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Once again in 2012 equity investors failed to keep up with their benchmark; the S&P rose...

Once again in 2012 equity investors failed to keep up with their benchmark; the S&P rose 8.21%, while equity-fund investors made just 4.25%. According to Barron's, learning to sell puts when financial news turns dour is the antidote to underperformance.
Comments (19)
  • bbro
    , contributor
    Comments (9318) | Send Message
     
    Or selling out of the money calls with low deltas when things get giddy....
    31 Mar 2013, 09:12 AM Reply Like
  • Tom Armistead
    , contributor
    Comments (5219) | Send Message
     
    I tried selling puts in 2008, it didn't work for me...
    31 Mar 2013, 09:18 AM Reply Like
  • pollyserial
    , contributor
    Comments (1055) | Send Message
     
    The timing of this could not be more perfect.
    31 Mar 2013, 09:43 AM Reply Like
  • Ron Myers
    , contributor
    Comments (254) | Send Message
     
    Absolutely terrible advice from Barron's as always. They wouldn't even consider something reasonable like "buy and hold an index fund with no trading". Instead they point people towards a complex high commission high fee strategy that 99.9% of retail investors should never touch.
    31 Mar 2013, 09:48 AM Reply Like
  • EMS
    , contributor
    Comments (563) | Send Message
     
    Ridiculous advice once again. When common folk are trying to juice with the put selling they will yank the carpet out but quick.
    31 Mar 2013, 10:14 AM Reply Like
  • Reel Ken
    , contributor
    Comments (3850) | Send Message
     
    This advice is bad only to the extent that it is not complete enough.

     

    Selling puts is very effective strategy if implemented properly. Just look at the .PUT index from the CBOE for one such strategy.

     

    Granted, most people will just sell mindlessly, but the fault lies not in the recommendation, but in failure to execute a strategy.

     

    Borrowing form the military, selling puts is a tactic not a strategy

     

    31 Mar 2013, 10:36 AM Reply Like
  • bbarberayr
    , contributor
    Comments (151) | Send Message
     
    8.2% in 2012? It was more like 13% or 16% with dividends.
    31 Mar 2013, 10:42 AM Reply Like
  • Clayton Rulli
    , contributor
    Comments (2468) | Send Message
     
    LOL yeah sell puts now, at the top. good advice
    31 Mar 2013, 10:50 AM Reply Like
  • TruffelPig
    , contributor
    Comments (4058) | Send Message
     
    Who says it is the top?
    31 Mar 2013, 11:00 AM Reply Like
  • Clayton Rulli
    , contributor
    Comments (2468) | Send Message
     
    thats true, but puts are cheap right now right?
    31 Mar 2013, 11:04 AM Reply Like
  • TruffelPig
    , contributor
    Comments (4058) | Send Message
     
    Depends - some biotechs (ONCY, THLD) and stocks like DDD, MAKO and WPRT still pay good premium. Big stable market cap stocks premium is mau.....agree. So, one needs to understand that concept well and look at volatile stocks.
    31 Mar 2013, 11:12 AM Reply Like
  • Reel Ken
    , contributor
    Comments (3850) | Send Message
     
    Hi Clayton,

     

    The data clearly shows that selling puts, as a strategy, such as the .PUT Index, will outperform owning stocks, over the long run.

     

    The most interesting part of the data, is that selling puts as part of a strategy out-performs owning stocks by its widest margin in falling markets, and less so in rising markets. So, if you want to be invested and suspect a market top, a put selling strategy can be truly beneficial.

     

    Those familiar with options should instinctively know this.

     

    So, if you think it's a market top, you can get out, or short, (like so many mistakenly did during this five year rise), hold, try to time the market or engage in an option strategy.
    31 Mar 2013, 04:28 PM Reply Like
  • Tack
    , contributor
    Comments (12722) | Send Message
     
    "Equity-fund" investors could have underperformed for any number of reasons:

     

    1) Bad timing by fund buyers
    2) Bad timing by fund managers
    3) Bad selections by fund manager
    4) Management fees & expenses

     

    And, any investor who is inclined to buy funds is probably not the same investor who would be active in the options market.
    31 Mar 2013, 11:12 AM Reply Like
  • ThetaDecay
    , contributor
    Comments (107) | Send Message
     
    Selling puts, in my opinion, doesn't offer a favorable risk-return tradeoff. A majority of the time, you'll make a steady stream of modest income; on rare occasions, however, you'll face catastrophic losses, losses that aren't accounted for in the Black-Scholes pricing model. It's a strategy that fails exactly when you can't afford to have it fail (during six sigma events).

     

    In the current environment, I prefer staying heavily invested and using OTM put spreads to lock in YTD gains. For example, I have been over 95% invested in equities since Jan 1. I bought some put spreads in late March (June expiry) and am in the process of selling some non-core holdings in anticipation of the annual April/May correction.
    31 Mar 2013, 04:38 PM Reply Like
  • Reel Ken
    , contributor
    Comments (3850) | Send Message
     
    Hi Theta,

     

    It's a question of opinion vs data. The data shows that a strategy of selling puts, such as the ZPUT index, outperforms the market.

     

    Now, if you have a method that outperforms that, well great.

     

    The point of the Barron's article was not the best method possible, or the only method possible, but one simple strategy to employ instead of just "buy and hold"

     

    It may have oversimplified, but it was far from a mis-statement.
    31 Mar 2013, 05:40 PM Reply Like
  • ThetaDecay
    , contributor
    Comments (107) | Send Message
     
    My point is that the article fails to discuss the intermediate drawdowns of this type of strategy. I can't believe a put-selling strategy outperformed the index during late '07 / early '08.

     

    Hindsight is 20/20. So when the other flippantly comments on how selling GS puts in late '08 was a great play, he ignores an important part of the discussion: those that sold 150 strike puts when GS was trading at 190 (just 6 months earlier) faced catastrophic losses and margin calls. Selling puts in November '08 is still a form of market-timing. There is no silver bullet.
    
    Personally, I prefer a "smoother" strategy, one that deliver returns with lower standard deviation.
    31 Mar 2013, 06:02 PM Reply Like
  • ThetaDecay
    , contributor
    Comments (107) | Send Message
     
    Ken,

     

    Just to feed my curiosity, do you engage in an actively-managed put-selling strategy? And if so, in average market conditions, what is your margin per contract like?
    31 Mar 2013, 06:11 PM Reply Like
  • Reel Ken
    , contributor
    Comments (3850) | Send Message
     
    Hi theta,

     

    This is just a case of belief vs realty. Not trying to "datamine" any particular result, I took the six months from 9/1/07 thru 3/31/08 (end of '07--beginning of '08) as you wanted.

     

    SPY dropped from $149.08 to $136.70.

     

    PUT rose from $965.42 to $984.84

     

    You can visit CBOE Web site and check any other time frame you want.
    You will find that this strategy does exactly what yuou ask for , it lowers risk and increases return. Now, I'm not saying it can't be improved upon (I use a variant that lowers beta by even more) . It's just that what people may think or believe isn't support by facts and data. The data goes back over 20 years and is consistent in its result.
    31 Mar 2013, 07:26 PM Reply Like
  • Reel Ken
    , contributor
    Comments (3850) | Send Message
     
    Hi theta,

     

    Not only do I engage in selling puts, I've written many articles on SA about various strategies.

     

    Over the years my portfolio Alpha is about 1.11 and my Beta .62

     

    You're welcome to read my articles on the methods I employ.

     

    I have intimate knowledge of the .PUT Index strategy quoted in the Barron article, though I employ a variant of it, which I have also written about.
    31 Mar 2013, 07:16 PM Reply Like
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