A case against passive investing

I have long posted about the benefits of passive or Index investing. I still firmly believe that is the way to go for most investors, including those who are investing for a long time.

Active stock picking requires lots of skill, you need to have some understanding of the business, basic accounting, and it is required on various industries. It is not easy or you should be just lucky like me :slight_smile:

SPY is basically flat for the last 2 years


This is my trading account performance during the same period. For gigles, BRK.B had 30.9% return beating me. Damn WEB.


Beating Index by 30% feels very good (even though you know very well it is sheer luck)

One critique is that the 2 year timeframe is too small a period.

There is no question that active investment including ***judicious use of low risk options and even leverage can boost returns. The problem occurs when investors drift from low risk to “gambling” in pursuit of easy money.


I think there are still questions. I haven’t seen an studies yet, but I would posit that using low-risk options definitely works to boost returns (I do it myself regularly depending on various conditions) for a year, or two years, or 5 years, or even 10 years. BUT, I am not that certain with regards to very long term periods like 30, 40, or 50 years, in other words over a person’s investing career. The reason I say that is because at least once every 20, 30 (40 or 50) years, there is a “large event” that could turn those low-risk options into utter disasters. In my case, I was lucky because my “large event” occurred in 1987, relatively early in my investing life. In the mid-80s, I regularly traded NYA options (NYA was a very common index at the time, now SPY is the more common one) and was making some nice extra money each month to supplement my salary at the time. But come October 1987, I was literally wiped out, my entire option portfolio was worth exactly zero by the end of Black Monday. After that event, I took a breather, but eventually started trading options again. Now I approach it (options trading) differently for various reasons (one big one is that trading is far easier and far less costly today than in was in the 80s). Today I have a core portfolio that I rarely trade, but I do trade options “on the side” mostly for fun, and for some added income most of the time. And I also do my options trading with a tiny portion of my overall portfolio, when you are retired, you don’t take large risks with the bulk of your portfolio.

For the last few years, I mostly do option spreads. Using a spread, you can select ANY level of risk (and therefore potential return) you choose. And it has the added advantage of protecting you somewhat against time decay (because you bought one option and sold another). But most recently, my favorite options trades involve selling puts on stocks that I wouldn’t mind owning (and 99% of the time I already own some shares of that stock) at the put strike price. There are three outcomes:

  1. The stock drops below the strike price, it gets assigned to me, and I get to buy shares at that price (minus the option premium that was originally paid to me).
  2. The stock remains above the strike price and the option expires worthless. I keep the option premium that was originally paid to me.
  3. Even if I choose to buy (to close) the option at some point before expiration, and I do this only very rarely and primarily for tax timing, the time decay accrues to me because I sold it.

I especially like this type of trade because it essentially has only one decision point and thereafter is self-liquidating. In most cases, the only decision point is initially to sell (write) the option. After that, I can do nothing, and it will self-liquidate no later than the expiration date.

Now with all that said, it is not really a good trade at all over the long-term, and that’s because if you want to own a stock it is almost always better to simply buy it and hold it rather than to play around with options like this. The reason for this is because stocks usually tend to go up over long periods, so by playing with options and only actually getting to buy the stock if it goes down, you end up missing out on all the gains of the stock going up (which it does most of the time over long-term) and only get the very small gains of the option premium that was paid to you. So I only do this for fun, and to “remain in the game”, because otherwise I might only place a trade once or twice a year. So basically I do it for my own entertainment. :sweat_smile:

For me it happened during 2020, I am able to bounce back primarily because I have my trading and investing accounts separated. FWIW, I was worried about COVID on late Jan 2020 and sold some of my positions in my IRA accounts and raised cash. As a family we took some moves like asking my spouse to come back home from Seattle. Remember Seattle is where the outbreak occurred first. While I contemplated a possibility of some short term pain, but truly missed the magnitude. The reason I am stating this is, even when you foresee something, still you could be completely taken by surprise due to the magnitude of the event. So risk management is very important.

This is an excellent risk management strategy. This way you know exactly what you will lose.

This is the worst strategy. This is basically playing leverage to boost gains. You are selling insurance and with VIX at 12.x you are not getting adequately compensated. If you are doing cash covered puts, you may be better off doing covered call.

Having said that, I also sell puts, but now I have more discipline, willing to take losses early and often. When I stay away from that discipline is when I incur bigger losses.

The bigger gains are actually achieved not on the options, but on equity positions.

I have COIN leaps for Jan 2025 for $20 strike.
To protect downside, I have a covered call on them for $70

COIN currently is $133

The opportunity cost is real and massive as well.

Yes, but that is something you accept. For ex: I recently did few spreads ITA spreads, GLD spreads I bought Jan $180 and sold Dec $189.5 at that time I thought it gives decent upside and the premium basically helps to re-capture the premium I paid. But GLD moved strongly than I expected. I can rotate and capture some more premium but …

I know these are trading positions, not a long-term positions. Happy to take 50% gain and frankly I didn’t expect such strong moves either.

