You are on a trip and your fellow pilot says they have a new investment strategy that’s getting amazing returns. You are skeptical at first, but after talking about it for the next five hours on the way to LaGuardia you become convinced you must be missing out.
We hear these stories often; we even experience it ourselves! That’s why we are starting a new podcast segment where we discuss some hot topics circulating the pilot lounges, crew vans, and cockpits. We are calling these episodes the Pilot’s Crew Lounge!
In this episode, we are taking on the hot topic of Options Trading. We’ve had a few pilots come to us with questions about Option Trading after hearing about them on trips. We are here to address these questions and give our thoughts!
Are you missing out by not using options? In this podcast we discuss our Top Five Considerations Before Trading Options.
If you have questions, comments, or topics that you would like us to cover, send them to us at email@example.com.
Get your peace of mind back this summer with a comprehensive financial plan! Give us a call at 865-240-2292!
Flight #9: Can I Get Rich Options Trading?
[00:00:30] Rob: [00:00:30] A tip of the cap to you.
Thank you for joining us here at the pilot money guys, podcast. Welcome to the
special edition that we're calling the pilot lounge during these flights or episodes. If you will,
we will talk about the questions we've heard around the system in the pilot lounges. And of
course, I'm your host, Rob Eklund.
[00:00:48] We've got the flight crew today. We've got the godfather certified financial
planner. Charlie Mattingly. Sir.
[00:00:55] Charlie: [00:00:55] Yes, sir. Here, president of for
[00:00:58] Rob: [00:00:58] perfect and [00:01:00] advisor, Mr. Cal bell V Ben Dickinson.
[00:01:04] Ben: [00:01:04] I wish you still have that cowboy cowbell. Oh, the ringtone.
[00:01:07] Rob: [00:01:07] Yeah, but that's
[00:01:09] Ben: [00:01:09] all right. That's
[00:01:09] Rob: [00:01:09] all right.
[00:01:10] Without that certain special occasions, although it is the pilot lounge, so we will
have to get to it.
[00:01:16]Ben: [00:01:16] We might add it in post
[00:01:17] Rob: [00:01:17] production. Do you hear that? If you didn't bend was lazy. Okay.
Exactly. All right. Let's jump into some aviation news. Charlie, we're talking a little history.
What do you got?
[00:01:29] Charlie: [00:01:29] Yeah, so we decided to take the aviation news segment. And
and go historical we were talking before we came on you all about Pardo's push. I said, have
you all heard of Pardo's push? I remember talking about this. We used to do aviation or
excuse me, military history, every Friday night at the squatters, it was cool to go on or some
of our some of our warriors that went before us.
[00:01:48] So Pardo's push is very fascinating. It was I'll just tell the story real quick. Captain
Bob Pardot and wingman captain Earl Amman, I think is how you say that. Eighth tactical fighter wing [00:02:00] out of Thai air force base back in Vietnam, March, 1967, trying to tack a steel mill north Vietnam, just north of Hanoi.
[00:02:08]Both fr Phantoms were hit by anti-aircraft fire. Amman's plane took the worst
damage. His fuel tank had been hit and he quickly lost most of the fuel. So Amman
determined that they did not have enough fuel to make it to the tanker, the KC 1 35 tanker
over Laos. So the options are basically little bailout over hostile territory.
[00:02:28] So Pardot said, Hey, I'm going to push you. I'm going to push you to friendly
territory. So Pardot tried pushing the airplane. Now he's pushing his F for another F four
with his F four 80. So he tried using the drag shoot. Couldn't do that. Basically a mom put his tail hook down and then Pardot put the tail hook on his windscreen.
[00:02:49] And he pushed him that way. So basically then Amman shut down both engines and Pardot began pushing him now, in [00:03:00] reality, he's just minimizing the descent so he can push him far enough into friendly territory. It kinda did the trick basically then. So it gets more interesting.
[00:03:08] First of all, the tail hook would not stay in position for longer than about 15 to 20
seconds. So we had to reposition. Do it again, put the tail, look on his windscreen and push
some more just to reduce that descent, which is pretty incredible. And if you know the
physics of the it's, they call it the rhino or the flying tank, because it is a huge fuselage, huge
body of the airplane.
[00:03:29] And then these tanks, excuse me, the wings that go out are very thin they're not
big for the airplane. So the. So the glide ratio is not good, right? So they're doing some work
there. So he's repositioning every 15, 30 seconds to push the tail hook, to get them to
friendly territory. But Pardot was also struggling with fire and one of his own engines and eventually had to shut it down.
[00:03:50] So in the remaining 10 minutes part, I'll use the last engine to slow the descent of both airplanes. So it was pretty incredible. So they're flying [00:04:00] two airplanes are descending slowly on one engine
[00:04:02] Rob: [00:04:02] in between both of them. Most of the time they have four
between them. Yeah, exactly. So
[00:04:07] Charlie: [00:04:07] Pardot is playing running out of fuel after pushing a Mons plane almost 88 miles.
