No. of Recommendations: 0
Well, since there is at least 3 of us foraging of into the weeds, let me take the risk of focusing a spotlight on what might already be obvious;

The table merely answers the question, "So, how often did the historical returns fall into these various buckets, anyway? Just how many times were capped off?"

'How often' is irrelevant from a P&L perspective. The old trader's mantra applies; A system works when the average of all winning trades is greater than the average of all losers, minus the ability to survive the worst statistical drawdown.

In my prior 'Traders A/B' example, trader B lost on 100% of the rallies, yet still blew away trader A. Of course, a mere 2-trade market history is hardly sufficient to illustrate anything near reality... but as we proceed with our comparison illustrations, the clouds will begin to clear and I predict you'll see that this is the functional result in the overwhelming majority of market periods.

The IUL industry has coined the phrase "Zero is your Hero" (and I am sure that rankles some of the political hardcores... LOL!) but from a strategic trading perspective, it really does pan out.

Of course, you are absolutely right in that blocking or repositioning risk comes at costs... and in order to 'buy' the elimination of annual downside risks you have to give up some measure of upside risks.

The trader's/investor's question then, again, boils down to;
'At what trade structure will my cost (average trade losses) be less than my average gains?'

A 12% S&P hurdle (as I pointed out previously) is somewhat daunting... but more complex index blends (which take advantage of lower option spreading costs) push that "average gains" hurdle (via higher caps) to 17%-21%

At that level the trade is simply a no brainer... at least for the trade structure, on its mathematical face. Of course, then all the other factors have to be double checked (short term versus long term costs, liquidity, systemic risk exposures, etc.)

Dave Donhoff
Leverage Planner
Print the post  


The Retirement Investing Board
This is the board for all discussions related to Investing for and during retirement. To keep the board relevant and Foolish to everyone, please avoid making any posts pertaining to political partisanship. Fool on and Retire on!
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.