Passive income through option writing: Part 5 – A 2018-2020 backtest: Guest Post by “Spintwig” (plus a quick update on last week’s volatility)

June 17, 2020

Welcome back to another post centered around Put Option Writing. Today we got a real treat because my blogging buddy, fellow option trader and frequent commenter “Spintwig” offered to do a guest post to perform an independent review of my trading strategy. If you don’t know Spintwig, he also retired in 2018 (at age 30!!!) from a career in IT and now writes about FIRE and options strategies at his blog. He does a lot of interesting and important work, including careful and comprehensive back-tests of different option trading strategies, i.e., different underlying assets, different Deltas, different horizons (days to expiration), etc. I highly recommend you check out his work if you’re interested in option writing!

Oh, and following the guest post, I’ll also give a quick update on how my portfolio did during the crazy,  scary volatility last week! Stay tuned!

Over to you Mr. Spintwig…

 

Thank you BigERN for the opportunity to peer review your options strategy and publically share the results with you and your readers. I’ve relied on your research in my own journey to and through FIRE and I’m happy to be able to add to the discussion and body of research.

A few years ago I stumbled upon BigERN’s blog as I was researching safe-withdrawal-rate topics. Among the material was a novel idea: selling put options on the S&P 500 index could mitigate sequence-of-return risk.

The concept was straightforward but I wanted to know if there was an optimal approach or if it could be applied to other indices and have similar results. Would it be advantageous to replace a traditional buy-and-hold portfolio with an options trading strategy? Unfortunately, there were no definitive or trustworthy answers to this question on the internet so I set out to do my own research and publish what I find. Continue reading “Passive income through option writing: Part 5 – A 2018-2020 backtest: Guest Post by “Spintwig” (plus a quick update on last week’s volatility)”

Passive income through option writing: Part 4 – Surviving a Bear Market!

June 10, 2020

Welcome back to another post dealing with an investing strategy that’s central to our own retirement strategy here in the ERN household. Just a bit of background, about 35% of our financial net worth is currently invested in this strategy. But it accounts for more than 50% of our taxable assets, so for our early retirement cash flow planning, this is really serious business. This puts food on the table in the ERN household!

If you’re not familiar with this strategy, I’ve written about the topic of option writing to generate (retirement) income in general and my personal approach here:

The first three links are more about the general philosophy and the last link, Part 3, is about how I’ve been running the strategy most recently. The strategy involves writing (=selling/shorting) put options on the S&P 500 index with a little bit of leverage. And one can also keep the majority of the account in income-producing assets (bond funds, preferred stocks) to generate additional cash flow. Sweet!

In light of the recent market volatility, of course, it would be a good time to do an update on my strategy because I’ve gotten a lot of questions on how that strategy has been holding up during the bear market. Did it blow up? You are all a bunch of rubbernecks, aren’t you? 🙂

Long story short, my strategy did pretty well so far this year. Not just despite but even because of the volatility spike. Let’s take a look…

Continue reading “Passive income through option writing: Part 4 – Surviving a Bear Market!”

Are we in another Bull Market now?

Update 8/18/2020

Well, that didn’t take very long! On August 18, the S&P 500 and Price Index finally set a new record high. The Total Return Index (dividends reinvested) had already reached its new all-time-high on August 10. So, we know for sure that this is a new Bull Market and it started after the March 23 Bear Market Low!

2020 Case Study - update 8-18
S&P 500 returns, total return and price index since the 2/19/2020 peak.

May 11, 2020

The stock market is still well below its February all-time-high, but it’s holding up remarkably well considering how poorly the economy is doing right now:

  • Double-digit unemployment,
  • 20+ million jobs lost according to the BLS payroll employment data,
  • 30+ million jobs lost according to the sum of weekly unemployment claims since March,
  • -4.8% GDP growth in the first quarter (annualized rate) and possibly a 10% drop quarter-on-quarter in Q3, which would be reported as a 34% drop annualized!
  • And a whole host of other economic indicators that look so bad, you’d have to go back to the Great Depression to find similar readings

Actually, “holding up” is a bit of an understatement when you look at the stock market as of the Friday, May 8 close:

  • The S&P 500 TR index rallied 31% since the March 23 low!
  • We’ve recovered more than half of the drop peak to trough!
  • Since April 8, we’re no longer 20% below the recent all-time-high, which is often quoted as the cutoff for the Bear Market!