[00:04:11] Again that's really incredible considering where he would have been, had he not had somebody pushing him, he would have who glided a little bit, but not that much.
So the planes reached a friendly airspace at an altitude of 6,000 feet and left them about two
minutes of flying time where they ejected evaded capture and were picked up by rescue
[00:04:31] So incredible story.
[00:04:32]Rob: [00:04:32] It, we talked about a little bit Charlie, but yeah, it was funny. It was part, it was reprimanded for not saying his own aircraft, but then yeah. Military re-examined and said, oh, actually you deserve the silver star for saving both your butts on.
[00:04:47] As a credible. And they both retired at the prestigious rank of Lieutenant Colonel.
Yeah. That's a big rank. I'm a. That's the team in 20 days. Nice.
[00:04:58] Charlie: [00:04:58] Congratulations,
[00:05:00] [00:04:59] Rob: [00:04:59] man. Thank you. Thank you. July 4th is my retirement date. Oh, nice. So you're going to expect presence from Uben for sure. July
[00:05:09] Charlie: [00:05:09] 4th, you'll be retiring as a Lieutenant, as a reserve, as a
Lieutenant Colonel reservist, correct?
[00:05:17] Ben: [00:05:17] Robbie better sill better. She'll be on your game. You're still notthere yet. Can tell him those chickens.
[00:05:24] Rob: [00:05:24] Yeah, good point.
[00:05:27] Ben: [00:05:27] Good point. They're watching. I'm watching you like a Hawk.
Anything. I see.
[00:05:33] Rob: [00:05:33] Good call. All right. Thanks Charlotte. That's good. Any other aviation news you guys want to talk about?
[00:05:42] Ben: [00:05:42] Man. There's not much. It's been boring out there. I want some
more elevation. Come on. I'll just lines.
[00:05:47] Rob: [00:05:47] Give it to us. The Southwest boring is good. Boring is good.
Southwest is buying 30 plus max seven aircraft. So it's 7 37, 700. They're buying more of
[00:06:00] those. I think it would have over 60 next year.
[00:06:02] So that's good news, but a little bit other news, we got the electronic vertical
takeoff and landing system, apparently American and Virgin at least are buying some of these IE Vittol electronic, vertical takeoff and landing aircraft that will be coming out at some point. So that'll be interesting to see how that develops.
[00:06:23] So we talked supersonic last week and now we've got V. Wow. Heck yeah. Apple
is crazy world. Crazy world. Yeah. Yeah. All right. Any any
[00:06:32] Charlie: [00:06:32] talk at Southwest about different non Boeing airplanes?
[00:06:37] Rob: [00:06:37] Not that I've heard. Cause
[00:06:39]Charlie: [00:06:39] That was a big, hot topic about a year ago. Yeah. Have you
talked to Gary about that?
[00:06:43] Gary talks about it. Yeah. Because that's, this time last year I was like, holy cow,
you have one type of airplane. We know it. Wasn't this time last year. It was two years ago
when we had the max issues. So yeah, one type of airplane and they're having trouble.
[00:07:00] So that was difficult.
[00:07:02] Rob: [00:07:02] Yeah. Yeah. I don't know.
[00:07:04] I think right now we're they're focused on that, that max seven and what that's
going to do, there is rumors who knows what they're true or not of maybe some eat tops
out of Denver. I don't know. Woo. Nice. That'd be interesting.
[00:07:17] Charlie: [00:07:17] Don't forget about the Dreamliner rumors there at Southwest.
[00:07:20] I'm starting through dream liners coming to Southwest fall 20, 22.
[00:07:26] Rob: [00:07:26] Your words not mine.
[00:07:30] Excellent. All right. That's all we have for aviation news. Quick commercial here,
summers here, planes are full. Things are hopping while you enjoy the sun and fun. Or
overtime flying, whatever. Nice. Let us make sure your retirement plan is on track. Give us a
call or shoot us an email to discuss your financial needs.
[00:07:48] We are fiduciary fee only advisors, and you can reach us at 8 6 5 2 4 0 2 2 9 2 or
good old electronic mail. Do you know what that is? [00:08:00] Even electronic mail.
[00:08:03] Charlie: [00:08:03] You have to go to the post
[00:08:04] Rob: [00:08:04] office for that. Anyways. That's firstname.lastname@example.org.
And if you want to reach Ben Dickinson directly, call them at (865) 290-7523.
[00:08:18] Again, that's 8 6 5 2 9 0 7 5 2 3. That's enough of
[00:08:22] Charlie: [00:08:22] that, please call.
[00:08:24] Ben: [00:08:24] I need some more. I need some friends.
