Trade Alert: YARP (options section)
Added to put position, but that's all. Detailed explanation follows trade note.
Note: as we do from time to time, this trade alert is being sent to ALL subscribers of the SungardenInvestment.com service, not only the paid subscribers. In most cases, the day-to-day stock moves and deeper thoughts and perspective from me are reserved for the paid users of the service. However, in situations like this, where the trade itself was a quick item, but the education and insight into my thinking as a veteran portfolio manager is more extensive, we like to let the broader audience see what goes on. And why the service is well worth $300 a month in our opinion.
Here’s what the shared portfolio tracking sheet now looks like in regards to the options section of the YARP portfolio. The only trade I did today was the first line. Specifically:
I used 0.50% of the YARP portfolio assets to buy contracts in the same $XSP underlying I already have (see the 9/30/24 $470 puts below it in the grid). The cost currently is around $6.40 a contract.
So 1 contract costs about $640 and provides protection against a market decline below $520 between now and December 20 of this year. So $640 outlay gets me that “crash” protection on about $52,000 in assets. Adapt that to your portfolio size as you wish. I bought enough contracts to amount to 0.50% of my portfolio.
(As a reminder, $XSP is the S&P 500 “minis” 1/10 the value of the full $SPX contract and similar to SPY ETF-based contracts).
Additional notes/perspective on this trade:
This is a good example of why sometimes, when I get an idea like I did last week (“Rob, you should really freshen up that options exposure since both the put and call have sunk in value as the VIX sunk from the high 20s to the high teens in record time.”)
Sometimes it helps to wait a bit and see what develops. What developed is a few more days where the stock market spiked and VIX drove lower to around 15. That makes options cheap across the board.
I wanted to get some iron-clad protection for the YARP stock portfolio through the election and, based on past history, whatever political wrangling occurs in the 6 weeks following the election. That’s why the 12/20/24 expiration date was chosen.
The $520 level on $XSP is about 7% below where it is trading today, and I have 4 months to see it blast under there to profit from the option. Of course, I’d rather it not be needed, but I’m not about hoping bad things don’t happen. I insure against them as best I can.
This 0.50% allocation in the YARP portfolio protects about 50% of the portfolio if the options end up “in the money” with $XSP below $520 by 12/20/24. That gives me more flexibility to do more on the “long side” and grab more dividends and capital appreciation, without constant fear that I’ll be proverbially hit in the back of the head by a financial 2x4.
Note that I DID NOT sell the 2 existing positions, one a put option on $XSP and the other a call option on SPY. The other $XSP does not expire until 9/30 and since that is more than 30 days from now, I think that may mean that if I hold it another 30 days, my $XSP put purchase today won’t prompt a taxable “wash sale.” I am NOT a tax expert so don’t quote me on that one. I am not as tax-sensitive as most investors, but the thought occurred to me.
By leaving the existing puts and calls in place, instead of cashing them in for a total of what amounts to 0.14% of my portfolio (“chicken feed” since they have lost almost all of their value), I keep them as what I like to call “lottery tickets.” That is, if SPY continues spiking and crosses above $600 by 9/30, that option will be worth something. I’ll take that chance, given how well YARP is doing outside of the options.
And, if the market finds a reason to do another September panic as we’ve seen in the past, the $470 puts might just pay off huge. Probably not, but worth hanging on to, given what we just saw on 8/5 stemming from Japan. Frankly, if we did get some sort of 1987 style event in the next 28 days, between the $470 puts and the new ones I bought, I’d expect to be way up in the YARP portfolio when that happens.
Welcome to my world :-)
I also decided not to make any changes in the options set in CORE. That portfolio has so many ways to operate using ETFs, and I don’t want to “chase” by rolling over the options just yet. Those call options go out to 10/31, and a continued rally could make them profitable at that $600 strike price. That’s why they are down less than the options expiring in September.
Let’s see what happens next.