I posted about the strategy of leveraging assets that are not paying cash, but are extremely valuable a bit ago, and received some very savvy advice. As in, the Iron Condor strategy might not be a low-risk way to juice the return off of a semi-permanent hold like Berkshire Hathaway. All the arguments I heard made a lot of sense. To paraphrase, the strategy, with 15+ years of history, uses an asset (like Berkshire Hathaway stock, or another asset that has durable value, but doesn't pay much cash; it can include anything of sustainable value that isn't easy to leverage off of) to provide collateral for an out-of-the-money put/call band above and below the S&P Futures index, by both buying and selling puts and calls (2 calls, 2 puts) both above and below the asset to create income around the asset. Possible losses are defined, and limited, by definition.I have not pulled the trigger.Does anywhere here, though, have a suggestion for a Motely Fool board that discusses this sort of thing daily? I posted to one board that seems to be inactive. I just want to further vet this idea with people that play in the arena on a daily, or at least regular, basis.Many thanks for any suggestions.I am just trying to do my due diligence to make sure I am not passing up an opportunity that actually doesn't have much risk, that could earn roughly 6% on top of the return I already expect for Berkshire.If you know of a place on Motely Fool or elsewhere where I could further discuss this idea, please share. Obviously, it would need to be a discussion group that are options experts.Many Thanks!Doc
out-of-the-money put/call band above and below the S&P Futures index, by both buying and selling puts and calls (2 calls, 2 puts) both above and below the asset to create income around the asset. ... an opportunity that actually doesn't have much risk, that could earn roughly 6% on top of the return I already expect for Berkshire.I certainly have my doubts that there exists any strategy that will take a given portfolio and add a meaningful additional long run average yield to it without a downside.And I'm closer to a believer than most, having done over a hundred thousand options contracts.It seems you're suggesting you'd expect "same returns plus another 6%", and that doesn't pass the smell test at first blush.Can you say more about your goals? Which of these, and with which priorities?* To create a bit of current yield from a portfolio which does not pay dividends?* To smooth returns...make bad and so-so times better while turning occasional great times into merely very good time?* To increase the long run average return on your portfolio?* Improve a tax situation / avoid hurting a tax situation?I can think of things a person can do that have substantial chance of managing one or two of those with an increase in risk which is almost certainly acceptable.Jim
I'm confused:You want to sell condors on Berkshire yourself? Or you what to buy the fund you had earlier mentioned that does it on S&P underlying?I don't know of a Motley Board that would have good advice on this.FWIW, my advice regarding the first question is 'not a good idea' and regarding the second question 'look up the track record of LJMAX/LJMIX'
Jim has obviously given a response as well, but there's an options strategy board that has some knowledgeable people on it if you have a Stock Adviser subscription.http://boards.fool.com/1081/sa-options-118350.aspx?mid=33144...Many of the posters list trades as they execute them along with periodic results. The trades range from the simple to the complex. It's a good forum for having questions answered and getting feedback on potential trades.
If you know of a place on Motely Fool or elsewhere where I could further discuss this idea, please share. Or you could just hang around this board, you can find some invaluable option nuggets like this one (Thanks, Jim):http://boards.fool.com/jim-if-youre-reading-this-and-feel-li...M
Jim,"* To create a bit of current yield from a portfolio which does not pay dividends?"That pretty much nails it.I don't want to be greedy or stupid; don't want to risk on the downside, but at the same time, I don't want to ignore a reasonable strategy that could juice the big relatively large position I have in BH to gain additional income, without a lot of downside risk.Their track record seems to support the above, and I think I understand what they are doing and the potential downside; I'm just trying to be smart about DD before I do anything.Bottom line, I trust the people and the firm, given the long run history I've seen, but I am looking for others that have also been down this path, and what their personal experiences have been.I'm just not interested in "leap of faith" strategies.And I don't think they are offering any kind of leap of faith in what they do, but I am interested in any others that have considered going down this path.Just trying to be smart before I make any decisions.Doc
No, I don't want to do this myself.The firm would do it on my behalf.They would use the asset value of my BH position as collateral to execute the Iron Condor strategy on S&P futures to juice the return.Collateral could take many forms. For me, it would be BH stock. For others, as I understand, it could be any asset that has discernible value. For example, someone who owns an asset that is a collectible with discernible value (collectible gold coins, for example), could also offer that up for this strategy.It's a way to earn a small-ish return/cash on an asset that otherwise doesn't pay an effective cash return/dividend on a monthly or quarterly basis.
