade:
I use protective put options in both YARP and here in CORE
In the case of CORE, which is more of bond-substitute portfolio, I use puts to protect from “worst-case scenarios” such as if we had a steep drop like yesterday, except 5-10 times the magnitude, and over days to weeks. I’ve lived through enough of those to know that I don’t put my capital at risk without having that in place.
With the market going up, the put position fell in price and more importantly to me (since puts losing value usually means the rest of the portfolio is doing well), it has gotten too far from where the market (SPY) is. So I wanted to tighten it up.
$XSP ($ in the symbol on Schwab and other systems indicates the option is on an index, not a stock or ETF) is essentially the same as SPY. It is the “mini-SPX” in that it was created to allow investors to more easily afford S&P 500 Index options, since one contract on the $SPX (full S&P 500 index) can be extremely expensive. So, $XSP is 1/10 the value of $SPX, just as SPY is. That’s why SPY is so popular as a options underlying security.
And full disclosure, my CORE account is an IRA (my YARP account is a taxable account) and so I could have just sold one SPY put option contract and bought a different one (different strike price, different expiration). I’m not a tax advisor, but I assume that a SPY for SPY swap of the puts could be viewed as a “wash sale” and negate the tax loss I’d get from replacing a put with a put on different but highly-correlated underlying securities.
The actual trade was to sell the SPY puts I had, and replace them by buying 1/2 as many contracts of the $XSP puts. The strike price is higher, so it will be more reactive to a possible drop in the S&P 500. But the expiration date is further out. Details of the new position are in the shared research sheet.
My bottom line rationale on this trade: a tighter hedge, a smaller hedge, using the same amount of money. It makes up only 1/4 of 1% of the CORE portfolio, though it can be very powerful if we have a market “freakout” over the next several months. I will be watching to see if it makes sense to increase this position as the year continues.
Will this drag my return? Maybe, but I have plenty of control over that, since there are ways to offset that return drag if I so choose. But I’ll trade a little opportunity cost on the upside for peace of mind “tail risk” protection any day!
This is the element of my investment process that was the key driver of my ability to generate a gain of 2.5% in the CORE portfolio during the 5 weeks in February-March of 2020, when the S&P 500 fell by…wait for it…33%! In other words, $100,000 was worth $102,500 instead of $67,000. I think that’s some “value added.”
And while that was an outsized example, my defensive techniques have had similar wealth-saving impact back when I was managing other people’s money, such as during the 2008 debacle, and during other market pullbacks that lasted a while.
That is great to hear, and pretty funny on the "show." At the start of my career, I commuted from NJ into NYC and so I used to walk by that stuff on my commute.
Since our priority here is to make the institutional service available to the right audience, at the right price, and thus create a true community that can learn from me, but also adapt it as they see fit, we encourage any feedback from you and others as to how we can make it more accessible. For instance, since there is a bit of a learning curve involved and this is well beyond a common "retail" portfolio signal service, if enough people thought it would help them to have a ramp up phase, we could consider something like a payment schedule that ramps up over the first few months. Just one of many possible ideas.
Our overriding goal here is not maximum revenue, but to attract and service a group of active participants in learning from me, and being part of something that every day, I get more confident is an investment strategy built for the times we live in. All while the mainstream tries very hard to drop the masses into mediocre traditional approaches.
So, thanks for your interest. Email us at info@sungardeninvestment.com or just continue this chat here if you have more specific questions or feedback.
Great to hear from you and great to hear you are looking at the Institutional service. Yes, it is the “whole package.” Everything we do and will add eventually will be part of the Institutional service. Let us know if you have any additional questions or need any more info about it.
Best regards,
Rob