[00:08:29] Rob: [00:08:29] I know who I'm calling late Friday. Excellent. Let's jump in. We've
got options. I know we talked a little bit about. The pilot lounge would cover options,
covered calls and how to buy an airplane and the tax implications of these a little bit too
much to cover on one podcast. And we're just going to cover the options and covered calls.
[00:08:45] And we're going to get to the airplane and tax implications next week. Charlie,what do you got?
[00:08:50] Charlie: [00:08:50] Absolutely. We've got some top five considerations before
considering wait a second. That's redundant considerations before I said a lot of things here.
[00:09:00] Top five considerations before. Trading options. So yeah.
[00:09:04] Number one, what is your goal? Are you trying to make money? You're trying to
minimize risk. What are you trying to achieve here? Just like our now famous Bitcoin
discussion, it's like we don't just buy an investment to be buying it. We have to know why
we want it. Secondly, is it something, I think this is this has to be true.
[00:09:22] It has to interest you because you need to spend some time. Studying this stuff,
understanding it. Options can be boring and confusing. So you better enjoy it before you
jump in there. There's other ways to achieve the same results. So that's number two,
number three. Are there more profitable alternatives for you?
[00:09:37] In other words, how do you spend your time? Is there an, is there a better way to
spend your time maybe so profitable and maybe monetarily, maybe in quality of life, that's
number three, number four. Do you have the time. Maybe we just talked to that. I don't
know. Maybe that's a, maybe that's a sub-bullet of number three, nonetheless.
[00:09:54] It is. It does take a lot of time, and you've got to take that into consideration. If
you're taking time away from your normal [00:10:00] job, then there's a cost to that.
Number five. What other options do you have for your free time? Other hobbies, you might
enjoy spending time with your family instead of investing in options.
[00:10:10] But we'll talk about today. Investing in options, pros and cons, nuts and bolts. Yes,
[00:10:15] Ben: [00:10:15] It's exciting. It's this has been a hot topic on on tip
[00:10:20] Rob: [00:10:20] tic-tac.
[00:10:22] Ben: [00:10:22] Yeah, absolutely. People are making millions from what I've seen some of these videos. According to these anonymous
[00:10:29] Charlie: [00:10:29] videos
[00:10:30] Rob: [00:10:30] and they've only lost 10 millions, so yeah,
[00:10:32] Ben: [00:10:32] exactly.
[00:10:33]They don't put this on important, it's not really that, that math doesn't really need
to work. Yeah.
[00:10:39] Rob: [00:10:39] That's funny. We've got Obviously, we're going to explain a little
bit about options. We're not going to get too in the weeds. What are we not going to get
into? Oh my gosh. I wouldn't even some of those fancy
[00:10:48] Charlie: [00:10:48] terms.
[00:10:49] I want that straddles long call butterfly spreads are my favorite. Yeah. Not to be
confused with peanut butter spread.
[00:10:58]Rob: [00:10:58] No. That's different
[00:10:58] Charlie: [00:10:58] long [00:11:00] strangle, married put, but. But call spread. No,
that's not the butt call spread. It's the bull call spread. Sorry, I misread my notes there. I was
pretty close, protective collar rights and unwinds.
[00:11:13] So we're not going to, luckily we're not going to talk about any of those that,
especially the buck calls. Those are not fun to talk about.
[00:11:20] Rob: [00:11:20] Optimism.
[00:11:21] Ben: [00:11:21] Call me all the time, Charlie. We should talk about
[00:11:23] Rob: [00:11:23] this. That's a good point.
[00:11:26] Charlie: [00:11:26] We've got to
[00:11:26] Rob: [00:11:26] keep it professional today. Call you at eight six five two nine zero
[00:11:33] Yeah. All right. Excellent. We're not going to cover that. We're just going to keep
it high level, if you will, or low level or whatever, we're not gonna get into the details. Okay. I
love that. Yeah. So what is an option? It's a derivative means derived from something else
for our purposes today.
[00:11:48] We're just going to talk about stock options, where the options derive their value
from stock. Typically one option is worth. 100 shares. So that's the first part I [00:12:00]
want you to know. We get a little bit of the history here. Options are very old. They're not
brand new. They've been around quite awhile.
[00:12:05] They were even, yeah. During the stock market crash of 1720, and yes, you heard
me right. 1720, not 1929. Whoa. So back then too, people would go into a contract and
that's all an option is a contract between two parties. And they would enter it in the contract
or one person would write the contract, given the buyer the option to buy or sell the stock if
it hit the exercise or strike price on or before the exercise date.
[00:12:35] So it was just a contract between two people. That's it? That was back then.
