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SPY'ing Bear Market Protection With 12% Yield

Mar. 11, 2020 2:15 PM ETSPDR® S&P 500 ETF Trust (SPY) ETF16 Comments
Richard Berger profile picture
Richard Berger


  • The current steep market correction has a risk of tipping to a full bear market as systemic contagion spreads.
  • Now is the time to plan and protect from a possible bear market while also generating immediate cash to weather to volatility.
  • Lock in a 12% yield for the coming year while managing downside market risk 29.13% below the recent $339.08 SPY market high.
  • Looking for a helping hand in the market? Members of Engineered Income Investing get exclusive ideas and guidance to navigate any climate. Get started today »

An Engineered Income Investing Top Idea:

On 2/21/20 the markets began a plunge into a deep correction. So far, this swoon has remained just above the 20% pullback, defining the official point that a bear market has been reached. Nonetheless, the threat of a bear lurks in the bushes.

My recent article discussed The Key Elements Of Risk Management. Today, I examine this bear market threat and show how you can plan for the likely deep bottom of any such bear market if it emerges, while locking in a 12% yield paid in cold hard cash right now to help you weather current and possible coming market downside volatility for the coming year.

Let's begin by looking at the trigger of this current market pullback. The prior market correction actually was a bear market. From an Oct. 2, 2018, high of $293.21, the SPY broad market ETF fell to a low of $233.76 on Dec. 26, 2018. It fully recovered from this 20.28% bear bottom by 4/23/19. From there, it rose a bit more and then consolidated in largely sideways movement around the $294 level through 10/10/19. Since that point, SPY rose sharply without any significant pause to a high of $339.08 reached on 2/19/20. That $45 (15.4%) unbroken strong bullish advance reflected a strong economy driving markets to resist all negative threats and deliver prices only supported by perfection going forward. A minor correction and consolidation was certainly due and would have been welcome.

Instead, news of spreading contagion by a new flu-like coronavirus (COVID-19) reached the point of significant disruption to critical Chinese supply chains. The unknown continuing disruption of these raw material and product sources tipped the broad market into free fall, plunging to deep correction levels 12.6% off the high in just one week. Since then, further decay has seen a test just

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This article was written by

Richard Berger profile picture
Mr. Berger is the creator and developer of the YDP screening tool, a chart system and its analysis for screening and monitoring dividend income equity investments. The recipient of Seeking Alpha's Outstanding Performance Award, he also has been Seeking Alpha's #3 ranked Author for Income Investing Strategy & #4 for Utilities. 20 years of sitting in the board room gives me unique insights into Oil & Gas investments and corporate deal making in general. Additionally, he offers a Subscription Service  for Value & Income investors, boosting income while reducing market risk using covered option writing on a dividend income equity portfolio. Residing in Brazil gives me a local's inside view on the pulse of its economy, politics, investment climate and breaking news. A view of my front yard is available here.A former Chief Operating Officer, Director, Vice President and General Manger of Oil and Gas for Southern Pacific's Oil and Gas Operations, Business owner, geologist, and cribbage player, I've been an investor for over 48 years (started young at 13) and learned my lessons the way that makes them stick, by hard knocks and both big and little mistakes. Hopefully I can share some of those lessons with others.I am an American expatriate that decided to retire at age 57 in 2009 and now live in Brazil. As an early retiree I invest for income and manage portfolio risk by screening for strong and reliable historic data along with favorable fundamental and technical current trends.I spend 6 months/year living at home in Brazil and 6 months/year traveling the world. I have structured my financial positions so that I live virtually tax free with much of my income exempt from US tax since I live ex patriot and a lot of my US derived income over the annual ex-patriate exemptions is held in my tax free ROTH and tax deferred IRA/SIMPLE plans. This enables my tax savings to pay for my 6 months of annual traveling :) . My investing is for income and appreciation with a balance of low to moderate short term risk and low long term risk. To accomplish this I use quality dividend payors with a long track record of steady or increasing dividends along with slowly appreciating equity prices. I target a 8 to 15 % yield and almost exclusively require a minimum history of 5 years of steady/increasing dividends and no decreases in dividend ever or at least past 10 years. I diversify through sector, country and currency unit the stocks are traded in, and security type (equity, royalty trust, REIT, etf, and ADRs). I use covered call writing to enhance my portfolio yield with no added risk. In fact, it lowers the risk substantially. Once I identify a stock I want to own and an entry price for it, I write cash covered puts at or below that entry price (with a minimum of 1%/month time premium. Thus i obtain at least a 12% annualized yield before compounding just from the option premium. Likewise, I use the sale of cash covered puts to generate income and and generally get an entry point at 5 to 10% below my acceptable entry level price if/when the put stock does get presented. Thus my strategy provides a 12% pre compound yield on cash and entry into stock purchases at a 5 to 10% discount from "retail". Because I only select stocks that I am willing to hold long term for their reliable dividend yields, I am not concerned much with market volatility or short/midterm risk. Indeed, market volatility is my friend since it increases the premiums paid on the options I sell. I also selectively sell covered calls on positions I hold long so as to add to my yield that way while not taking on any additional risk.This strategy has kept me happily living off my portfolio income and traveling 1/2 the year while my portfolio has been slowly increasing in value even after my harvesting income for living expenses. As of December 2020, I am no longer writing for Seeking Alpha. If you would like to contact me with questions about my work or subscription service, please leave me a message on this site or email me at boater805@gmail.com

