IRA accounts and TMV short hedge

IRA accounts and TMV short hedge2017-03-03T15:27:18+00:00
  • Author
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  • Frank Grossmann
    Moderator
    Post count: 161

    I got quite some emails of subscribers not able to short TMV. Most of them had normal IRA accounts which don’t allow to short ETFs.

    So, in the future i will continue the strategies by default without the TMV short hedge. The TMV hedge will be be some option, which will be treated apart from the original strategies.
    If somebody can short, then TMV is really a good solution which can stay in place for a long time. Just go short once with 20% of your capital and that’s it. You probably have to rebalance every few month a little bit.

    If you can not hedge with a TMV short position, then you have two possibilities

    1) Just go on like before. The rotation strategies are already safe without a hedge, because they would exit the stock market if there is a big market correction.

    2) Another simple solution is to invest 50% of the funds in the Bond Rotation Strategy. The strategy always had a positive return year to day and this way would have reduced your intermediate January 2014 drawdown by more than 50%.

    But anyway, with the time you get used to such market corrections. They are just normal during such a bull market.

  • jaradgiese
    Participant
    Post count: 2

    Would buying leap option puts in TMV be a good option if you can’t short? I can’t short in my investment account can buy to open option positions.

    • Frank Grossmann
      Moderator
      Post count: 161

      Personally I would always sell long term options to collect the premium. I think, buying options is always bad. So, you could sell TMV calls. The problem is that these are not liquid enough. They have huge spreads of sometimes more than 10%.
      However instead of shorting TMV you can sell longer term TLT options. These behave much like the underlying ETF and you collect the premium.
      I have done this myself on one account where I can not short TMV. I sold ATM January 2016 TLT put options.

  • Mark
    Participant
    Post count: 7

    I’m new to Logical Invest and have noted several comments in blogs discouraging the use of long calls and puts to implement strategies. In my IRA account, I too can buy long calls and puts but no margin. As a stock replacement strategy, I had thought to buy long calls, 2-3 strikes ITM, 4-6 months from expiration. I plan to roll calls prior to final month before expiration. Rather than short TMV, I could buy puts using a similar strategy using TLT or TBT. What am I missing? Why do you feel buying options is always bad? Thanks for insight.

  • Mark
    Participant
    Post count: 7

    For clarity, is a short TMV position on margin significantly different than buying TBT (or TMV) puts? Thanks

  • Vangelis
    Moderator
    Post count: 156

    Mark,

    Options are one of the most misunderstood area of investments analysis. While there are many layers to understand, here are a few important aspects:
    – Options are leverage that changes, based on the underlying price relative to the strike price. Further out of the money – much more leverage. That can be useful, and dangerous – as the leverage is not stable.
    – Generally, all else being equal, you have a nice wind at your back when you sell options (you are closer to the “house” or market maker ); buying options is the mathematical inverse, everyday you have wind in your face, with the hope that your leveraged bet is worth the theta decay price.
    – If you can predict the next volatility shift, that can change the analysis.

    For me, I like the wind at my back, not in my face. I would not buy options unless I really had another huge edge. And I would only sell them if you have done a good amount of homework and practice.

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