Protecting profits

Aligator said: "I am an experienced options trader. I no longertrade stocks, though, and only trade mutual funds. Because of the three year run that we have had, I have made some very nice gains that I would like to protect, and I would like to protect them without selling out and going to, say, hi-yield bond funds. That is because I believe - but don't know - that the bull market is still intact. So I'm staying in. I could buy DIA or SPY at the money December puts. That would place me in a position where I may be able to take advantage of any sudden reversals in the market and take some of the sting out of the inevitable corrections. Then every month (or so) I could sell the puts and either take the profit or take the loss and reach forward another 6 months and buy another in the money put. I'm thinking I could place enough money in the option account to buy 5 contracts (about 2 grand) and pretty much break even in a years time if there is no huge correction and make money if there is a huge correction or disaster...... I'm viewing this as an insurance policy and am using about 10% of this year's gain to fund it. So if I have to lose the whole 2 grand, that'll be fine becuse my mutual funds will be doing their job. Comments?"

JAP said: "[quote=Aligator]I am an experienced options trader. I no longertrade stocks, though, and only trade mutual funds. Because of the three year run that we have had, I have made some very nice gains that I would like to protect, and I would like to protect them without selling out and going to, say, hi-yield bond funds. That is because I believe - but don't know - that the bull market is still intact. So I'm staying in. [/quote] Protecting profits is smartest thing a trader can do right now. The current euphoria clouds the judgement of many traders. Fear and greed can kill you. Why do you believe the bull market is still intact? I'm curious."

LongArm said: "[QUOTE=Aligator]Because of the three year run that we have had, I have made some very nice gains that I would like to protect, and I would like to protect them without selling out and going to, say, hi-yield bond funds. [/QUOTE] I probably wouldn't go to high-yield bond funds to protect myself in a market downturn, anyway. Junk bonds, as they're affectionately called, tend to move with stocks more than investment-grade bonds do. If stocks go down, junk bonds will likely go down too, albeit to a lesser degree."

Aligator said: "[QUOTE=JAP]Protecting profits is smartest thing a trader can do right now. The current euphoria clouds the judgement of many traders. Fear and greed can kill you. Why do you believe the bull market is still intact? I'm curious.[/QUOTE] The chart ($DJI and $COMPX) shows an intact bull. I'm not really in a position to know one way or t'other. So....make a comment on my put strategy......will you?:th_coolio:"

Aligator said: "[QUOTE=LongArm]I probably wouldn't go to high-yield bond funds to protect myself in a market downturn, anyway. Junk bonds, as they're affectionately called, tend to move with stocks more than investment-grade bonds do. If stocks go down, junk bonds will likely go down too, albeit to a lesser degree.[/QUOTE] I kind of knew that and I appreciate your comment. It's just the thought of going to 4.5% hi grade bonds make me a little ill........maybe I'm just not that old yet!:laugh:"

thezster said: "[QUOTE=Aligator]I kind of knew that and I appreciate your comment. It's just the thought of going to 4.5% hi grade bonds make me a little ill........maybe I'm just not that old yet!:laugh:[/QUOTE] You can get a 12 month CD with better returns than that..."

LongArm said: "[QUOTE=Aligator]It's just the thought of going to 4.5% hi grade bonds make me a little ill........maybe I'm just not that old yet!:laugh:[/QUOTE] I hear ya (:)) and I don't blame you for not wanting to be conservative. But 4.5% certainly isn't the ceiling on what your return could be. If interest rates were to start heading down, bond prices would rise and your return would be greater than the yield. Back in 2000-2002, when stocks were dropping 9-22% per year, the Vanguard Intermediate Term Bond Index fund (for example) was averaging a total return of nearly 11% per year. Investors holding bonds at that time were THRILLED--even some young folks I'll bet (;)). Not to imply that bonds will necessarily do that again at the first sign of a correction--just throwing out what's possible. Anyway, sorry to ramble on about bonds--I know you were asking about options. I'm sure one of the esteemed options guys will chime in soon."

