Another Option Strategy Failure: Why it’s “Nickels in Front of a Steamroller” and not “Benjamins in Front of a Baby Stroller!”

My little blog here may be mostly known for the Safe Withdrawal Rate Series. But I’m surprised how many people share my other passion: options trading. Both here on the blog and at FinCon last weekend lots of fans of the blog asked me when I’m going to write something about derivatives again. Wait no more! I have been thinking about this one for a while; it’s another cautionary tale about markets going haywire and unsuspecting and unsophisticated investors are caught in between. And then they realize the “safe” and “conservative” strategy marketed by their financial adviser can blow up in their face!

The Wall Street Journal came out with a pretty detailed article (subscribers only) a few weeks ago, but the story has been around for a while. See, for example, on WealthManagement.com or SeekingAlpha.com. And this time it’s not some obscure small shop in Florida that got into trouble. No, it’s one of the big fish: UBS!  Their so-called “Yield Enhancement Strategy (YES),” marketed as a conservative and low-risk strategy to risk-averse investors with mostly bonds in their portfolio, racked up heavy losses late last year. Well, at least people weren’t completely wiped out like the poor sobs in the OptionSellers mess. But a purported 20% loss (about $1b) is still a hard pill to swallow for investors that were told that this is completely safe. Sure, if you were 100% invested in the S&P500 last year and lost 20%, then yeah at least you knew what you’re getting into. But for the average mom-and-pop muni bond investor, a 20% loss is pretty epic. And not in a good way!

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Headlines from around the web. Source: Wealth Management, Wall Street Journal, Seeking Alpha

Of course, looking at the low-yield environment right now – in some places we even have a negative-yield environment – I don’t blame investors for shopping around for higher yields. But be aware of the charlatans. If they tell you that higher yields come with no side effects run away! There is always a catch with a higher yield! Even if it’s your trusted personal wealth advisor at a shop as famous as UBS!!! This yield enhancement strategy involved a risky options trading strategy. With 5x leverage! And most of the investors didn’t even know what they were getting into unless they had read the pages with the fine print! So, let’s do a post-mortem for this strategy. What were they doing and how and why did this go so horribly wrong?

Continue reading “Another Option Strategy Failure: Why it’s “Nickels in Front of a Steamroller” and not “Benjamins in Front of a Baby Stroller!””

Passive income through option writing: Part 3

Back in 2016, I wrote a few posts on trading derivatives, especially options, to generate (mostly) passive income:

I’m still running that same strategy but it definitely evolved quite a bit over time. This might be a good time to write a quick update on what I’m doing and what I’ve changed since then. And for everyone who’s wondering what’s the use of this: I’m planning a future post on how selling options may help with Sequence Risk, so this is all very, very relevant even for folks in the FIRE crowd!

So, let’s take a look…

Continue reading “Passive income through option writing: Part 3”

The OptionSellers.com debacle: How to blow up your portfolio in five easy steps

Right around the time when I wrote my options selling update a few weeks ago was when everyone in the option seller circles talked about the blowup of OptionSellers.com. Option Sellers, LLC was a Tampa, Florida based Registered Investment Adviser and CTA (Commodity Trading Adviser). They managed money for 290 clients. Considering the minimum investment was $250,000 and most investors likely had more money with them, I’d surmise that they were managing around $150m. On November 15, 2018, they informed their investors that not only was all their money lost but that clients would likely owe more money. Wow, let that sink in: they had a loss of more than 100% and clients are left with debts they have to cover now! Bad news for the clients who invested all their money with OptionSellers!

A failure of a small obscure adviser probably would have stayed under the radar but the co-founder published a tearful apology video, confessing that all customer accounts were wiped out “by a rogue wave.” The movie was since taken down – probably the lawyers didn’t like the idea of this kind of mea culpa so much – but it’s still available on YouTube. The story went viral (or at least as viral as something as obscure as options trading can go) and was then picked up even by the national news media, including the Wall Street Journal, CNBC and many others.

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Should have prayed before blowing up $150m! James Cordier in his apology video, via Youtube.

