Retirement strategy - ETF + cash-secured puts

[Philly_UK]

I am considering a following 25-year-long investment strategy:
- as the new savings come in, write cash-secured puts on EFA ETF, with an expiry of 2-3 months
- accept that from time to time puts will be exercised and I will end up with EFA shares
- continue the above for the first 15 years
- after that, for the last 10 years invest new savings in fixed-income securities
- re-allocate funds from EFA to fixed-income securities as soon as target profit in EFA is reached.

I am targeting an annualised rate of return of 9% for put options and hope that EFA will return 5% annually (including dividends) on average.
I would like to execute this strategy in GBP-denominated securities embracing international equity markets including U.S. but there is no equivalent instrument with both adequate low share price and option market liquidity - unless anyone could suggest something else?

My main concern is that EFA holdings might lose value in the last 10 years of this strategy and the GBP/USD exchange rate risk.

I would welcome all critical comments that would help me identify any drawbacks I might have missed.

 

[itspossible]

You sound like a genius Philly.What line of buisiness are you in at the moment and how old do you want to be when you retire.Do you have a pension or is the above your strategy.

 

[Philly_UK]

You sound like a genius Philly.What line of buisiness are you in at the moment and how old do you want to be when you retire.Do you have a pension or is the above your strategy.

Hmm, I think you wanted to sound ironic but maybe I am wrong...
I want to retire after at least those 25 years the investment strategy is designed for - if everything goes well.

Do you see any drawbacks that can ruin this plan? Please, share your views.

 

[itspossible]

The strategy is beyond me but i would not put all of your eggs in one basket.Maybe do this but with only 25% of your capital just in case its flawed.Do you have other investements alongside of this isas,pension etc

 

[Philly_UK]

The strategy is beyond me but i would not put all of your eggs in one basket.Maybe do this but with only 25% of your capital just in case its flawed.Do you have other investements alongside of this isas,pension etc

Good point. I have to rethink that. I do have other investments but probably the proportions are wrong - too much of it would go in the strategy described.

 

[itspossible]

Good point. I have to rethink that. I do have other investments but probably the proportions are wrong - too much of it would go in the strategy described.

Just be careful and expect the worst whilst hoping for the best.Im just a cynic but ive done ok through it.

 

[Erasmus]

I am considering a following 25-year-long investment strategy:
- as the new savings come in, write cash-secured puts on EFA ETF, with an expiry of 2-3 months
- accept that from time to time puts will be exercised and I will end up with EFA shares
- continue the above for the first 15 years
- after that, for the last 10 years invest new savings in fixed-income securities
- re-allocate funds from EFA to fixed-income securities as soon as target profit in EFA is reached.

I am targeting an annualised rate of return of 9% for put options and hope that EFA will return 5% annually (including dividends) on average.
I would like to execute this strategy in GBP-denominated securities embracing international equity markets including U.S. but there is no equivalent instrument with both adequate low share price and option market liquidity - unless anyone could suggest something else?

My main concern is that EFA holdings might lose value in the last 10 years of this strategy and the GBP/USD exchange rate risk.

I would welcome all critical comments that would help me identify any drawbacks I might have missed.

Interesting idea - so in summary you want to collect the premium from the puts and then effectively buy the market for the long term on the dips.

A couple of thoughts: I think you'll be lucky to make 9% on the sold options. What's that based on? Volatility now is quite elevated so you need to look at longer term averages: 6% is a more realistic figure I think. This assumes that you're writing at the money, but not sure it works otherwise.

One risk as the option writer is that you get assigned early (I think I'm right that ETF options are usually American-style?) What would you do then? Wait until the end of the period to buy again, or do it immediately? It also means that you might end up holding more shares than you expect, if you get assigned on dips and the market ends up and the option would have expired worthless otherwise.

On FX, just convert back to GBP when you receive the premium. You could sell your EFAs as you receive them and immediately switch into a UK ETF to manage the FX risk on the longer term holdings. You'd have higher transaction costs but could mitigate the exchange rate risk.

I'm interested because I use options in a slightly different way for long term saving / investing, but buying long dated calls. My theory is that the 6% I pay (roughly) as an annualised premium is equivalent to the long run average return of the market, but it's returns are unevenly distributed. So the most I can lose is 6% in a down year, but this is more than compensated by up years which are typically in excess of 6%. I've done it for years, buying once a quarter and it has worked well so far.

 

[Philly_UK]

Interesting idea - so in summary you want to collect the premium from the puts and then effectively buy the market for the long term on the dips.

A couple of thoughts: I think you'll be lucky to make 9% on the sold options. What's that based on?

One risk as the option writer is that you get assigned early (I think I'm right that ETF options are usually American-style?) What would you do then? Wait until the end of the period to buy again, or do it immediately? It also means that you might end up holding more shares than you expect, if you get assigned on dips and the market ends up and the option would have expired worthless otherwise.

On FX, just convert back to GBP when you receive the premium. You could sell your EFAs as you receive them and immediately switch into a UK ETF to manage the FX risk on the longer term holdings. You'd have higher transaction costs but could mitigate the exchange rate risk.

I'm interested because I use options in a slightly different way for long term saving / investing, but buying long dated calls. My theory is that the 6% I pay (roughly) as an annualised premium is equivalent to the long run average return of the market, but it's returns are unevenly distributed. So the most I can lose is 6% in a down year, but this is more than compensated by up years which are typically in excess of 6%. I've done it for years, buying once a quarter and it has worked well so far.

9% is simply the minimum expected rate of return - to achieve it I can be flexible about "moneyness" and expiry date of options written, although within specified limits.

I can convert the premiums back to GBP but I cannot do the same with EFA holdings after the option is assigned. Otherwise, I would have to sell EFA with a loss. The idea is that I will end up with all my funds invested in EFA eventually, collecting some premiums and buying on the dips in the process. I then plan to convert all of it to fixed-income instruments within 10 years, as soon as the annualised rate of return of such EFA holdings reaches 5%.

The threat I see is growth of EFA's share price, or an event like reverse split, that will disrupt the frequency of put writing. If the price goes up too much and the inflow of new funds/savings does not catch up, I will have to write puts less often than I would like so the cost-averaging effect will be less pronounced. Current share price of around $60 with estimated growth to max. $150 over next 25 years is one of the reasons I selected this particular ETF.