Obviously if one person didn't have the shares or couldn't buy the shares, when the exercise
price was hit on the exercise date or before. Then that would be a problem. So in 1973,
Chicago board options exchange came about and they were able to solve some of these
[00:12:54] And now it's called CBO for you traders out there. , CBO came about helped solve
some of those problems. And if someone [00:13:00] wanted to write an option, Now they
needed to show that they had the shares and this exchange would make sure of this so that
someone would just, wasn't saying, oh, I've got the chairs when they didn't and take off to
London or something.
[00:13:11] And they, or they have money in a margin account. So they say, okay, you've got
money in a margin account. If the stock goes, whatever way we can put more in. And that's
what the margin call is, where you'd have to put more money in. I don't ever want to be a
part of those. I don't think there are any fun for.
[00:13:28]Some of the folks I've talked to who have been a part of those, you have to put
more money in and it can get ugly. But in any case, you get to a point where you're writing
options and they're called naked options or naked calls and naked puts. And all this means is
you don't know the shares.
[00:13:44]With the exchange you're on that margin account where you have that money
away so that they can go in there and trade on your behalf. If the stock goes the wrong way.
Opposite of being naked as being covered, which leads us to cover calls. Charlie, what do
you [00:14:00] got on to cover calls?
[00:14:02] Charlie: [00:14:02] They're not naked, so that's the good part.
[00:14:04] That's good. So options are like we say, can get very complicated as you've
already learned. Very difficult to follow along some of these, but the most basic. When I
was studying and learning about options they said is , you could do covered calls with your
[00:14:21] In other words, it's conservative enough to be able to do that. So that's the one
that people maybe are most familiar with and are able to do if they wanted to not a
recommendation if they want to do that in their 401k they can, in most 401k is like in an, in
a in a brokerage window of some sort.
[00:14:39] Of course in a taxable brokerage account at Schwab or E-Trade or fidelity, you can
do any of these things if you want to, or there's other brokerages out there that facilitate
options specifically. They specialize in that. However, again, we're going to focus on what is
a covered call.
[00:14:53] So let's pretend for a minute that, that I own a stock now. Now most people buy
covered calls [00:15:00] or write covered calls, the lingo there, like Robin said, okay. In a
market where they believe it may be flat, the stock market, the stock may go up in price a
[00:15:09] It may go down a little bit, but flat that's when they might do a covered call, but
basically it can add income to your investment. So it's essentially like an income producing
strategy, maybe like a dividend, you could compare it to. So just real quick explanation, let's
say I own a stock ABC stock it's at $20 a share.
[00:15:29] So I own that stock and I say, Hey, I'm going to produce a little extra income. And
I'm going to sell a call option. I'm going to sell that contract. Someone's going to pay me to
do that. So I take that premium that I get paid by selling that a call option. I still own the
stock. Let's pretend then that the stock goes down.
[00:15:48]If the stock goes down, I still own the stock and I've got money for that call option
that I wrote to someone or sold to someone. So that's one scenario. Now let's say that I did
the same thing. I sold the call [00:16:00] option. And the stock goes up well, I've got the
premium from the call option that I sold stock goes up to the exercise price or strike price,
someone else exercises that option I am required to now sell my stock.
[00:16:14] And so it's gone. So in other words, let's say I own that stock at $20, ABC stock at
$20, I wrote a call. I received a premium, it went up to $25. It was called away because I had
to sell. So I made 20 excuse me, $5 on the increase in the stock. And I made a little bit of
premium on the selling of the covered call.
[00:16:35] So that is the strategy in a nutshell. And there's a lot of services out there that
offer that as in, I'll be honest with it, they offer it as some magic solutions and magic potion
to increase your 401k and make your life wonderful.
[00:16:50] Rob: [00:16:50] Yeah. And it's interesting why they might do that.
[00:16:54] You start talking about a lot of, Robin hood and, almost all the brokerages
nowadays are doing zero [00:17:00] commission trades for you. And a lot of people get
confused and they think, oh I'm not getting charged anything. Everything's great. And yes,
that is true. However, the brokers are still making a lot of money, especially when it comes
to option trading.
[00:17:13] So on a normal equity trade, a broker might make 17 cents portrayed off of
what's called. Payment for order flow. So that's where they get a kickback from the market
maker, the person actually doing the trade there, they get paid to channel the trade to that
person. And you'll never guess who actually pioneered profit for excuse me, payment for
[00:17:39]Any guesses there? Bernie made off burning. Whoa. He planned here or helped
pioneer payment for order flow. So the broker gets a kickback. Yeah. You're not paying
anything, but they are getting paid off that bid ask spread is pretty big compared to a regular
[00:18:00] trade when you're talking about option trading and that market maker is able to
offer those guys as much as 58 cents.
[00:18:05] So 17 cents. Compared to 58 cents, those are just rough numbers there, but
they're making a lot of money off of option trading, which is why you'll see some companies
Robinhood, even TD Ameritrade, other companies wanting and pushing option trading
because they are getting a heck of a lot of money.