Quite intriguingly, their strategy imploded over the span of just a few trading days. And just to be sure, this wasn’t fraud a la Bernie Madoff but investors actually lost their money “fair and square” if there is such a thing. Is this something all option sellers should worry about? Yes, if you are as reckless as Option Sellers. If you had bothered to check what these clowns were doing it was clear that this debacle was all but unavoidable. Let’s take a look at what they did and the five obvious mistakes that lead to the meltdown…

Continue reading “The OptionSellers.com debacle: How to blow up your portfolio in five easy steps”

Trading like an Escape Artist: How I made money in October trading S&P Futures Options with 2x leverage

October was a scary month for stocks: the worst monthly S&P 500 return in seven years! And November is off to a volatile start as well! We haven’t even seen a real correction yet but apparently, the drop was bad enough for me to got inquiries from friends and former colleagues asking how I’m doing with our portfolio and if (and when?) I’m going to come back to the office again! Sorry, not anytime soon! As I detailed in the post two weeks ago, we are not too concerned about one month of bad returns early in retirement.

Some friends and readers of this blog were specifically concerned that my options trading strategy might have been hit badly by the wild swings. After all, I’m doing this with a little bit more than 2x leverage and with the market down about 7% does that mean we lost more than 14%? Of course not! To all the rubbernecks out there who suspect we had a bad car wreck in our portfolio last month, I’m happy to report that we actually made a small profit with this strategy in October! And continued to do so in November! How awesome is that!? Well, there were a few close calls but I was able to escape any major damage. It took some Houdini Skills (or luck???), hence the title image of escape artist Harry Houdini (Picture Credit: Lomography).

Let’s take a look at the details…

Continue reading “Trading like an Escape Artist: How I made money in October trading S&P Futures Options with 2x leverage”

So what, we retired at the peak of the bull market? Here are seven reasons why we’re not yet worried…

Wow, did you see the big stock market move in October? The worst monthly S&P 500 performance since 2011! When you’re still working and contributing to your retirement savings it’s easy to lean back and relax: you can buy equities at discount prices and you buy more shares for the same amount of savings when prices are down, a.k.a. dollar-cost-averaging. Now that we’re retired things are different. Sequence Risk creates the opposite effect of dollar-cost-averaging: you deplete your money faster while the portfolio is down. I have been writing about this theme for almost two years now and now it looks like I might become my very own poster child of Sequence Risk.

The 2018 calendar year gains were almost wiped out in October. Ouch!

So, are we worried having retired at (or close to) the peak of the market? Well, take a look at the title image: an ERN family selfie while vacationing in Angkor Wat (Siem Reap, Cambodia) in October. It doesn’t look like we’re too concerned about the stock market! And here are a few reasons why…

Continue reading “So what, we retired at the peak of the bull market? Here are seven reasons why we’re not yet worried…”

Guest Post: Farmland Is The New Gold

Happy Wednesday! I have been busy with the move this week so this is a good time to run a guest post! Today, we feature a guest post by Scott, who runs the Basic Capital Forum. I don’t really feature guest posts very often despite getting tons of proposals – my fellow bloggers probably know what I’m talking about! But a guest post about an alternative asset class with pretty cool return stats is actually something I like to publish. So, take it over, Scott…

Are the boom times back? Judging from investor sentiment, it looks like they are. Despite some recent volatility, the bull market is still in full swing and according to data from fund tracker EPFR Global, markets attracted $102b into equity funds over the past four weeks. Behind the curtain, the euphoria might be unjustified – there are a few warning signs that investors may be ignoring. Firstly, stocks are over-valued by many measures. The Shiller CAPE hit 31 in January – the same vicinity of its peak in 1929. Warren Buffet’s measure states that stocks are overvalued by 40% as of November. The most over-weights stocks are FAANGs (Facebook, Amazon, Apple, Netflix, Google) with forward-PE-ratios even higher than those in the overall S&P500.

Secondly, the level of private debt is enormous. According to the IIF, global debt hit $233 trillion this month. If global GDP is roughly 73 trillion, the global debt is 310% of global GDP. To put this in perspective, private debt to GDP only surpassed 150% in 1929 and 2008. In this time of overvalued stocks, one could make the case for investing in gold. The issue with gold, of course, is that it produces nothing and it has no inherent value. The enterprising investor, however, could invest in the 21st-century gold: Farmland. Continue reading “Guest Post: Farmland Is The New Gold”

My podcast appearance on Millionaires Unveiled

Late last year, I chatted with Jace Mattinson and Clark Sheffield at Millionaires Unveiled. It’s a fairly new podcast but they’ve already lined up an impressive list of guests including Dr. Dahle, aka White Coat Investor and Mindy and Carl from 1500 Days. I also particularly appreciate the diversity of different investment styles. Not everybody becomes a millionaire by investing in VTSAX! We can also learn from real estate investors and business owners! But first, of course, please listen to Episode 15 with yours truly, which was released today…

—> Click here for the podcast on iTunes <—

—> Click here for the podcast on Stitcher <—

And please also subscribe, review and “like” them on iTunes and StitcherContinue reading “My podcast appearance on Millionaires Unveiled”