2020 Case Study
The 2020 Bear Market up to May 8. Did a new Bull Market start on 3/24?

Does that mean the Bear market is over now? I certainly hope so! Whether the Bear Market is over and a new Bull Market might have started already obviously depends on the definition of Bull vs. Bear. What is that definition of Bull vs. Bear anyway? Different people have different definitions, some more sensible than others. And it gets more complicated: even if we do agree on a sensible definition, there could still be uncertainty over what’s the state of the market right now because some criteria cannot designate the state of the world in real-time but only after the fact. There’s a confirmation lag! So, we could be in a sort of a bull/bear-limbo state right now! How is that possible???

So many questions! Let’s take a look at how I think about Bull vs. Bear…

Continue reading “Are we in another Bull Market now?”

Three Equity Investing Styles that did OK in 2020

April 22, 2020

Recently, I wrote a post endorsing the simple Bogleheads approach: invest in passive index ETFs. Everything else is just mumbo-jumbo, window-dressing and people not understanding the (mostly) efficient market nature of the stock market. In other words…

Simple (indexing) beats complicated active investing

Well, after unloading on some of the fancy complicated investing styles, I just like to point out the select few of them that indeed performed relatively well in 2020. At least better than the index. So, for the record, I’d also like to write about three examples where…

Complicated beats simple index investing

And most importantly, I’m not pulling some “Monday Morning Quarterback” nonsense telling you that if you could have sold your airline stocks in February and replaced them with stocks for video conferencing makers you could have done really well. Well, duh, very few people other than U.S. Senators had that kind of inside information back in February! Rather, I want to write about some of the deviations from simple indexing that were mentioned here on the blog in my posts and/or in the comments. Before the crisis!

Let’s take a look:

Continue reading “Three Equity Investing Styles that did OK in 2020”

COVID-19: Some Empirical Observations and Reasons for Optimism

April 14, 2020

Welcome back to a new post! I hope you all had a happy and safe Easter Weekend! Last week I published a post wondering about how the stock market can be down “only” about 20% in the first quarter when we’re facing a deadly virus, a wide-ranging shutdown of the economy and no clear idea when we can reopen again. We are expecting a deep recession and macro data significantly worse than during the Global Financial Crisis.

If you listen to the media talking heads it’s all doom and gloom, so why is the stock market holding up so well? Why isn’t the stock market down 55% as in 2009 or even 80% as in 1932? Does the stock market “know” something that even your trusted news anchor doesn’t realize yet?

I updated some of the charts I posted a few weeks ago and gathered some additional data as well. And it all looks much better than the breathless and scary headlines in the media. Maybe that’s why the stock market looks relatively solid – under the circumstances, at least.

Let’s take a look… Continue reading “COVID-19: Some Empirical Observations and Reasons for Optimism”

Some Financial Lessons from the First Quarter of 2020 (incl. Jack Bogle’s Revenge)

April 8, 2020

Wow, we made it through the first quarter of 2020. Seemed like an eternity! Remember January 2020? Suleimani Drone strike and an almost-war with Iran? Australian Wildfires? February? The Super Bowl, the impeachment trial? Even early March: Super Tuesday (March 3). It all feels like years ago! All those daily 100-point S&P 500 and 1,000-point Dow Jones moves took a toll. They make you age in dog years, I guess!