[00:18:22] I think one of the quarters, Robinhood and TD Ameritrade, there were upwards of
400 million during the quarter. So it's a wow, it's a lot of money out there and it makes sense
why they're pushing it because they get. Again, they get more money off of it. Off of those
zero commission trades there.
[00:18:39] They're getting quite a bit of money. Now, quick note here, fidelity doesn't accept
payment for order flow. And why do you care about that? You're like I don't care except that
if someone's getting paid to channel your trade to a certain market maker, that means you
may not get the most favorable [00:19:00] terms.
[00:19:00]If they're getting. If they're getting paid to send it to, Maydoff, then they're going
to send it to him to get paid. So anyways enough about that what'd you have,
[00:19:10] Ben: [00:19:10] yeah, that's a shame. I was just going to say. Yeah. Like you said,
with these. Different brokers out there that are now pushing options more.
[00:19:17]Options trading has exploded in popularity in the last 10, 15 years. And it keeps
increasing. I think I saw recently it was like 20 million options are traded a day now, and so
talk about a moneymaker, but then also talk about the popularity increase. Like it is a
serious thing and now.
[00:19:35] Again. I actually see it on social media, people talking about this as if it's, instant
way to, to make a bunch of cash. And so yeah, if you want to know these, the ins and outs,
[00:19:47] Rob: [00:19:47] Yeah, absolutely. If you want to get into any of option trading,
just try to search for any podcast on opposite trading.
[00:19:53] You'll get a bazillion different ones out there because people are pushing it like
crazy. [00:20:00] Not to say you can't make money. You just better know the risks. And to
that point, some of the things, some of the things we talk about here at leading edge, if
you're going to do it, and you really, like Charlie said, you want to get into it.
[00:20:12] You're really interested in it. You have the time you have the, it's a hobby for you
or whatever, then you're going to want to put no more than at least what we advocate here
is no more than 5% of your portfolio in that you don't want to put too much because you
might lose it for one. If you're going to do it, make sure you define your risk and know your
[00:20:34] It can take years to get comfortable with it. That's something you're going to have
to make sure you have the time to get. Get good at it. It's not something you're just going to
pick up one day and say, oh, I'm going to, I'm going to be a great option straighter and make
a ton of money tomorrow.
[00:20:46] The one thing I will read here, which is pretty interesting is one of the quotes, the,
one of the quotes from TD Ameritrade that they make you read before you can even start
[00:20:55] As opposites are not suitable for all investors. As the special risks inherent to
option [00:21:00] trading may expose investors to potentially rapid and substantial losses.
And it goes on to say a whole bunch of other things. Option trading privilege privileges in
your account are subject to TJ, TD Ameritrade review and approval.
[00:21:13] Not all accounts owners will qualify. So lots of different things out there. Charlie.
What else? What else do you got on options? Yeah.
[00:21:22] Charlie: [00:21:22] Yeah. It's just it's just, I don't know the way you think about
some of these things, a lot of times as investors, we're sold stuff, we're sold strategies.
[00:21:29] We're sold annuity, sometimes nothing wrong with annuities. If they fit your
situation, nothing wrong with options. If they fit your situations, don't get sold something
though. In other words, let's say someone's trying to sell me on call options. Call options are
great, cover calls, fine, income producing the stock gets called away, fine, whatever it can be
beneficial, but as a, as an accumulator right now in my life or any, let's say one of our pilots
still flying, do I really need to [00:22:00] produce some income?
[00:22:01] And my 401k, people are like of course I do. Maybe not because I really want to
keep those investments and I want them to grow. For the long-term, so what is it that I
really need because sometimes executing this fancy complex call strategy sounds really cool,
but is it really what I want?
[00:22:19] And I probably could do better if I, go, just go long on equities, period. And so
that's, I'm not trying to produce income until I'm in retirement. I really want capital
appreciation. So that's one of the things and the other thing is that, we talk about the risk of
options and there are some risks, but most options strategies they're designed to reduce
your risk, buying a put option, it's designed to provide a floor to a stock that you might own.
[00:22:47]To minimize losses, or like I said, covered calls, designed to produce a little bit of
extra income. So most of the time, these things, are risky mitigation strategies that large
insurance companies are using. Large [00:23:00] institutions are using hedge fund managers
are using an individual investor.
[00:23:04] I'm not so sure that we often understand exactly what options are for when we're
investing in them. In other words, most of our most investors will say, I just want to make
more money. Options probably aren't your best bet. Then you don't just go along the stock,
or as many oxygen you can.
[00:23:19] So anyway it's interesting how sometimes things are sold to us when we don't
really know exactly the purpose of the particular investment, we're just attracted to it
because of the complexity.
[00:23:29] Rob: [00:23:29] Yeah, that's a good point and note on that. If you're buying call
options or you're a call option holder, and you're not entitled to the quarterly dividends,
every other person is, that, that has, that just regularly buys that stock regardless of when
they purchase, when you purchase that option.