Some of my Thoughts on Bitcoin and Cryptocurrencies

As a follow-up to yesterday’s guest post, here are a few of my own thoughts about the challenges and opportunities. For full disclosure, I don’t currently own or have ever owned Bitcoin or any other cryptocurrency myself. I reached Financial Independence (FI) years ago the old fashioned way with equities and a little bit of real estate. Only a few weeks away from early retirement, I have no need to throw “Hail Mary passes” with my money! But just because I’m interested in finance and technology I should have an opinion, of course, so here are some of my random thoughts in random order on Bitcoin and Cryptocurrencies… Continue reading “Some of my Thoughts on Bitcoin and Cryptocurrencies”

Guest Post: Should you invest in Stocks or Bitcoin?

Hard to believe that this blog has been around for almost two years and I never wrote anything about Bitcoin and Cryptocurrencies. I will have some more of my own thoughts and comments in tomorrow’s weekly Wednesday post but to set the stage, our online buddy Matt Paulson has agreed to write a guest post on the topic. Matt runs a site called MarketBeat which is pretty neat. It has a lot of free information, including all the interesting stats on earnings history/forecasts, dividend history, SEC filings, etc. for individual stocks. I don’t think I have seen all that information aggregated so nicely anywhere else, see below:

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In any case, here’s the guest post on Bitcoin, take it away Matt…

Bio: Matthew Paulson is the founder of MarketBeat, an Inc. 5000 financial media company that empowers retail investors to make better trading decisions by providing real-time financial data and objective market research.

The stock market continues to soar, reaching new highs on a regular basis. Many people attribute this to the brighter macroeconomic outlook, lower taxes and less regulation, so markets find it easier to price future expectations. This has led to record highs for both bitcoin and the stock market. However, individuals need to be careful when making an investment. Although bitcoin may appear to be the wave of the future, we need to understand the benefits and drawbacks of both stocks and cryptocurrencies to ensure they make the decision that is right for their unique needs. Continue reading “Guest Post: Should you invest in Stocks or Bitcoin?”

Ten Lessons From Ten Safe Withdrawal Rate Case Studies

Last week, we published the Tenth Safe Withdrawal Rate Study! Amazing how time flies! I did about one case study every three weeks for the last 6 months! And I could even include another one if I were to count the one I did for the ChooseFI podcast back in 2017. In fact, the ChooseFI appearance (Episode 23R and Episode 26R) started the idea because our first volunteer reached out to me after he heard me on the podcast. Since then I’ve published 10 posts, worth almost 30,000 words that generated tons of clicks, feedback and encouragement:

  • “John Smith”: Seven-figure net worth, but not quite ready for FIRE yet. Big ERN would recommend a few more years in the workforce!
  • “Captain Ron”: Early retirement on a sailboat. How much can they withdraw from their $3m portfolio to stay afloat (pun intended) in retirement?
  • “Rene”: No need to worry about the recent layoff: You are more than ready for early retirement!
  • “Mrs. Greece”: More than ready to retire due to large portfolio size and moderate living expenses, especially if the husband keeps working!
  • “Mrs. Wish I Could Surf”: Alternative investments (real estate hard money loans). Keep the mortgage or pay it off? Either way, more than ready to retire!
  • “Mr. Corporate”: Geographic Arbitrage by moving to a low-cost European country. Roth Conversions and zero tax liability!
  • “Ms. Almost FI”: Your name is a misnomer. You are ready to retire now even when self-funding substantial long-term care expenses in the future!
  • “Mr. Corporate Refugee”: How to deal with a large portion of the net worth tied up in a house in a high-cost-of-living area?
  • “Mrs. Wanderlust”: Substantial supplemental cash flows due to buying an RV and then selling it later.
  • “Mr. and Mrs. Shirts”: Ready to retire this year, but should Mr. Shirts work for another nine months for some additional big payday?

But, alas, all good things have to come to an end! I have decided to take a break from the case studies, at least for now. I might revive the series again later but for next few weeks and months, I will pursue other topics! Thanks to all volunteers who submitted their data. And thanks to all other folks who didn’t get their case studies published. I’m not even sure I properly responded to everyone whose request was denied. I think I may have some inquiries from October last year that I haven’t responded to. If you submitted a request for a case study and haven’t heard from me back, sorry, I’m just a bit disorganized!

Sooooo, ten case studies: what have I learned from them? Plenty, because that’s the topic for today’s post…

Continue reading “Ten Lessons From Ten Safe Withdrawal Rate Case Studies”