LionZion said: "just an idea. its something I use to do here in the market, usuly for short terms, when I want to stay in the market, but need insurance of falling and a chance to earn somethign too. what I do is like "coverd call" and use that call to buy put. thats usualy gives you like same range to each side, like 5% to here and there for a month. if the market will go up you earn up to 5%, if goes down you are coverd from 5% and more. that way you KNOW whats going to happen. and can keep to "flow" with teh market as long as it bulls. another thing u can ofcourse play with risk/reward, like buying the put on the money then you are fully insurance but that will cost you something of your prinicpal."

Aligator said: "Thank you for your suggestion LionZion.......I'll work up some figures and get back in a few days; I have to go out of town tomorrow...... Thanks again.:)"

Aligator said: "OK..... Cover Call is not really possible for me because everything I own is in mutual funds. The limited profits/limited losses provided by vertical spreads doesn't really do it for me because I am looking for disaster protection. Anyone got a feel for calender spreads? I've never used them and have no feel for it. At this point it looks like At The Money puts are the vehicle of choice, and they're not all that good because they will eat up some money before - AND IF - they ever pay off...........maybe I should continue to view them as an "insurance expense" and pay for it just like I insure my house.:cussing:"

LionZion said: "[QUOTE=Aligator]OK..... Cover Call is not really possible for me because everything I own is in mutual funds. The limited profits/limited losses provided by vertical spreads doesn't really do it for me because I am looking for disaster protection. Anyone got a feel for calender spreads? I've never used them and have no feel for it. At this point it looks like At The Money puts are the vehicle of choice, and they're not all that good because they will eat up some money before - AND IF - they ever pay off...........maybe I should continue to view them as an "insurance expense" and pay for it just like I insure my house.:cussing:[/QUOTE] Alright, Im starting to understand your situation (english is hard language ;)) Im thinking maybe you can write calls againts your mutual funds, it depedns on what they are investing in and if it got options that will have corlicain with it. its something I would check. I dont know whats the mautual fuds investing in, but I hava base to assume that in the long term if will do at least as the dow index, maybe you can use those funds as spot to write coverd calls on it. the other only choice is like you said, pay for the insurance from you own pocket, and yeah thats the right way to look on that to my opinion, as insurance premium. in the vix of here its usually around 2-3% to get full insurance on the main index, its cheepr then insure my car. about "calender spreads", Im not sure i understand ... do you mean "time spread"? long in the short-term and short in the long-term speards?"

drdan said: "OK first you have two different types of securities here that do not coincide. Mutual Funds can not be treated like stocks or ETF's and buying puts for protection against a downturn from them is not possible. Mutual Funds are controlled by a person and their decisions to change the securities and/or the weight of each security in the portfolio. You will not be able to match the protective put against them. ETF's on the other hand can be protective put if they allow options. There must be a reason you are sticking with the mutual funds and not changing over to ETFs?? Bottom line is with mutual funds you are giving your money over to someone else to manage and trade for you, so trying to buy protective puts against them is like you trying to second guess what that person is going to do with your money. @LionZion - Calendar spreads, horizontal spreads, diagonal spreads, time spreads are buying (long) a longer term option and selling (short) a shorter term option against it. Calendar spreads use a far out option such as a LEAP as the long and then sell the current or next to current month for the short. Horizontal and other time spreads use options that are one or two months apart. I personally trade calendar spreads diagonally."

LongArm said: "[QUOTE=drdan]There must be a reason you are sticking with the mutual funds and not changing over to ETFs??[/QUOTE] Yeah, I too was wondering why he's trying to "trade" mutual funds, which is not very practical with the 90-day redemption fees, end-of-day NAV prices, etc."

thezster said: "[QUOTE=LongArm]Yeah, I too was wondering why he's trying to "trade" mutual funds, which is not very practical with the 90-day redemption fees, end-of-day NAV prices, etc.[/QUOTE] To be honest with ya... I've contemplated 'trading" my mutuals... the early redemption fee is only $59 - and, on a half decent day, I can pick up a whole lot more than that with my holdings....... Of course, you're faced with trying to "time" the market - which, in itself, is a real bitch..... Overall - i wouldn't suggest it unless you've tons of $$ and serious insight (crystal ball) into the market."

LongArm said: "Nothin' wrong with the concept of trading funds...but if you're gonna do that, why not trade ETFs which will cost you a lot less, allow you to buy/sell at intraday prices, allow you to set stop losses, etc.?"