[00:23:47] So something to keep in mind, sometimes you don't capture those dividends,
which dividends aren't the end all be all, but they are, they do help in certain cases. So
something to keep in mind. Yeah.
[00:23:57] Ben: [00:23:57] Yeah. So I heard something that, . [00:24:00] And again, this is
the pilot lounge topic, cause this is something that we hear.
[00:24:04]That people are talking about and whether it be in the cockpit or in the pilot
lounge, but there's a lot of different people out there actually trying to sell what they call
like the, basically the signals of, Hey here's what options I'm looking at. Here's what options
you should go and buy.
[00:24:20] And then, you pay a subscription fee. They give you a, Hey here's three options a
week that you go and buy and here's the returns I'm making. It's crazy. That's just something
to look out for because I've seen that a lot going around. I've heard a few of our pilots tell us
this and that people are doing it and people are asked telling them about it.
[00:24:38]I would definitely do a lot of more research before you go ahead and subscribed
to something like that, because a lot of scams happen that way. And it seems to be
increasing in popularity. I don't know if you all have seen any of that advertised or anything,
but it's definitely something that you should be .
[00:24:53] Cautious of, if you see
[00:24:55] Rob: [00:24:55] it. Yeah. It's been floating around for sure. One of the pilots I flew
with [00:25:00] not too long ago, he's doing it and, I think he's trying to make sure he's doing
it the right way and protecting himself. But just a side note here, if you're riding or selling a
naked option, You get paid for writing that contract, but your losses can be all the way, you
could lose it all.
[00:25:15] So knowing your risk again, foot stomp in that know your risk, know your
downside as you're getting into this. And if you don't know that, then you probably shouldn't
be doing it.
[00:25:25] Charlie: [00:25:25] Yeah, exactly. And like we talked about before, there's a
couple other alternatives too. Like individual options contracts. So there's a lot of mutual
funds out there that, that take these strategies and wrap them into a mutual fund.
[00:25:39] In fact, there's an ETF. So we'll talk about it in a minute too. But so what I did is I
just Googled, the top 10 mutual funds that, that execute option strategies. So I've got the
top 10 . I put them in our software. And Rob, I was showing you this before we got on the
[00:25:55] And I was like, we'll look at the risk return profile of these investments in
[00:26:00] the expenses. We're all averaging. They probably average about 1.5. In fact, I
might be able to take a look right now, but it is significant, so here's an example for you on a
portfolio. You typically average a 0.16%.
[00:26:15]It's what our portfolios, average expense ratio. So for every a hundred thousand
dollars, that's $161. So the expense ratio of these option based mutual funds is an average
of almost 1.5%, which is $1,400 annually versus 161. So you've got huge expenses and oh, by
the way, let's take a look, is it worth it to have those expenses?
[00:26:37]No, it's not worth it because up until last fall, The intermediate term treasury was outperforming these top 10 together. So I took the top 10 option based mutual funds. I
equally split them, about 8.3%. And their performance was was just about on par with a
government [00:27:00] treasury. Wow. And so not only are you taking more risks, you're
paying more expenses, but I could have been the same thing with immediate term.
[00:27:06] Yeah. So I'll be honest with you. I don't get it. I don't get, because one, an investor doesn't usually a mutual fund like this for a timing strategy. If I'm going to buy a mutual fund like this, I'm going to let those managers execute their strategy. That's the whole point. And that's why you pay more expenses.
[00:27:23] But they've not really done what they said they were going to do. So anyway, I'm just very fascinated at why and what place. Cause that's what we think about Rob and Ben is like as investment advisors. Where, what role does this play in my portfolio? Does it provide diversification? Does it add value? When times are tough, does it help me?
[00:27:44]Let me tell you about in 2020, the options based mutual fund portfolio that I
created returned 3.6, 2%. Intermediate term government treasury 7.5%. Okay. If you'd just
done a 70, 30 portfolio, you probably [00:28:00] would've gotten mid-teens. So what role, a lot of people say you gotta have alternatives in your portfolio.
[00:28:05] Wow. I don't get it. So I'm not sure, you know what I'm missing here. But I don't think I want them in my portfolio.
[00:28:12] Ben: [00:28:12] It's like people it, there's something about the complexity of it
and, Hey, we're doing all these options training. It may sound great. Hey, we're doing all this look, look at all this complex stuff we're doing it sounds maybe good on the surface, but really, yeah, like you look at the numbers, you look at the fees involved, you look at the risk profile, you look at what are their returns been, and you start to realize that just because things are really complex and these portfolio managers are really active. Doesn't necessarily mean that's what's best for you.
[00:28:40] Charlie: [00:28:40] Yeah. And that's a behavioral thing as investors. We just can't believe sometimes that it can really be that simple to own a diversified portfolio.