1 Like

Just to be clear, it is not the options that boosted my returns but equity positions. For example the November gains are primarily driven by Citi, BAC, WFC, KRE, PYPL all stocks I have posted elsewhere. These are not option positions. The reason I am posting is, I don’t want folks to think you need to do options or take leverage to make gains. Of course, I keep lot of dry powder (cash) and tactically move in and out. For example I went pretty long on Citi, a name I am very familiar with around $40 and got out at $46, that is 15% gain in a month and I earned $.53 cents dividend.

I am not against options, but there are risks and I am trying to limit my option exposure.

2 year outperformance with equities is too short a time period to declare victory. S&P works its magic over a longer duration.

This is what I posted. If you read this as declaring victory… So be it.

Active stock picking requires lots of skill, you need to have some understanding of the business, basic accounting, and it is required on various industries. It is not easy or you should be just lucky like me

I am intrigued by this and I agree with this.
Can you share what kind of options were these ?

1 Like

They were all call options on the NYA, the NY Stock Exchange Composite index, which was quite popular in the mid-1980s. It still exists today. Trading in those years was MUCH different than today. It was far more expensive, and it required phone calls, holds, and actually talking to a broker. And options trades meant you had to talk to an options broker at your brokers firm. It was a hassle and a half. Other than that, I don’t remember any of the details.

1 Like


I think that is how Buffett operates today. He is 93. He said that he speaks to a broker daily at 8 a.m. about what trades to do (including buying t-bills) and he is confident that they are done.

You are kidding right? Not just WEB, but most money managers, fund managers all let the brokers execute their trades. You are not expecting WEB to connect to E*Trade and submit buy orders, do you???

Pretty much all big trades are done this way. When you do big trades, you can’t just put an online order out there “Buy 1,000,000 XYZ at limit $122.45” like we do for normal quantities like 100, 1000, or even 10,000 shares. If an online order for 1,000,000 shares hit the market, havoc could ensue and the bid/asks would go wild. Instead, you have a broker do the trades for you, and they slowly dribble them out throughout the trading day(s) until the trade is accomplished. This includes trades like corporate stock buybacks. I remember reading that Apple contracted with a large Wall Street firm to do some of their buyback, and they chose to do it via selling ITM puts because it ended up costing less overall. In fact, that’s where I learned to use put selling as a way to accumulate shares I want to buy!

Buying Calls?
Or selling?
*. If selling, then Covered Calls?
*. Or selling naked calls?


Investing was democratized by E-Trade and the other discount, DIY brokerages.
We normal proles are better off due to the development of the discount brokers.

Only buying!!! Back then, it was quite difficult to get approved for selling options, especially naked ones. You needed a hefty amount of capital deposited at your broker to do that. And they only very rarely gave individuals approval. In this case, I was long all sorts of calls on the NYA and by the time Black Monday ended, they were all worthless.

Absolutely true. I signed up with Schwab almost immediately, even when “everyone” was still suspicious about “what’s their angle” and “how are they going to rip me off?” But the discounts weren’t that great even then. Almost all my trades were with Schwab, except for a few smaller ones with a old-style broker that was a family friend. Later on, the real discounts came and trading costs went way down.


I did a little trading with Schwab in the 80s and IIRC the commissions were around $40. Anyway, very expensive. They have other ways of making money now.

As I recall, the commissions were $XX + $0.YY * number of shares traded (and were tiered by size). And commissions for options trades were quite a bit higher (also a tiered $AA + $B.BB per contract). I recall that I also traded shares of F (Ford) at around $40 a share for small $1 or $1.20 gains (holding for a few days or weeks at most) and I recall that my commissions were a sizable percentage of my gains. None of this was for “investing” per se, it was just trading to augment my relatively meager salary at the time. When I traded options, my commissions were also generally a sizable percentage of my gains.

I wanted to recall the actual numbers, but I can’t find my notebook that I tracked my trades, must have been lost or tossed in a move/cleanup over the decades. I did buy a PC XT in 1984/5, but it only had floppy drives and was very slow, so not appropriate for tracking investments yet. A couple of years later, I refurbished a 67MB hard drive and installed it. That’s when I started doing tax returns (me and some close family members) in a custom spreadsheet that I created/modified each year in a free Visicalc knockoff. But I didn’t begin tracking investment results in a spreadsheet until the late 90s. Just looking at my current investing spreadsheet, at a glance, it looks like the first trade in it is from 2001. That may be when I switched over to using Excel? It’s interesting seeing old options trades with the 5 character symbols like “APVJF”.

[EDIT: Just found this commission schedule from 1999, still was quite expensive!]