6- Mustachians and Overwriting

I know mustachians are about as anti-active investing as you
can get, but a more perfect crowd for portfolio overwriting
doesn’t exist! Not knowing how to portfolio overwrite as a
FIRE adherent would be like Einstein deciding that he should stick to
patents.

Mustachians Know What Money is Worth

Firstly, Mustachians are frugal. Keeping expenses to a minimum means you really understand what’s important in life. It also means you have a built in, experimentally verified marginal return on utility. I only mention this because it is a really neat concept that can be understood with a simple picture.

Swiss Mathematician Nicholas Bernoulli posited that different people have different utility (use/value) for a given amount of money. This intuitively makes sense— if I am completely broke, $1,000 will mean a lot more to mean than it would a billionaire. Illustrated below, it shows wealth on one axis and utility on the other axis, with utility dropping off bigtime after a certain point in wealth.

Ye Olde Marginal Utility of Money Graph

Adjusted for FIRE, your 25x is the biggest boost. After that it’s all gravy, but it’s not as important as that first 25x. As such, the Mustachian version might look something like this:

The Mustachian Marginal Utility of Money Curve.

Mustachains and Index Investors have Unshakeable Investing Faith

Second, your conviction in the underlying security— namely the US market over time— is indestructible. Bogleheads, like the FIRE crowd, believe in buying and holding the overall US market with religious fanaticism, and with good reason.1 This ability to buy and hold forever is a skill not routinely found among active investors.

Compare the Boglehead investor to active investors working with options trading and selling covered calls for income. A large portion of this crowd treats securities as interchangeable, buying stocks and selling a call on them based on momentum2, without full faith in each underlying stock’s long term prospects. This crowd will forever be plagued with uncertainty of their underlying thesis, and concerned with maximizing return on capital. They might lack the financial stability and patience3 required to wait for a recovery from a dip in price to ensure they sell covered calls at a strike price above cost basis.

People Pursuing FIRE End Up with a Large Portfolio of Index Funds

Depending on funds, you can also leverage your financial stability into accepting smaller, more consistent returns that allow for sizable upside potential, mitigating your upside risk. Allow me to illustrate:

  • When I wrote this, the S&P was $4204 a share
  • The $505 LEAPS call sells for $2.30 a contract
  • If you had 2,000 shares in excess of 25x, you could sell 20 calls at $2.30, netting yourself $4,600
  • Depending on your spending, $4,600 is probably a normal Mustachian monthly budget
  • Selling the $505 call allows for about 20% upside. So, even if you did allow those shares assigned,5 you’re making a $170,000 profit. Probably something you’d be happy with.

Having this many excess shares (about $840,000 worth) to sell calls against is a lofty goal6 , but combined with the ability to wait a year and not think about it, it’s a pretty good deal overall.

Simply said, having more funds and small expenses allows you to make trades that are very safe from an upside risk perspective, but still impactful on your (low) living expenses.

Anyone Seriously Pursuing No Longer Having to Work is Nonconformist

Additionally, Mustachians as a whole are iconoclastic.7 The fact that you even wanted to escape the rat race and sunder your meaning in life from your source of income means that you are already thinking outside the box that others may be trapped in. That’s all the iconoclastic mentality and motivation that it takes to learn a complex topic like options… and you’ve already got it.

Even the Best Mustachians Worry About Withdrawal Rate

Even the most frugal indexers cam still have worries about SWR (Safe Withdrawal Rate— most commonly agreed to be 4% per year). Return sequence risk is a very real thing, where withdrawals made during down years greatly decrease performance over time.8 It is the fear of every Mustachian about to FIRE that the market will crash and stay crashed the moment that they retire early.

The good news is that covered calls do great in flat or slowly decreasing markets, and can keep you from selling your shares if your index dips after you sold a call.

Options Might Just Be Fun for You

Finally, there’s the off chance that you might fall into the unique category where this FIRE wizard (yours truly) exists. If you enjoy probability, risk, mathematical thinking, strategy, and the possibility of gains above the market then this is a great hobby to read and learn about. I’m not going to try and pull you into an active investing rabbit hole in the pages of this tome,9 but suffice to say making some extra money every month via safe, conservative index portfolio overwriting using only your smarts and some trades feels pretty good.

  1. It’s kind of crazy to think about how a lot of the world’s inhabitants don’t even have access to this luxury. The fact that Americans have direct access to participating in the gains of a (seemingly) ever-upward trending economy is like being able to put money down on an EZ-made millionaire machine that only requires patience, and not buying stuff you don’t need, is astounding. The fact that a lot of people with the means to participate in it simply don’t is equally baffling. [↩]
  2. Or news, or technical analysis, or social media like Fintwit, or Reddit [↩]
  3. This patience can also allow for an ultrahedger/LEAPS strategy. Covered in more detail in chapter 22, LEAPS is an acronym for a “Long-term Equity AnticiPation Security”. Simply put, it is an option with an expiration date 1–2 years into the future. [↩]
  4. Nice. [↩]
  5. You aren’t locked into assignment— we cover this and other position management techniques in future chapters [↩]
  6. I am nowhere near that level of wealth at the time of writing this, but I’m working on it. [↩]
  7. I guess if you are an iconoclast by virtue of being a Mustachian, and you choose to sell calls (with active investing being anti-mustachian) then that makes you a… meta-iconoclast? [↩]
  8. To learn the concept intuitively by playing with a free calculator and Monte Carlo simulation, check out FIRECalc [↩]
  9. In fact, I wouldn’t recommend it. As such, throughout the course of this book I’ll mostly be deterring you via good-natured self-deprecation and cautionary tales. [↩]