[00:28:49]Government treasuries provide the best diversification and in difficult times, at
least they've shown to do that in, in, in history anyway. So we, it's just our natural tendency
to look for something [00:29:00] really complex. Somebody has got to have the secret potion out there and listen to these names, equity call a premium, a tactical core fund, enhanced equity, income, strategic program, risk emergent.
[00:29:11]It's that sounds pretty good but it looks when you look, dig a little deeper, it
doesn't look so, so good. So anyway, so sometimes simple wins out in these types of
[00:29:20] Ben: [00:29:20] It's boring just to own a fund with a bunch of companies in there, but then you look deeper and you realize, these companies that like it and are just a regular portfolio, that's not doing these complex options.
[00:29:31]These are companies and businesses that are doing complex things behind the scenes, trying to make more money for their company and grow. So really it's not boring. It just, it may sound more boring than that. I want that tactical, a whatever you called it. That sounds pretty cool, but really it's just a S a smoke and mirrors from what it seems like,
obviously on the, in those tendencies.
[00:29:52]But is there a place for options?
[00:29:56] Rob: [00:29:56] Yeah. Sure. Sure. I think if you're going to be [00:30:00] trading stocks, individual stocks, and you're scratching that itch again with a very small portion of your portfolio and you're trading stocks, I can see where you're going to head some of those positions. Yeah. To protect yourself from the downside.
[00:30:12] And that's where I see if you're going to be doing that. Then, that's one thing. Or again, if you're really adamant and you're really You really want to get into this, riding those covered calls and doing some of those things with a small portion of your portfolio. I think it could be interesting too.
[00:30:26] And it's got an appeal to it, to some
[00:30:27] Charlie: [00:30:27] people. Yeah., and the way we make decisions is interesting. If
I just had my speculative money out, and I'm ready to go do some different things and just
learn about investing. I'd have no problem doing covered calls.
[00:30:39] I have no problem. With put options buying put options, they create that floor for you, and they're better than doing like a limit order. limit order on a single stock or a put option is better than that because it gives you more flexibility. We won't go into too many details, but think about it this way.
[00:30:53]If the choices of my hobbies and my off time are like to do put call, put options
and cover calls
[00:31:00] versus say, buying a horse. I think you're way way better, better off doing covered calls. Okay. Let me just put that out there because you don't have to feed
them. You don't have to call the vet. You just have to spend some time and if you enjoy it,
great do it. But like you said, Rob, just understand that it's speculative unless you've unless you're doing something little more conservative, again, cover calls, fairly conservative, just to understand which kind of options strategy you're doing.
[00:31:25] Rob: [00:31:25] Yeah. Good stuff. Yeah.
[00:31:28]Charlie: [00:31:28] Hey, do we have time to talk about the the last ETF?
[00:31:32] Rob: [00:31:32] I, yeah, absolutely. I think so.
[00:31:34] Charlie: [00:31:34] I think so. Like you said, Ben, the options are used by our
clients, if they buy and, in fact to fixed indexed annuities and that's, that sounds like a dirty word to some of us, but there are some times when fixed index annuities are appropriate, just depends.
[00:31:50]But those types of annuities use option strategies. They use out of the money calls in the money calls and they create. This floor for [00:32:00] investors and they create a cap.
Now all of that is very confusing. We won't go into detail on how those constructed, but
sometimes they're appropriate.
[00:32:07] Sometimes they can serve a purpose and that's why insurance companies use them. So that's one example. There's another example, and this is a relatively new thing in there called buffer ETFs. You can look these up online. They're called innovator ETFs and they came out a few years ago. And basically what they do is they're that fender fixed indexed annuity that I just described where there's a floor created, and then there's a ceiling created.
[00:32:30]. So a couple of years ago, these buffer ETFs came out and they've since multiplied like crazy, they have all kinds of them right now.
[00:32:37]. They don't talk about how exactly how they construct them. But nonetheless, I
could buy one of these buffer ETFs it's in an ETF wrapper, which makes it much more
[00:32:46] I know what to expect. I say because there still are some things to think about. I know the expenses they're less than an insurance product. The fact they're about 0.8% is the expense ratio, which is expensive for an ETF. There's no doubt about it, but there's a lot of moving parts going on here.
[00:33:00] [00:33:00] So I will tell you that last year during the COVID downturn this was an alternative to getting out of the market completely. It's not a panacea. If I, when I describe it to you right now, it will sound like a panacea. Okay. So in other words, I can buy an ETF. That's called a buffer ETF S and P 500 is what I'm tracking.
[00:33:19] It protects me for the first 9%. Decline. In other words, the stock, the market goes down S and P goes down 8%. I don't go down at all. So that sounds pretty good. Now, if I go to, if it goes down 20, then I'm going to go down 10 ish. The difference. Okay. So there is not complete protection, but they have other ones that can protect you almost 30% on the downside.