Aligator said: "Why do we trade mutual funds? Because we only trade every six months, swap funds mostly within the Janus family, and sometimes make no moves at all. Does it work? Sorta. I'd have to figure it out again but we're getting about 16% (+-) annually over the last 5 - 6 years...... drdan.....I hear what you are saying, and of course I can't protect myself the same way you can with your stocks. But I'm not trying to. I'm trying to "insure" myself against catastrophic loss. Our funds are going to go the same direction as the rest of the market, more or less. We don't always see what's coming down the pike. We didn't see 9/11 and we can't see the next one, but we've got some pretty significant profits built up and we're willing to spend a little money to protect them...........like I said, "insurance premium".........ya know?"

drdan said: "Well then here is my opinion on your options strategy... If you are using options as they were intended as insurance then you are going to want to pay less premium. So in order to pay less I would not buy at the money options but rather look at a few points below. For example the SPY is at 151 I would buy the 145 strike price. A 5 point drop is nothing and most likely will not affect your mutual fund portfolio very much but the cost difference for the insurance when you are only purchasing 5 contracts is significant percentagewise. Also because you would be lowering your cost by lowering the strike price I would suggest buying more time instead of December options I would look at March or even June (the quarterly options). I would then hold onto the options for three months and then sell and switch to the next quarter. This will also reduce your commissions cost."

Rickster said: "I dont have a clear cut answer for you, but here are some thoughts. For the last few years, the options sellers have controlled the options markets. With bond yields so low, big money has resorted to selling options as an alternate means of getting yield. As a result, the market volatilities have dropped to eerily low levels. I do not know how long this trend will last, but i do suspect that like all contrived situations, it will go as long as it can, and then blow up. We had a shock wave in Feb. Its intent appears to have been to shake out the weaker or poorly positioned options sellers, and pump up options premiums a little. I bring this up because I think if this continues, it means that your strategy is likely to result in a series of small cuts. The bleeding may not be too bad, but the pain may get damned annoying. And as luck often has it, things will blow up just after you give up, and you will miss making a fortune in puts, while at the same time, taking a bath on the mutual funds. Sorry if that sounds negative. Not wishing any bad luck on you. Just mentioning the possibilities."

drdan said: "[QUOTE=Rickster]I dont have a clear cut answer for you, but here are some thoughts. For the last few years, the options sellers have controlled the options markets. With bond yields so low, big money has resorted to selling options as an alternate means of getting yield. As a result, the market volatilities have dropped to eerily low levels. I do not know how long this trend will last, but i do suspect that like all contrived situations, it will go as long as it can, and then blow up. We had a shock wave in Feb. Its intent appears to have been to shake out the weaker or poorly positioned options sellers, and pump up options premiums a little. I bring this up because I think if this continues, it means that your strategy is likely to result in a series of small cuts. The bleeding may not be too bad, but the pain may get damned annoying. And as luck often has it, things will blow up just after you give up, and you will miss making a fortune in puts, while at the same time, taking a bath on the mutual funds. Sorry if that sounds negative. Not wishing any bad luck on you. Just mentioning the possibilities.[/QUOTE] Rickster I hope you are correct here because I would enjoy some higher premiums. It is getting difficult to find good spread trades. I should be playing a bunch of good bull put spreads right now but unless I want to play closer to in the money the credits are pretty slim."

Rickster said: "I think I know what you mean Doc. Premium levels had (have) gotten down to the point where it wasnt hardly worth selling options. Premiums took a jump in Feb and have now settled back to a plateau that is more in line with last year. The big boys are playing what seems to me to be a dangerous game. Taking out (margin) loans at very low interest rates and then selling premiums. I am sure they have smarter strategies than I would come up with, but sometimes they can out smart themselves. Remember that outfit full of PHDs that had a sure thing and then blew up. Long Term Capital (or something like that). These low volatilities make it tough on the little guy to compete, in that he usually has to pay the spread. Probably wont get any better. Too many fisherman in the same lake."

roarflolo said: "What's wrong with borrowing and leveraging? Nick Leeson and Robert Citron are both heroes in my book ;)"