If you know of a place on Motely Fool or elsewhere where I could further discuss this idea, please share. Or you could just hang around this board, you can find some invaluable option nuggets like this one (Thanks, Jim):http://boards.fool.com/jim-if-youre-reading-this-and-feel-li......---------------------------------------------------------Jim, how do you feel about this being done now?
http://boards.fool.com/jim-if-youre-reading-this-and-feel-li......Jim, how do you feel about this being done now? Well, (a) it's not as juicy as it was then. The value proposition was better and the implied interest rate for the leverage was lower.The cost is still getting worse, too, since the cost of a call has built into it the expected short term interest rates over the next year or two. Those have gone from nothing to meaningful.(b) I'm still doing it anyway, to a certain extent. I'm dumb.As it emphasizes, a little leverage goes a long way.You don't have to do this with your whole holding.Selling 1/3 your stock and replacing it with some options with 2:1 leverage can add a useful little bonus to your retirement.Most especially if you do it at an opportune moment in terms of valuation.At *really* good moments you might do it with more than 1/3 or your stock or more than 2:1 leverage built into the options.But do note the comments on why it's important not to do this with your whole portfolio.Sometimes you will have to roll the options, the price won't have risen during the term you've held them, and the roll will cost you extra cash.That cash has to come from somewhere, or you're forced to abandon the position while prices are low.On the upside, I think there's a good chance that the Fed will blink at some point in the interest rate cycle and the interest rates built into the calls will peak and start falling again.I'm not counting on this, but I'm rather expecting it.I have a slightly higher ratio of one year options to two year options at the moment, as thecurrent price for the second year is quite high and I thin kit could conceivably come down a bit.Who knows?Jim
* To create a bit of current yield from a portfolio which does not pay dividends?* To smooth returns...make bad and so-so times better while turning occasional great times into merely very good time?* To increase the long run average return on your portfolio?* Improve a tax situation / avoid hurting a tax situation?..."* To create a bit of current yield from a portfolio which does not pay dividends?"That pretty much nails it.Well, here are some strategies that might be worth considering. Or not.By far the most prudent and obvious is this: sell 1% of your current remaining Berkshire share count each quarter.Bang, you have an income stream. The tax treatment is fine. Almost by definition you will average realizing the long run average market multiple on the sales.What's not to like?No, it's not an *additional* income, but you can't get that without additional risk, so...it's OK.It's prudent and intelligent and reliable.But it contains no promises of magic or excitement or free money, so I imagine you'll read on.If for some reason you have an irrational attachment to income that comes from dividends for some reason,sell 1/3 of your Berkshire position and buy some BIP. And/or BPY. And/or WFC/PL.The problem is that we live in a very low yield world.There aren't that many things with good coupons that are safe enough.Those are three I might consider personally, but they are VERY much exceptions.Very slightly better might be a combo. Switch 1/3 of your BRK to BAM.You get a small dividend on the BAM, and you can sell a small amount of either one each quarter to top that up.Whichever one seems to be most fully valued at the time.BAM doesn't have quite the bulletproofness of Berkshire, but the central expected return in the next few years might be higher.It's at least conceivable that BAM will have a higher return, and therefore the higher return onthe BAM portion of the portfolio means that the income you're pulling out doesn't make the overallportfolio return much/any lower than it would have been as a simple block of BRK stock, meaning the yield is "gravy".Depends on how much you pull out, and how well BAM does relative to BRK.As others mentioned, I have in the past suggested that greedy people like me can sell moderate fraction of your BRK stock and buy some long dated deep-in-the-money BRK calls with the proceeds.http://boards.fool.com/jim-if-youre-reading-this-and-feel-li...This works amazingly well...as long as BRK's valuation is good, and interest rates aren't bad, and you're patient.It can be combined with suggestion #1, just selling 1% of your remaining current count of BRK shares each quarter.Use the calls for the rest, as a way of aiming for boosting the long run portfolio returns.The long run average extra return from the leverage in the calls has a very substantial chance of increasing the long run return enough that you are getting the return you would have had on just the BRK stock,PLUS enough extra income that the slight liquidations leave your account as big as it would otherwise have been.But of course, it's just leverage. It isn't a zero risk proposition.The attractiveness depends somewhat on the tax treatment of your account, but less than you might think.Then there are strategies involving gathering option premiums.There are quite a few of those, to say the least. Few live up to their promise.Iron condors? and paying somebody to manage that for you? I remain dubious. Another I have done in the past is writing repeated Berkshire puts.