Analyst’s Disclosure: I am/we are long SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am not a licensed securities dealer nor certified financial advisor. The views here are solely my own and should not be considered or used for investment advice. As always, individuals should determine the suitability for their own situation and perform their own due diligence before making any investment.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (16)

Some good analysis here, although I disagree with use of SPY. Since there are so many unknown variables, I purchased eight SPY 275 Apr puts lat week as protection from a much steeper bear market. Holding up very well.
i bought at 270. Dont worry about it. You wont be losing out for too long. Goldman and Buffet are really causing panics right now, thats a good sign.
Richard Berger profile picture

Thanks for reading and joining our dicsussion. Certainly protective buy of puts is a good way to use them as insurance, although Apr is very short term and an expensive cost for the insurance.

I'm going to do the same only June. Should've earlier but I'll pay the premium and sleep at night. Too much at stake and my portfolio was a little more volatile than I calculated.
chuck54 profile picture
I admit to ignorance when reading options strategies. Probably need a flow or box chart that outlines what happens, and when, and what to do at various decision points. Knowing little about puts, my impression is that around 3-1-20, investors tried to guestimate the lowest value of SPY but it went lower than that. So I guess that's where one 'rolls' a contract hoping reality catches up to their guestimates. So as SPY sits at 254 on 3-12-20, I don't know if the idea presented in the article is profitable. I have a fairly mechanical mind and see things best in an orderly graphic format. Just sharing...
Richard Berger profile picture

Thanks for joining our discussion and sharing your thoughts.

The idea and specific trade remains with its locked in 12% and time horizon targeting ideally a SPY at or above $270 a year from now. Interim falls in SPY do not effect it. In fact, part of the reason it is a long term put contract is to walk past the anticipated high volatility now and for many months to come.

Specific market pricing is changing fast with SPY (and the options) right now, so the strike price and option premium do indeed adjust for those choosing to start a position at any given market moment. Providing real-time trading prices and targets is part of what my EII service does for subscribers. This is not practical for a public article such as this.

If the stock price reaches 270 before March '21 can the shares be assigned? Thanks.
Richard Berger profile picture
Sanya Roberts,

Yes, all "American sytle" options can be presented at any time during the running of the contract. If shares are presented early, the effective yield rate (but not the actual cash) is higher because of the shorter contract tie up time. Should shares be presented at any time (early or in 3/21), I will simply begin writing covered calls at my cost basis or higher to continue to harvest SPY dividend distributions and more premiums while holding the shares. Of course, if SPY drops extremely below my $270 basis level, I could opt to write covered call strikes as low as my $240 adjusted cost basis (after the initial put premium I got) so as to continue to generate more new call premiums while not risking any net loss if called away. In worst case, I am presented shares at $270 and the market is too low to provide any significant covered call option premiums. In that case, I have my 12% I got upfront and harvest 2.5% annual SPY dividend distributions giving me at a 2 year hold (double the orig time), a 14.5% total yield, average annual = 7.25% even just sitting tight through a very deep bear market. Still a great yield locked in through a long deep bear market. The same reasoning and strategies are available for any holding length. I think we can all agree that the market will eventually recover and even advance. If not, then NO investment will work anyway.

you think SPY will drop below 230. LOL your analysis is a bunch of BS. I suggest you take your nonsense down. The index will go up tomorrow, are you gonna make another article saying that the index will not drop below 270? Who pay you to write this article? are you trying to cause a panic sell off?
Richard Berger profile picture

Thank you your clear comment showing you to be no more than an ignorant flaming troll.

As to the points you raise, I did not say the SPY was headed below 230, I said my strategy gives downside protection to the $239 level. Further, this was not about today or tomorrow, the strategy is for a full 373 days (more than a year) to come. It is a protective strategy, not a speculation that SPY will fall at all. The 12% is made regardless of whether SPY rises stays flat, or falls.

Junk Man profile picture
@karondongotbanned a very well constructed/worded fact based rebuttal (SMH). I suggest you outsource your investing to a professional.
Patrick Doyle profile picture
I think you should understand the strategy he's proposing before commenting on it.
Clément B profile picture
@ Richard, I tought doing this; But am still affraid SPY will go down more.
Richard Berger profile picture
Clement B,

You feel SPY will drop below $239 and stay below it for a full year to come? That is unlikely in my view, but it certainly is possible. IF so, shares will be presented under the contract and I will simply write a new covered call contract at or above $270 to earn yet more income and further lower my net cost basis while I harvest the modest SPY dividends and continue such a strategy until SPY eventuallly rises and is called away from me again.

You see, the presentation of shares is not really a threat, its just fine if it happens and does not interrupt the ability to continue to generate more income and a future exit. Just how long do you think SPY will remain below $270? MOre than 2 years? 5 years? Forever? If you really have fears of that, you probably should not even be investing in the stock markets.

Your graph has an error on the 20% pullback technical - it's December 2018 not 2019. Fyi.
Richard Berger profile picture

Yes, I thought I had corrected that but evidently it snuck past my blurry eyes. Thanks for catching it. I did correct the article text I know.

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