[00:33:39] That sounds great. But the upside is also kept much, much lower. Ah, so see how
these get complicated really quickly. There's the rub. So now is it an alternative? And again, going back to, how does this fit in my port polio last year, we thought, Hey, should we use these or not? And in fact, we tried [00:34:00] to talk to, if a client was having difficulty maintaining their plan in the market, they wanted to go to all cash, which we thought was a bad move.
[00:34:09] Then buffer ETS, we thought were a good solution. Because it provided
somewhat of a predictable outcome. In other words, at the end of this one-year period,
they're all based off of one year, because that's when the options expire, you know what
you're going to be limited to on the downside and the upside.
[00:34:27] So that provided some people, some certainty in a time where uncertainty was rampant. I talked to one person last year and they said, Hey, I think we're headed for the great depression. And I couldn't disagree with him. I had nothing to come back to cause
anything could have happened. That sounds silly.
[00:34:40] Maybe looking back now, but at the time it was pretty scary, a lot of uncertainty.
Now they're not a stock replacement. And maybe they're not a bond replacement, maybe
they're a hybrid, so you gotta think about how you're using them in your portfolio.
[00:34:52] There's pros and cons to everything. I'll go over the couple of negatives real quick.
They're very expensive. Like I said, 0.8% is a very high expense ratio for [00:35:00] ETFs, but you can understand why, because they have options, et cetera, going on inside these ETFs, they're likely to underperform during strong bull markets.
[00:35:09] Now last year, there was such a quick recovery hindsight being what it is.
Probably would have been better off not going into buffer ETFs. However, remember what I
said, it was a stretch, it was an option to go in into cash. We stayed in the market. We've got
some return, not as much as the S and P gives it recovered quickly and strongly stronger
than we ever thought it would.
[00:35:29]So there, there are these ETFs that have these options strategies, quite frankly,
they're going to underperform in the longterm. That's just what you're gonna have to, put up with they're complicated. They have a lot of moving parts. So again, anytime you use an
options, strategies, you need to know what you're doing and know what to expect, because there's nothing worse as an investor investing in something thinking I'm going to have this
result in the exact opposite happens.
[00:35:53] So I think that's one of the big things to consider.
[00:35:57] Rob: [00:35:57] Yeah, absolutely. That is a great [00:36:00] example. Charlie and to piggyback on that, that's one of the reasons why we are so adamant that we're getting your risk analysis, right? Because we want to know when COVID hits, when you know, the 2008 financial crisis hits, we want to know what your risk tolerance is.
[00:36:16] Sometimes you can't know until it happens. And I get that. But if you can, and if
you can simulate it and share flat or whatever you're going to do to see when COVID hits, I'm okay with it going down, 30 to 40%, and I'll, I'm going to be just fine because I'm a long-term investor or I've got my risk.
[00:36:32] I know I've got bonds. , and I'll be able to get through this rebalancing and those
kinds of things. So I don't need to get into to these options that we're talking about right
now, even the ETFs. If you've got your risk analysis nailed, you don't need to get into that.
[00:36:46] If you don't or if you start getting cold feet, that's where an advisor can really
help you out and get you through those hard times. All right. Anything else?
[00:36:58] Charlie: [00:36:58] I think that's about it. Like I said, if you're going to [00:37:00] do horses, the options are better.
[00:37:06] That's it? In a nutshell, I just got my little girl four chickens, because like I said, last time our chickens got eaten by someone besides me or something besides me. I don't like it.
We've got some new chickens. We're going to do some goats. But we're not going to do
horses. As long as I can stiff arm that as long as I have a say in my own family, Which may
not [00:37:26] Rob: [00:37:26] be very long.
[00:37:28] Yeah. Good luck. We're all counting on you. I'll
[00:37:32] Charlie: [00:37:32] talk a bit. Let's talk a big talk. Yeah, my daughter, this
weekend, we got chickens. Soon as we got chicken. So daddy, did you say I could get horses when I'm 12? No. 15. I said 15 and before it was 20 she's already talked me down. She's already anchored me down five years.
[00:37:47] It was 20 before
[00:37:50] Rob: [00:37:50] hires you hire her now. That's awesome. Good stuff. We've
arrived at our final destination. This I [00:38:00] believe is flight nine, episode nine. Thanks for joining this year. Pilot money guys podcast. If you have any questions. You would like us to answer anything on the show.
[00:38:09] Shoot me or Charlie and email Robert leading edge planning.com.
email@example.com or firstname.lastname@example.org. Any of us throw us an email. We'll try to cover it. Leave you with a couple of Charlie Munger quotes. The big
money is not in buying or selling, but in the waiting a second one, here is a lot of people with high IQs, terrible investors, because they've got terrible temperaments.
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