Time to look back and reflect. Let’s take a look at a few lessons I learned… Continue reading “Some Financial Lessons from the First Quarter of 2020 (incl. Jack Bogle’s Revenge)”

Million Dollar FIRE Summit: My interview with Liam Austin on the Bear Market and what it means for the FIRE community

April 4, 2020

Are you worried about how the current bear market will affect your financial situation? I had the pleasure of chatting with Liam Austin of Entrepreneurs HQ about the FIRE community and what the current market conditions mean for folks in the FIRE movement.

I’ll be sharing my thoughts at the Million Dollar FIRE Summit (Special Market Crash Edition), on Thursday, April 9. It’s a free, virtual event, meaning you can tune in from anywhere. So, if you like to hear from me and four other FIRE/Personal Finance bloggers who I really like:

… then head to

—> This link <—

… and find out more.

Again, this is a free event but it does require registration. I don’t make any money from this event. I simply chatted with Liam because I feel passionate about personal finance.

I hope to see you there!

Stay safe

Karsten

 

PS: Some additional resources and posts I mentioned in the interview:

Continue reading “Million Dollar FIRE Summit: My interview with Liam Austin on the Bear Market and what it means for the FIRE community”

The Ultimate Tax Hack: We Are Moving To Monaco! (No we’re not! Happy April Fool’s Day!)

April 1, 2020

Despite the postponement of the deadline this year, April is still tax season for us! Oh, how much I dread this part of the year! And it’s not even the paperwork! If I could do twice the paperwork to cut my taxes in half, I’d gladly do so. So, certainly, for me, the problem is not the filing of my taxes! The discomfort of tax season is 100% due to paying income taxes. Sure, we moved to Washington State to eliminate the state income tax – a big plus compared to California – but that still leaves that pesky federal tax. Last year, we still ended up in the 22% federal tax bracket for ordinary income and 15% for long-term capital gains and qualified dividends. I still don’t the final, final tally yet but it looks like our total federal tax bill will be about $23,000. That hurts! And it hurts more having to pay taxes for the blockbuster year 2019, right around the time the market is melting down this year!

So we developed the ultimate tax hack! Move to a location without any(!!!) income taxes! At all! That location is Monaco, a tiny sovereign nation on the Mediterranean coast surrounded by Southern France. It has no income tax, no capital gains tax and no property tax, how awesome is that?

We did a reconnaissance visit to the Cote d’Azur last year, including Monaco, and we absolutely fell in love with the place! I mean, where else in the world can you watch a Formula One race looking out of your apartment window?

Monaco-HairPinCurve
Yup, that’s the hairpin curve you’ve seen in the Formula One races!

It’s sunny and warm year-round and the food and wine are outstanding.

Let’s look at the numbers in more detail… Continue reading “The Ultimate Tax Hack: We Are Moving To Monaco! (No we’re not! Happy April Fool’s Day!)”

Some Random Thoughts on the State of the World

March 27, 2020

Wow, I’m in a writing mood these days. A second post this week! Here are a few random thoughts about the current situation. All the things on my mind right now that might be too short to put into a separate blog. Since you’re likely all sitting at home feeling bored, I thought you might enjoy this… Continue reading “Some Random Thoughts on the State of the World”

Dealing with a Bear Market in Retirement – SWR Series Part 37

March 25, 2020

In my post last week, I looked at how the 2020 Bear Market will impact folks saving for (early) retirement. But I deferred my recommendations on how current retirees will optimally adjust to the new realities. So, here we go, a new installment of the Safe Withdrawal Series, now 37 posts strong!

Nothing I write here today should be shocking news to people who have read the other 36 parts, but having it all summarized in one place plus some new simulations and perspectives is certainly a worthwhile exercise. In a nutshell, I argue that if you’ve done your homework before you retired, not even a bear market, not even this bear market will derail your retirement. Depending on what approach people chose, some retirees might even increase their spending target now.

Let’s take a look…

Continue reading “Dealing with a Bear Market in Retirement – SWR Series Part 37”