Comments on: Is Black Swan Protection Worth the Cost?

By: Friday Links – Canadian Finance Blog

Friday Links – Canadian Finance Blog — Fri, 22 Jun 2012 09:00:20 +0000

[...] With the launch of two new ETFs, Money Sense wants to answer the question, Is Black Swan Protection Worth the Cost? [...]

By: The Frequency of Black Swan Events | Canadian Capitalist

The Frequency of Black Swan Events | Canadian Capitalist — Wed, 20 Jun 2012 04:27:32 +0000

[...] answer to the question is important for investors who want to perform a cost-benefit analysis on the Black Swan Exchange-Traded Funds that were launched by Horizons ETFs recently. The cost side of the equation is clear: a portfolio that sells puts as protection against market [...]

By: darren

darren — Fri, 15 Jun 2012 14:59:15 +0000

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

By: Introverts and Extroverts, Building Assets, Bankruptcy and More! | Million Dollar Journey

Fri, 15 Jun 2012 11:30:49 +0000

[...] Is Black Swan Protection Worth the Cost? @ Canadian Capitalist [...]

By: My Own Advisor » A blog about saving and investing my way to financial freedom!

Fri, 15 Jun 2012 00:54:15 +0000

[...] Canadian Capitalist wondered if black swan protection is worth the cost. [...]

By: Canadian Capitalist

Canadian Capitalist — Thu, 14 Jun 2012 16:33:23 +0000

@Mike: It is interesting to think of cash/bonds as Black Swan insurance. Cash has a bit of a drag and provides rebalancing opportunities when deviations are significantly from target.

@darren: Mark Wolfinger’s The Rookie’s Guide to Options is on my reading list for a long time.

@Raman: I’m not tempted in trading options at all. If I were to do some tweaking, I would first look into providing value and/or small cap tilts to the portfolio.

@Sampson: I’ve been investigating the frequency of Black Swan events (defined somewhat arbitrarily as a 20% monthly decline in stock prices). For the S&P 500, I found that since 1950, we’ve had just three Black Swans: 1987, 2008 and 2009. That’s quite a bit less than the once in 2 years indicated in the Horizons materials. I will probably do a story on that sometime.

By: Sampson

Sampson — Thu, 14 Jun 2012 14:08:08 +0000

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.

By: Raman

Raman — Thu, 14 Jun 2012 12:30:39 +0000

Perhaps it would be wise to carefully consider the stock we place in Darren’s counsel. “Do not be surprised when those who ignore the rules of grammar also ignore the law. After all, the law is just so much grammar.”

By: darren

darren — Wed, 13 Jun 2012 20:05:47 +0000

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.

By: darren

darren — Wed, 13 Jun 2012 19:56:02 +0000

I would not go crazy with the leverage but only hold the same number of shares so they would give me the same amount of dollar increase equal to a dollar increase if I was holding the underlying in an up move i.e., if delta @ 90 buy 10 % more shares then you would have if you were holding underlying. I would go deep enough so your @ least 90 delta. By going deep enoug in the money so there is little or no premium the option has no choice but to increase in value as the market moves in your direction. As the market moves farther & farther against you the delta becomes smaller & smaller because the premium expands & time decay will take little away from the option because if the option is deep enough there will be little premium to decay & theta is slow being so far out in time ( theta is the reason I would only hold a year then roll over & buy 2 years out)

will continue