(sell some stock, leave cash sitting there, write repeated first-in-the-money puts backed by the cash.Each time a put expires or gets to a uselessly low maximum rate of return to expiry, close and write a new one.Each time the stock gets assigned, immediately sell the stock and write a new put.This works. During the time I did it, I got all the stock's return plus a bit of "yield".The problem with it? The premiums on Berkshire are generally pretty darned low).As a rule of thumb, use analogies from the insurance business for all premium gathering strategies.There is a premium level at which a strategy is worthwhile, and another at which it's dumb.Option premiums are awfully low lately.Consider all premium harvest strategies seriously only when, say, VIX is over 20.It has been a long time since that was true, but over the very long run it has been true half the time.One of the safest and most reliable strategies I know is laid out in great deal in Jeffry Cohen's book "Put Options".This is not a general manual on options like so many others, but rather a VERY explicit description and defence of a single very specific low risk strategy.In general the strategy is nearly risk free. You make maybe 15% a year in normal years, andwhen things occasionally go south you occasionally break even.The catch is that some years the strategy described is just not worth the bother...the prospective return is too low.The silver lining is that when premiums are too low to make the return interesting, you know in advance you're not going to make much, so just don't do it. Do something else that year.If you don't use the hedge side of his strategy it's an all long strategy based on repeated cash-backed put writing, something I've done a lot of.As a rule of thumb, I find you'll get a return equal to roughly the midpoint between the return on the underlying stock portfolio and about 10%/year.A -20% market drop turns into a loss of -5%, a flat year for the stocks turns into a 5% profit, and a 20% year for stocks turns into a 15% profit.(maybe that 10% in the formula becomes 8% in low VIX times and 12 in better VIX times, but you get the idea)There are lots of ways to get fancy.There is a smaller population of things that promise a free lunch.And a vastly smaller number that actually deliver on the promise.Jim
Bottom line, I trust the people and the firm, given the long run history I've seen, but I am looking for others that have also been down this path, and what their personal experiences have been.OK: I had some money in the volatility premium capture fund 'LJMAX' which was titled "Preservation and Growth".It had a long track record of nice results for an 'alt', did fine in crashes, and was considered one of the best "alt" funds. I understood very well what they *said* they were doing (read academic papers on similar approaches complete with backtests etc).It blew up in early 2018. Why? Perhaps illegal activity, perhaps stupidity, perhaps both (law suits abound).The big print in the prospectus of such funds is all about "premium capture", "preservation and growth", "risk management", etc.The small print typically allows them to *do anything*.Are you feeling lucky?
Thanks, StockNovice.Don't have a Stock Advisor subscription, but maybe I should get one.
Ted,Yes, I have read the small print. There ARE risks, and they have the legal ability to do LOTS of things that are beyond the core strategy. However, they have not done that in the past. And, they flew through 2008-2009 just fine. And the net return numbers are truly net; after all fees. And, I do trust the people involved in this strategy, as I have talked/met all of them, and friends of mine have had relationships with them for years. The human trust factor is a huge thing for me. Almost every investing endeavor I have done that didn't turn out well had a people problem that caused the downfall. Picking good business models is kind of the easy part, in my experience.Having said all that, the proverbial truck could hit them all, and then all that goes out the window. I understand that risk. That's why I'm seeking others' thoughts, and proceeding slowly.And, I am also getting more interested in doing a couple of things that Jim/Mungo suggests on my own, which gives me complete control.Or, punt on the whole idea and not be greedy. It's not like I need the potential extra $ to pay the bills.And, to add to that, I keep telling myself that it's time to start simplifying. Easy to think about and hard to do!
Jim,I like a couple of your last suggestions about options strategies. I will study these a bit more and see if they make sense for me. I (effectively, but without any public scrutiny!) ran a mutual fund for 15 or so years some years ago, and my partner spent about half his time on the options side, and did pretty well (never super risky things, writing covered calls and the like). (We structured it and ran it like a mutual fund, but never pulled the trigger to make it legal to offer to the public. It ultimately was just a friends and family fund that we handled privately.)Thanks for all your advice and specific expertise! Very kind of you to share your thoughts.Doc
Best Of |
Favorites & Replies |
Start a New Board |
My Fool |