Skip to main content
No. of Recommendations: 0
Just starting to look at use of options. Have been tracking paper transactions plus made a couple of actual transactions; call, put & covered call.

Starting to look at portfolio protection. How are people on this board using options to protect their portfolio? Any examples?

Print the post Back To Top
No. of Recommendations: 1

I guess it depends on what you mean by portfolio protection. For me that means cost basis reduction. Covered calls or simulated covered calls are one way.

I've owned stocks and have sold calls about 75-80% chance of being out of the money at expiration. This will reduce my cost basis. Here's an example:

Let's say I buy 100 shares of XYZ at $50 a share. I'll go out about 30 to 50 days for an option and sell a Call that is about 75-80% chance of being OTM at expiration. Let's say that would be $55. If I get $0.75 for a contract that means I reduce my cost basis $75 (minus resort fees). I've paid $49.25 a share. I'll continue to do this each month except I might stay away from earnings. If the price is over my strike price, I'll buy back the CALL and sell my stock. Assignment for me is around $20 in addition to normal commissions (resort fees).

The only thing I don't like about this is I tie up a lot of capital. Another way you can look at this is simulating a covered call by buying a Call ITM and selling a call OTM. The ITM Call would be 6 to 9 months out. I would then sell an OTM Call each month.

Using the same example as above instead of buying the stock at $50, I would buy a $45 Call 9 months out. This might cost me about $6. Each month I would sell the $55 Call for $0.75. That would reduce my cost basis to $5.25 the first month and so on. If the price of the stock is $60 at the end of one month, I'd buy back my Call at $5 and sell my $45 call for around $15. I would make about the same amount of money but it would tie up less capital.

Of course if the stock drops, I could lose money in the simulated covered call if it is below $45 at expiration.

Hope that helps,
Print the post Back To Top
No. of Recommendations: 0
Horb -

Love the simulated covered call strategy. Was not familiar with that until reading your post. Thank you!

Print the post Back To Top
No. of Recommendations: 2
I've heard the simulated covered call I described called a Poor Man's Covered Call. It allows me to do a covered call in stocks like AAPL, NFLX or PCLN if I wanted to without actually buying the stock.

I generally wait until the stock hits it's floor. I'll go about $5 ITM and then sell calls against it. AAPL trades in a range of $120 - $130. When it gets close to $120, I can buy a $115 Call about 9 months out. I'll then sell $125 Calls. I try to sell a couple of Calls. After a couple of Calls, I'll sell them closer to ITM.
Print the post Back To Top
No. of Recommendations: 1
Starting to look at portfolio protection.

In general, "portfolio protection" insurance is a losing proposition; the ongoing cost is simply too high.

IMHO, of course. But then, I think covered calls is one of the more nonsensical investment techniques there is.
Print the post Back To Top
No. of Recommendations: 0
I agree ongoing protection far a trading portfolio is too high, at the very least it really starts to eat up your return. However, I don't see where covered calls is nonsense. It depends what you want from your investment and risk tolerance. I'm talking here about selling a covered call. If one has the stock already but is willing to let it go for a quick 14% annualized, OK. Plus it just converts one asset for another that is more liquid and can be used for another trade. I should state here that I am mostly a cash secured put writer. I clear 24% annualized in an IRA.
Print the post Back To Top
No. of Recommendations: 1
Covered calls ... most of the downside of the stock and some of the upside. What's not to like?

"In big down markets you get to keep the option premium, but are otherwise fully exposed, while in up markets you get very little participation because you have sold off the upside in exchange for the call premium." (David Cowan, Sam Wilderman;

OTOH, covered calls have worked fine for the last several years, while we've been in a bull market. That's convinced a lot of people that that have found a way to mint money. They'll discover "what can possibly go wrong?" when we get into a bear market.
Print the post Back To Top
No. of Recommendations: 0
I agree a falling market would be ugly. Investing for 35 years I have seen ugly. This is why stock selection is as important in options as in going long. I only trade stocks I would be willing to buy. But I agree you loose stop protection if your stock is tied to an option.
Print the post Back To Top
No. of Recommendations: 1
"Starting to look at portfolio protection."

There are so many things one can do.

1) one thing would be to sell upside call spreads in SPY.

here's a video about this technique, called "portfolio enhancement":



2) sell upside calls or call spreads to finance buying puts or put spreads

3) buy DIM VIX calls or synthetic long on VIX (but don't hold these positions for very long, because there's "decay" in the vix futures (which they track).

4) buy calendar spreads below the market. this is a positive vega trade, which means if volatility increases it would help this position.

5) sell SPX futures, or sell-short some type of index or index ETF (be careful of dividends)


currently, I'm long /VX futures as a partial hedge, but selling /ES or /NQ futures would be easier.

Print the post Back To Top