CC

The precise event (crash) the ETF is trying to make money on could make it lose a lot of money. The further out of the money puts the fund is selling the premium could easily expand @ a higher percentage rate then the closer to the money premium expands. This is more suited for markets that are not going to drop fast. @ max momentum down in crash of 1987 or 2008 I would have wanted to have sold the puts that were closer to the strike price on a market rally before the crash & bought the puts that were further out in time. An hour latter after crash low in 1987 & the max momentum point down in 2008 option premium dropped aprox 50%. So one must be fast & sell @ max momentum down. Even if option is far out of the money the prenium explodes & the farther out can explode @ a far faster rate.

These funds I think are totaly misleading & most investors have not studied option prices on puts prior to, during & after a crash such as 1987 or 2008 & have no idea of the dangers.

Elliott wavers the best time to buy out of money puts is top of a wave 2 rally & sell in middle i.e., 3 of 3 or end of a wave 3 down. Secound best place to buy top of wave 4 sell @ bottom of wave 5

Looking at the information on these new ETFs, I got a sense of how severe a downturn in stocks markets has to be before these ETFs offer protection, but I couldn’t get a sense of what the option drag is likely to be in most years.

@darren: I have no experience with options and I know my limitations, so I’m staying out of this game. However, this is a retail product and I’d like to understand how it works. Like Michael points out, it is hard to get a sense of what the option drag will cost over the years. Horizons has provided some information on how they expect the strategy to perform in the event of a drop in the markets but it looks like you are saying that the options that are short will increase in value substantially compared to the long options, thereby decreasing profits.

@Michael: I agree. I’m also not certain that drops of 20% or more are as common as outlined in the Horizons material because losses in rolling periods are not the same as losses in independent observations. I’ll have to think a bit more about this though.

CC more should do like you & invest in only in products they understand. In 2008 I made money hand over fist with options. I have only a small understanding of all the differnt ways these products can be used but I fully understood how I was using them & some of the stratagies are just to complicted for me to ever use. (prector has an excellent video but kinda expensive & of course it might not suit everyones personality)

The further out of the money options can cause the investment to lose a lot of money if the market drop is fast enough. The drop has to be a goldilox drop not to fast & not to slow to make money. Fast enough so the closer to the out of money puts increase in value more then the farther out of the money puts but not so fast that the farther out of the money puts increase in value more then the closer to the money out of money puts.

CBOE website a huge amount of educational infoe can be found on options.

CC I will tell you how I would use options if I was a long term coach potatoe investor holding etfs which if memorary is correct is your style.

I would use spy (small contract) or spx (large contract) for most of my stock portion of portfolio (reason most liquid , goes out long time, can buy deep enough in the money, Canada has no product that works well for this style). But I would not use the underlying I would use a deep in the money leap call going out 2 years or more that the price of leap would consist of little or no premium but consisted mostly of intrinsic value. These are not for trading Bid ask spreads wide. I would purchase them when vix was low i.e., not in the Sept – Oct time period for setting up position.

To be continued

This can give your postion a positive curvature market moves up in your direction you make dollar for dollar & as the market moves against you you lose less money point for point. In a crash such as 2008 the option premiums accross the board expand so you lose less money point for point as well as have less money on the table.

Warning few have the disapline to give options the respect they deserve & will get blown up by buying to many contracts. This system just reduces risk.

I wonder how much it would cost a DIY investor to set up their own downside protection using options. When buying puts on a basic portfolio, would this amount to > 0.7% of the holdings value per annum (the effective cost of this product)?

Until I see some evidence that Black Swan event frequency is high (which by definition it is not), then I would avoid such a strategy. Like buying extra insurance when you don’t need it. Like Mike says, adjust your portfolio allocations to limit downside risk.

Raman I agree with you & Iam happy you pointed that out because I do not want anyone to invest based on something I say if they blindly accept what I say is true without out understanding & yes I do make mistakes. (in fact I might have made on above if the black swan fund ratio of puts being bought & sold is set up right they might not lose more money in a crash)

Everyone that posts on here as well as any book written I kinda think each reader should do thier own thinking & judging to determine the truth.

That being said my sister is an english teacher for 30years makes close to 100 grand & is flat broke with debt. I failed 2 grades by grade 12 english was my worst subject & I have made most of my money by having it work for me & for the last 5 years live a happy life off of aprox half my income from money working for me