1) I never said it was lucrative.

2) In fact I stated that during rising markets the strategy under-performs. It compensates nicely during bear markets.

3) It’s not a secret. Anyone who is familiar with options already knows about collars.

4) I’m sharing it – and this is a very appropriate forum – with many investors who have probably never considered using options.

5) This is a widely read blog and there are lots of investors here. Many passive investors are buying index funds and are happy doing that. They get the fact that trying to out-perform the averages is a losing effort for most.

Most understand the idea that diversification helps reduce risk.

Many get the concept of asset allocation, but not everyone take the time to do it.

But very few know that collars are available to cut the risk of loss. Why should anyone deny them the right to make this discovery. I’m here to introduce the concept of options. After that, it’s no longer my decision.

I am ‘sharing’ because I believe that a high percentage of average investors – both active and passive – can benefit from knowing that there will never again be a devastating portfolio loss. Or even a large loss. Or even a medium-sized loss.

For those who treasure that insurance – for those willing to accept a limited upside – for those who know bull markets do not last forever – for those investors who cannot afford (or are unwilling) to take losses – for them, the collar is a good deal.

For you it is not a good deal.

One reason it’s such a ‘secret’ is that the professional stockbrokers, financial journalists, financial planners and advisors are either unaware of collars, or more likely, are unwilling to recommend them to clients.

If you consider your homeowner’s insurance as ‘cheap,’ why can’t I consider collars to be worth every penny of the potential cost? I say ‘potential’ because there is no cost if the markets do not rise significantly.

I think collars are cheap. despite the ‘work’ – which decreases rapidly as you gain experience.

You say you cannot understand the strategy. Then how can you pass judgment? I’m sure a smart guy like you doesn’t make a habit of doing that. What is there about my post that disturbs you so much?

If you believe that, then I understand why taking out insurance that limits gains seems foolish to you.

The whole idea of investing is to minimize risk while seeking gains that compensate you for taking that risk.

If you are looking for huge returns, then you may indeed be forced to risk it all. But to seek above average stock market returns – which is impossible for the majority of investors – is no reason to risk losing it all.

I believe you will discover that most investors prefer some type of risk management.

1) I do not care about ‘unrealized losses.’

2) I mentioned it here because it was in response to Dylan. In a previous discussion elsewhere, I believe it was Dylan who said that it you don’t have to sell (i.e., if you don’t have to realize the loss) then there is no loss.

3) I raised the point here because Dylan said “If an investor has no immediate plans to sell investments, even if their investments experience a huge price drop, then they don’t need to pay the cost of insuring it right now.”

I disagree. All investments should be protected in some fashion. regardless of when the investor plans to sell.

That’s all the ‘detail’ I have.

Stock drops 50%… Stock now needs a 100% gain to get you back to even:

Now, because you were so worried about limiting your upside… because you couldn’t accept the possibility of just above average gains… preferring instead to HOPE for a homerun… You sit HOPING for a double to BREAK EVEN—back to where you started!

I guess I should be glad some people still feel that way (I’m not). Because my job is to hunt folks that think that way down, and to reduce the size of your account. Nothing personal, it’s just what I do.

Thanks for the intro on options collars. I definitely can’t say I understand them but I appreciate the perspective.

I think I will stick with B&H but this idea leaves something to munch on.

One thing to consider: We have had a stupendous bull market – with interruptions – since WWII. You are wagering that the general trend will continue over the next 20 years.

I am afraid to make that wager.

Most people insure their houses, knowing the chance of a fire, or other disaster, is small. That insurance is costly.

I like the idea that portfolio insurance is available. No one has to buy it.

Here’s why I believe planners refuse to learn about options: a) they have heard options are risky tools from people who don’t know how they are used to reduce risk and especially, b) If they use options and the client loses money, they know the client will sue based on those same stories that ‘options are dangerous.’ It’s prudent for the planner to avoid taking that risk for his own protection. Prudent – but unfair to the client.

Options are not dangerous. What is dangerous is options in the hands of gamblers.

To reply: Sure, I’d like to see people embrace it, but it’s not for everyone. I may be reading too much into the responses, but it seems to me that the replies are saying: options – forget them.

My position is that anyone who has stock market investments ought to be aware that collars exist. And for those who would love to have a guarantee of very limited losses – the price to be paid is either accepting similarly limited gains, or pay more cash for the portfolio protection and give yourself the chance for better – but still limited gains.

Regarding the need for insurance when you have no plans to sell: We have had this discussion before (I’m almost certain it was with you). When the portfolio value has declined, you have a loss. It may be unrealized, but it is a loss. To pretend otherwise ‘just because I’m not selling’ is not living in the real world.

I believe it’s MUCH better not to suffer those losses – even when I don’t have to sell soon – and to accomplish that, portfolio insurance must be in place. I choose collars. Others choose allocation. No one is ‘wrong.’

Protective puts sound good, but the cost of puts is so high that you would have to make a lot (probably over 20% per year just to overcome the cost of the puts). That’s why I use collars. The call sale pays for the puts.

Your suggestion makes perfect sense. The difficulty is knowing just when is the appropriate time to get defensive. I never know in which direction the market is going to move, so for me the recommendation is to cover x% of your portfolio with collars. That can be 0% when you want to take a bullish stance, 50% all the time; or 100% whenever you deem it appropriate.

It’s a very flexible method. If you have market timing skills use them. But statistics tell us that the vast majority of investors lack that specific skill. That’s why I suggest owning protection for a portion of the portfolio at all times.

I was reluctant to nod my head at your post as well as responses until I read this last response you wrote. Your insurance stategy is effective during periods of uncertainty and large downsite potential like the one we all experienced in the last 12 months. Why would we want to limit our potential in times of “green chutes”? Wouldn’t a protective call or put strategy make more sense. I think the best strategy is buy and hold but dont go away. If you see high periods of uncertainty then options provide a nice income off the premiums. What is scary and makes options definetely not for everyone is the fact that the options market has to to net out. There must be a loser and winner.