Gyroscopic Investing

Thinking out loud here, and was hoping to get some insight on this. I know you can't time the market, and I believe studies show you are best just investing everything you have at once. But what about selling puts to establish your PP?  For example, at end of day today I see the following:

VTI @ 72.00
Jun 16 71 put @ 1.15
Breakeven (71-1.15) 69.85

TLT @ 117.20
Jun 16 117 put @ 2.53
Breakeven (117-2.53) 114.47

GLD @ 161.03
Jun 16 161 put @ 3.50
Breakeven (161-3.50) 157.50

SHV is cash, no options.

Let's say I take 25% of my available funds and sold puts in those 3 ETFs. Depending on how these asset classes decide to move, I'd like to think I can somehow extract a better price on the overall portfolio by collecting all of that premium right out of the gates. If each ETF moved up (unlikely but possible) I'd collect all of the premium but possibly miss out on upside had I owned outright. If each moved down (also unlikely but possible) I'd be buying in at a better price than I would have otherwise. I think the pain would occur should there be large divergence - for instance, if stocks plummeted and bonds rose, I'd have to either cut my losses on stocks by buying back the VTI put, or buy TLT before my premium cushion disappears. I don't mind that this all requires work. I know it is supposed to be a lazy portfolio, but this is something that interests me.

Anyway, just looking for some thoughts on this, and I'm wondering if it is an approach anyone has attempted.

I would say this approach would not be worth the trouble, and would be counter to the basic assumptions behind the PP.

Since you are just starting out, though, this might be an interesting experiment:

Take one-half of the money you had earmarked for the PP and put it into your "Put-PP", and then take the other half and put it into a regular PP.  When the put strategy had worked itself out, you could compare the two portfolios and see which one did better.

iwealth, I have also spent some time looking into how options may play a role in the PP, but came to conclusion that they are not compatible.  I will however use options if the PP has dropped a significant amount and believe that it's due for a major rebound.  This would be pure speculation, and I would be willing to completely lose the premium if I'm wrong.

iwealth wrote: If each moved down (also unlikely but possible) I'd be buying in at a better price than I would have otherwise.

Wouldn't you have to buy the ETF's at the strike price?  So if the ETF prices fall over the next couple months, it wouldn't really matter if you bought now or on June 16.  So it seems that this strategy would limit your upside gains, while providing a little boost from the premiums.  Also, you miss out on any dividends -- not sure how that would compare to the premiums you receive.

Is this what you had in mind, http://www.optionsplaybook.com/option-s ... short-put/

I really do wish there was a good strategy to combine options with the PP, but IMO it doesn't seem possible (could you imagine 10x the PP gains ).  The options market is extremely efficient, and the only way to make money at it is if your guess is better than the markets.

Hey guys, thanks for the responses.

MediumTex - That's not a bad idea, at the very least I can observe what happens with the prices and premium between now and June while I continue to research the appropriate portfolio allocation for me. I do have a lump sum to invest and up to this point I've done hardly anything with it (wild internet ride that lasted a couple years and fizzled as fast as it grew).

Gosso - Yes, I would have been holding short puts. I would have to buy the ETF(s) at the strike price(s) but assuming they did not move in tandem, they wouldn't all be exercised. If I was exercised hopefully the collected premium would make up the price difference (and then some). You mention the efficiency of the options market, and I agree; however, I'm of the belief that the only edge we have in the market is that it trends up over time. The PP as a whole should theoretically trend up with significantly less volatility than the market itself which makes selling puts on the entire portfolio more appealing than selling puts on a general market ETF like SPY, IWM, QQQ, VTI, etc., since each individual component -should- move in a direction independent of the others.

In any case, I'll look into it a bit more.

Hmmm, well if you do decide to do it let us know how it goes.  I'm thinking that the PP is primed for a potentially large move over the next few months, so I wouldn't want to be limiting my upside potential at the moment.  Although I do understand how seductive those sweet sweet premiums are.