Lifetime Income: S&P500 Plus Strangle Options

I’ve looked at several strategies that can be used to extract income from an investment in the S&P 500.  One strategy involved purchasing a small amount of call options on the S&P 500 in addition to investing in the index, and another strategy involved purchasing a small amount of put options on the S&P 500 in addition to investing in the index.

The strategy described this month is a combination of the above two, and this combination is called a strangle.  The basic idea is that the put option provides some amount of protection from the market falling, while the call option pays for the put option in the years the market rises.

If there are investment topics you’re interested in that I haven’t covered yet please send me an email:

joseph AT StockMarketMovement.com

Lifetime Income: S&P500 Plus Protective Put Options

This month’s analysis is another twist on the constant payout strategy I covered earlier.  That strategy consisted of putting all capital in S&P500 ETF’s, and drawing out a constant amount each year.  This provides a fixed annual payout for as long as the capital lasts.

In this month’s strategy, all capital is again invested in S&P500 ETF’s, and a constant amount is withdrawn each year.  However, an additional amount is withdrawn and invested in 12-month put options on the S&P500 ETF.  If the market has a significant drop during the year the put options offset a portion of the decline, so that any subsequent market rise will boost capital from a higher base.  If the options are not in the money at the end of the year, the principle balance is lower than it would have been had the options not been purchased.

If there are investment topics you’re interested in that I haven’t covered yet please send me an email:

 

joseph AT StockMarketMovement.com

Lifetime Income: S&P500 Plus Index Options

This month’s analysis is an interesting twist on the constant payout strategy I covered last month.  Last month’s strategy consisted of putting all capital in S&P500 ETF’s, and drawing out a constant amount each year.  This provides a fixed annual payout for as long as the capital lasts.

In this month’s strategy, all capital is again invested in S&P500 ETF’s, and a constant amount is withdrawn each year.  However, a portion of the withdrawn amount is invested in 12-month call options on the S&P500 ETF.  If these options are in the money at the end of the year, the value is available for additional spending.  If the options are not in the money at the end of the year, the amount available for spending is reduced by the amount that was spent on the options.

If there are investment topics you’re interested in that I haven’t covered yet please send me an email:

 

joseph AT StockMarketMovement.com

Lifetime Income: Constant S&P500 Inflation-Adjusted Payout

Continuing on the annuities and lifetime income topic, I’m going to look at a modification of last month’s analysis.  Last month, I analyzed putting capital into S&P500 stocks, and taking the dividends and a fixed percentage of assets every year as payout.  The advantage of this strategy is that capital will never go to $0 (unless the S&P500 goes to 0), because the capital withdrawn is a fixed percentage of its current value.  The downside is that year to year payout varies greatly, making budgeting extremely difficult.

In this month’s analysis, I look at what happens if the amount taken out each year is constant (adjusted for inflation).  Obviously budgeting is a lot easier, because the same amount of income is available each year.  However, with this strategy the capital can go to $0, and as you’ll see it would have gone to $0 with higher withdrawal rates over the study period.

If there are investment topics you’re interested in that I haven’t covered yet please send me an email:

joseph AT StockMarketMovement.com

Lifetime Income: S&P500 Payout

I’m changing tracks a bit this month.  I got an email asking about annuities and annuity alternatives.  There’s no single way to look at this, so I’ll post analyses looking at it several different ways.

This month’s analysis is very simple, put a lump sum of money into the S&P 500, and take out only dividends and a small percentage of the underlying capital.  This is very different than an annuity, which pays the same amount (possibly with an annual inflation adjustment) every year.  There are many variations of annuities.  You can get a good introduction on Investopedia to learn the basics.

Today’s analysis runs from 1970 through 2016, and all of the results are inflation-adjusted.

If there is enough capital to live off of only the dividends, this strategy would have worked out fairly well over the study period.  The annual inflation-adjusted payout was reasonably consistent through the mid 1980’s, at which point growth in the stock market and corporate earnings allowed the annual payout to appreciate substantially.  By the end of the study period, inflation-adjusted annual payout was more than twice the initial value, and underlying asset value was more than three times the initial asset value.

Taking out even a small percentage of capital each year as payout had a significant effect.  While the annual payout over the study period was reasonably maintained, the portfolio value was not.  Over a longer period of time, it’s likely the payout would reduce substantially as well.

Take a look at the analysis and let me know if you have any questions, or variations you’d be interested in seeing.

I love hearing from my fellow investors, so if there’s anything you’re interested in please send me an email:

joseph AT StockMarketMovement.com