Do you have adblock enabled?
If you can read this, either the style sheet didn't load or you have an older browser that doesn't support style sheets. Try clearing your browser cache and refreshing the page.

(Barron's)   How to profit off of the batshiat insanity of 2013   (online.barrons.com) divider line 17
    More: Interesting, contrarians, free cash flow, European politics, call options, stock investor, Capital Group, Stephen, ETF  
•       •       •

3691 clicks; posted to Business » on 30 Dec 2012 at 3:46 PM (2 years ago)   |  Favorite    |   share:  Share on Twitter share via Email Share on Facebook   more»



17 Comments   (+0 »)
   
View Voting Results: Smartest and Funniest

Archived thread
 
2012-12-30 01:34:19 PM  
So someone just discovered options strategies that profit from volatility?
 
2012-12-30 04:24:34 PM  
All my money is in Fark stock.
 
2012-12-30 04:38:59 PM  
If I had any money...
 
2012-12-30 04:52:31 PM  
 
2012-12-30 04:58:30 PM  
1.) Lobby a political official.
2.) Repeat step 1.
 
2012-12-30 05:12:26 PM  
Playing options with your retirement money would be batshait insane.  Playing options with the money you were going to use on a Vegas vacation would be a better bet than the pass/don't pass line.
 
2012-12-30 05:52:46 PM  
What's wrong with writing covered calls?

Let's take a nice boring stock like PG. Trading at $67.10, it pays out $2.25, or about 3.3%, in dividends. It's trading steadily in a range between $60-70 since 2010.

Now let's price some calls. A January 2013 $67.50 call trades at $0.75. If the stock's over $67.50, it gets called away in three weeks and you make about 1%. (Lather, rinse, repeat.) There are a few other catches in cases where the ex-dividend date is close to the expiration date, but you can solve that problem by rolling forward into the next month.

Or you can ignore the problem and let the stock get called away, and re-establish the position with new shares and a new covered write next month. Even if you don't capture the ($0.5625) dividend every quarter, the cash you receive from writing the calls exceeds the value of the dividend, which is kinda the whole point, especially if you can do it in a tax-sheltered account such as an IRA. No paperwork or worrying about whether the income was capital gain, qualified dividend, or non-qualified dividend. Dividend capture strategies aren't magic, and they can't save you from a meltdown like the one we had in 2008, but they're a reasonable way to squeeze a little more yield out of a conservative portfolio during periods of flat or trendless market movement. Sometimes boring can be a good thing. Is the object of the game to have an exciting time, or to make money?
 
2012-12-30 06:43:09 PM  

Twilight Farkle: What's wrong with writing covered calls?

Let's take a nice boring stock like PG. Trading at $67.10, it pays out $2.25, or about 3.3%, in dividends. It's trading steadily in a range between $60-70 since 2010.

Now let's price some calls. A January 2013 $67.50 call trades at $0.75. If the stock's over $67.50, it gets called away in three weeks and you make about 1%. (Lather, rinse, repeat.) There are a few other catches in cases where the ex-dividend date is close to the expiration date, but you can solve that problem by rolling forward into the next month.

Or you can ignore the problem and let the stock get called away, and re-establish the position with new shares and a new covered write next month. Even if you don't capture the ($0.5625) dividend every quarter, the cash you receive from writing the calls exceeds the value of the dividend, which is kinda the whole point, especially if you can do it in a tax-sheltered account such as an IRA. No paperwork or worrying about whether the income was capital gain, qualified dividend, or non-qualified dividend. Dividend capture strategies aren't magic, and they can't save you from a meltdown like the one we had in 2008, but they're a reasonable way to squeeze a little more yield out of a conservative portfolio during periods of flat or trendless market movement. Sometimes boring can be a good thing. Is the object of the game to have an exciting time, or to make money?


Shut up and take my money.

And invest with it.
 
2012-12-31 12:01:22 AM  
Good advice for the unemployed.
 
2012-12-31 08:13:18 AM  

halB: Twilight Farkle: What's wrong with writing covered calls?

Let's take a nice boring stock like PG. Trading at $67.10, it pays out $2.25, or about 3.3%, in dividends. It's trading steadily in a range between $60-70 since 2010.

Now let's price some calls. A January 2013 $67.50 call trades at $0.75. If the stock's over $67.50, it gets called away in three weeks and you make about 1%. (Lather, rinse, repeat.) There are a few other catches in cases where the ex-dividend date is close to the expiration date, but you can solve that problem by rolling forward into the next month.

Or you can ignore the problem and let the stock get called away, and re-establish the position with new shares and a new covered write next month. Even if you don't capture the ($0.5625) dividend every quarter, the cash you receive from writing the calls exceeds the value of the dividend, which is kinda the whole point, especially if you can do it in a tax-sheltered account such as an IRA. No paperwork or worrying about whether the income was capital gain, qualified dividend, or non-qualified dividend. Dividend capture strategies aren't magic, and they can't save you from a meltdown like the one we had in 2008, but they're a reasonable way to squeeze a little more yield out of a conservative portfolio during periods of flat or trendless market movement. Sometimes boring can be a good thing. Is the object of the game to have an exciting time, or to make money?

Shut up and take my money.

And invest with it.


Me too.
 
2012-12-31 08:27:24 AM  
Twilight Farkle:

The issue I see is that you're giving up the upside on stock price to increase your yield, while remaining exposed to downside risk. PG might be a boring stock without much price movement, but that doesn't guarantee that it's going to remain that way. I guess the question is: what is the perceived level of volatility versus the real level of volatility? If the real level of volatility is lower that the expectation priced into the calls then your strategy is sound. Predicting volatility is hard though. So many potential outside factors.
 
2012-12-31 08:35:00 AM  
Show me someone who follows an investment strategy based on exploiting (timing) market volatility and I'll show you someone who has less money than they started with.
 
