Originally published October 13, 2020
Market Call Option Sale
I finally sold my market call option with a gain of 38% YTD. The option was a pre-covid strategy to take advantage of a generally stable rising market. It basically returns what the Sp500 returns times 5. If the market went up 1%, then the call option went up 5%. The same is true if the market falls. This is the power of options, you can really increase volatility, therefore returns…or losses…ick. The volatility over the year was a wild ride, to say the least. The option was up 50% just recently and down 60% during the month of March. As always my bets are measured in case I am wrong. The total value of the option represented no more than 6-7% of the total portfolio and by nature would likely be worth something no matter how bad the market got. So a total loss would be improbable even in the current situation. I will likely return to a market option strategy in a couple of years when the probability of a rising stable market, returns. In any case, all things considered, the strategy was still successful. For reference, last year’s Option returned 60+%.
ETFs Instead of Cash
The purchase of the sp500 ETF (SPY) above is a direct result of the sale of the option, a direct exchange of proceeds. From a strategy perspective, the ETF is a placeholder for future purchases. As you know, I do not like holding cash for any length of time as it historically lowers returns. Effectively the call option on the Sp500 is equivalent to the ETF in every way except that the ETF does not have a multiplier effect. The market goes up 1% so must the ETF by 1%, easy peasy. It’s a great way to be in the entire market without worrying about individual stocks.
Surprisingly many of you are still holding large amounts of cash with the intention of one day investing it. As I mentioned earlier, from a probability perspective you are most likely going to underperform the market as it’s the time in the market that provides an equity return over and above fixed income investments. Most people keep cash out of the market because they fear something bad will happen. Yes, bad things can happen, but if you understand that your long-term investment horizon will erase any short-term losses, then there is nothing to be afraid of. It’s normal to have a few down years as it is normal to have many more up years. You can’t predict with certainty when these ups or downs will occur, but you can predict that with enough time, you will be up overall. With less money in the market, this just means that in the long run, your returns will be proportionately less as you forgo the long run return. To make matters worse, inflation erodes the value of your cash. Market ETFs like the one I am using for the Sp500 are a great way to stay in the market while you figure out individual stock picks. Just sell some of your ETF and buy that shiny new stock, until there is no ETF left. Or better, just invest solely in ETFs and you will likely get better returns than your average professional manager… but that is another story.
Market Direction
Going forwards, the market remains more uncertain than average, particularly since there is a controversial US election going on during a second pandemic wave. It’s hard to imagine more uncertainty than that but it’s still possible. I have been thinking that the economic effects of the pandemic will likely last longer than expected, so the question becomes “how does this affect the small investor?” The answer is not entirely clear, but history has shown that the market eventually gets over it, long term Covid is simply built into the market, and everyone gets used to it. The market reflects what it sees 12-36 months out, as long as it sees light at the end, the market will chug along. It’s the things we do not see that have the biggest effect – the unknown events, the black swans, like war, mass bankruptcies, and the second wave of zombies. But these things are possible at any time, so how is it really different for the investor? For me, there is no reason not to stay fully invested. The portfolio is now in a completely normal state, i.e. no market options, or margin and almost all Covid portfolio strategies have been unwound. However, I will continue to hold my underwater Covid picks – Delta and Boeing – as a return to normal will see huge gains. I will likely rebalance the portfolio in the next month or two and take advantage of the tax selling season but otherwise, I will keep my stick on the ice (Famous hockey reference I believe).
Happy investing.
Marc’s Monthly Moves
| Buy | Sell |
| Sp500 ETF (SPY) | Sp500 Mini Call Option |
Marc’s Portfolio YTD Returns
- Portfolio return 17.5% (Including currency gains)
- Portfolio return 16.5% (without currency gains)
- Sp500 return 9.5%
Note: Portfolio beat Sp500 by 7 points.
Money with Marc 