2012-12-31 11:27:20 AM  
buelahman.files.wordpress.com

ON RECORD, research it out
 
2012-12-31 11:48:03 AM  

gilgamesh23: Twilight Farkle:

The issue I see is that you're giving up the upside on stock price to increase your yield, while remaining exposed to downside risk. PG might be a boring stock without much price movement, but that doesn't guarantee that it's going to remain that way. I guess the question is: what is the perceived level of volatility versus the real level of volatility? If the real level of volatility is lower that the expectation priced into the calls then your strategy is sound. Predicting volatility is hard though. So many potential outside factors.


Exactly correct. If volatility increases (over the year), the additional income you can generate can go up - but typically that means everyone is having a crappy year, and is losing far more of their principal than they're making in income. Dividend capture strategies probably only work if you're willing to plod along at them for 5-10 years, in multiple stocks, and even then you need to be ready to just walk away. At some point you may as well just buy the index, and write calls against a portion of that position.

Back to that 5-10 year holding period... anyone wanna hold PG from its 2008 peak of $70 to its early 2009 trough of $44? I'm sure those folks got more than $0.75/month in option premiums back then, but the right move would have been to cut your losses early, sit in cash, and pick among the ruins after the dust had settled. If you'd written calls all the way down and all the way up, you'd have not only undergone serious trauma for trying to pick up pennies in front of a steamroller, you'd have also missed out on most of the rise from $44 to $60 in 2009, and ended up underperforming even a buy-and-hold investor.

I also ignored commissions and slippage, which will add up for smaller accounts. At 100 shares/1 contract, you'll be paying $10 to buy the stock, $20 to sell the calls, another $10 to sell the stock (exercised), and, if the stock drops quickly and you roll down into a lower strike, another $40 to buy back the $67.50 calls while selling some $65 calls. Slippage, even in a liquid name like PG, is probably going to eat up about another $50 or so per contract on the options side. That's at least $100 out of the $750 in premiums eaten up, every month. The commissions problem goes away as the account gets bigger, but slippage doesn't.

If there were a foolproof way of getting 10%/year, everyone would be doing it. Anyone who says he has one is lying. Anyone who believes he has one is wrong. My real-world rule-of-thumb for income is to fling darts in the general direction of utilities and consumer staples during times of high volatility, because they'll probably survive, and to write calls during times of normal volatility. As for times of low volatility, the last time we had that was back in 2004-2007. Once upon a time, a VIX over 15 was a spike, not the floor.
 
2012-12-31 02:53:37 PM  

Twilight Farkle: gilgamesh23: Twilight Farkle:

The issue I see is that you're giving up the upside on stock price to increase your yield, while remaining exposed to downside risk. PG might be a boring stock without much price movement, but that doesn't guarantee that it's going to remain that way. I guess the question is: what is the perceived level of volatility versus the real level of volatility? If the real level of volatility is lower that the expectation priced into the calls then your strategy is sound. Predicting volatility is hard though. So many potential outside factors.

Exactly correct. If volatility increases (over the year), the additional income you can generate can go up - but typically that means everyone is having a crappy year, and is losing far more of their principal than they're making in income. Dividend capture strategies probably only work if you're willing to plod along at them for 5-10 years, in multiple stocks, and even then you need to be ready to just walk away. At some point you may as well just buy the index, and write calls against a portion of that position.

Back to that 5-10 year holding period... anyone wanna hold PG from its 2008 peak of $70 to its early 2009 trough of $44? I'm sure those folks got more than $0.75/month in option premiums back then, but the right move would have been to cut your losses early, sit in cash, and pick among the ruins after the dust had settled. If you'd written calls all the way down and all the way up, you'd have not only undergone serious trauma for trying to pick up pennies in front of a steamroller, you'd have also missed out on most of the rise from $44 to $60 in 2009, and ended up underperforming even a buy-and-hold investor.

I also ignored commissions and slippage, which will add up for smaller accounts. At 100 shares/1 contract, you'll be paying $10 to buy the stock, $20 to sell the calls, another $10 to sell the stock (exercised), and, if the stock drops quickly and you roll down into a lower strike, ano ...


Shut up and give me back my money
 
2012-12-31 03:47:49 PM  
relaxitsjustme closes the position with 13 minutes of trading remaining in the year. The order is filled, and he receives his initial principal back, along with +1 Internet in received premiums, tax-free.

(A good trade, I might add. I don't mind rolling the dice with my own money, but I could never take on the responsibility of having to do it for clients.)
 
2012-12-31 07:09:00 PM  

Twilight Farkle: If there were a foolproof way of getting 10%/year, everyone would be doing it. Anyone who says he has one is lying. Anyone who believes he has one is wrong. My real-world rule-of-thumb for income is to fling darts in the general direction of utilities and consumer staples during times of high volatility, because they'll probably survive, and to write calls during times of normal volatility. As for times of low volatility, the last time we had that was back in 2004-2007. Once upon a time, a VIX over 15 was a spike, not the floor.


You're right about that. Any proven strategy, no matter how good it looks, just hasn't been proven wrong yet. I can see a dividend capture strategy working to produce a steady income, no big returns, as long as it's executed smartly. I'm a gambling type, though, that would take away a lot of the fun for me. Probably good I don't play the markets much.
 
Displayed 17 of 17 comments

View Voting Results: Smartest and Funniest


This thread is archived, and closed to new comments.

Continue Farking
Submit a Link »
Advertisement
On Twitter





In Other Media


  1. Links are submitted by members of the Fark community.

  2. When community members submit a link, they also write a custom headline for the story.

  3. Other Farkers comment on the links. This is the number of comments. Click here to read them.

  4. Click here to submit a link.

Report