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Re: Writing covered calls
Old 12-12-2006, 12:32 AM   #41
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Re: Writing covered calls

Good thing I have had results that exceed my expectations, or I might feel like I should be wearing a crown of thorns from you guys. Rant off
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Originally Posted by Nords
Who cares how the yields are calculated or what's at risk. Let's revisit the basics of capitalism, not cap gains.

I'm fundamentally skeptical of anyone whose system requires you to pay them hundreds, let alone thousands, of dollars for them to share it.
Ok, to your point Nords, I really don't have a problem with paying someone a reasonable price compared to the results for the information given to me. Otherwise we would expect all teachers to teach for free.
If the system works so well then she'd be rip-roaring her way to millions on her own trades without ever having to be a vendor. Instead of wasting her time at sales seminars she could be tweaking the software to do its own thing, similar to Poyet's AI screener. And then she could be optimizing its performance from a tropical island somewhere while she gets on with her own life...
She does claim to have all of her money in this plan, as well as a fair number of her family's. Funny you mention the island, her constant reminder is to go to Bora Bora between the trade day's activities, which is really to say get on with your life and don't focus so much on the mechanics of making money. And before ERD50 jumps in, that's not to hide your head in the sand, just to enjoy life. As to getting on with her own life, this is her passion, so she enjoys doing the training and working with her students - or her extended family as she calls them, and she really does treat us like family - the good kind, not the kind you hope doesn't come for dinner. More to ERD50's posts
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Re: Writing covered calls
Old 12-12-2006, 12:49 AM   #42
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Re: Writing covered calls

Quote:
Originally Posted by ERD50
whitestick, thanks for your replies. I think a few points need clarification:
...

RE: S&P returns vs Kim's 'yield':
How's that? When you do a covered call - you have put money up at risk. You own the stock, it can drop,

When buying a stock you consume money to make the purchase. In her plan, you allocate money for the total position that you could end up with, but you don't actually spend the money till certain trigger events happen, and then only in a controlled and gradual basis - kind of DCA - sort of. Her calculation of yields is based on the total money that you allocate up front, even though you may never spend it to buy the stocks. That's as much as I can get into, I think, without violating her copywright. I'm not trying to be a snake oil or hide things, it's just that there are pieces of this that you agree not to reveal, till you take the course. After taking the course, you still are free not to pursue the plan, if you choose, although that seems pretty silly to me, not to do it.


Maybe my term 'large gain' was confusing. I meant if there was a large gain in the stock, it would be called away, and the position gets closed - so you realize the gain (no matter how big/small), but the losses don't get closed. It seems like a one-way street of accounting. Count your (small) gains, ignore your losses, big and small.

True, although, as I mentioned before, her filters seem to prevent a total reduction of the stock price to zero - no guarentee of course, but the actual results are that the so called losers, actually go back up eventually within the time horizon she speaks of, and then you close them, and calculate the yield on that closed position.

Just ask yourself - why does Kim use a different accounting method from 'most others'? And why is it buried in the 'legal' page, rather than up front where she talks about the plusses?

Maybe Martha could answer that, I certainly cannot

You really don't detect the 'snake oil'?
Actual results have outweighed the snake oil detection. I suppose if after many years I have a down year, I may change my mind. It's not for everyone, but then again neither are FA, ETFs, annuities, health insurance, long term disability, or a dozen other things. It, so far, works for me, and everyone else that I know or met that took the course and followes the plan.
-ERD50
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Re: Writing covered calls
Old 12-12-2006, 12:56 AM   #43
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Re: Writing covered calls

Quote:
Originally Posted by ERD50
whitestick, one more comment on that S&P total return, vs Kim's 'yield':

I'm just suggesting - look at the whole picture. Don't get fooled by selective analysis.

Simple test - look at your start balance, look at your end balance. Do the simple math (assuming you had no more deposits/withdrawals) - (end-start)/(start). What % over what time frame? Compare to the S&P total returns for that period (the 'adjusted' numbers on yahoo historical quotes will include dividends). Then see how you are doing, and see how confident you are you could do it in a down market.

Appreciate the comment. She actually does have a form for doing that, I forget what it is called. I used it a couple of times, and it always came out positive, so I didn't see any additional value other then a "feel good" and I looked at the money from options each month, and a general sense that the stocks cycled and closed on a reasonable basis, and quit doing that form. As she says, I spend time in Bora Bora, and try not to dwell on the mechanics - would rather do what I like to do, and even spend time on this board for all the valuable things I have learned beyond that investing. Only real complaint is it's hard to put that kind of investing in FireCalc, unless you "game" the inputs.

-ERD50

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Re: Writing covered calls
Old 12-12-2006, 01:09 AM   #44
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Re: Writing covered calls

This one is easy. The dates of the numbers are due to accounts from a seperate organization called Chromium Investments which is her husbands investing firm. He makes a cameo appearance and talks about that during the class. First thing he says is that they are doing exactly the same thing taught in class, and they really recommend that you do it yourself. IF you feel so lazy uncomfortable doing it yourself, then they will charge you the percentages (it's a sliding scale based on how much money you have them work with) to do it for you following the same techniques. They do offer a service (purely optional) called vacation trades and general advice, where for (I believe) about $120 a year, they will provide interpretation and guidence on the plans mechanics, and if you supply them the months status of your various positions, when trade day comes around the will make the necessary trades for you. Of course Kim herself will provide written responses or phone answers to your questions, so the guidence is a bit of overkill, but some people think the vacation trading is nice - they do have a monthly fee version as well, so if you are only using them during the summer months it is about $30 total.
Now the numbers are drawn from the accounts under management that they have, since that's the only ones they have control over and know if you are following the plan exactly. (full disclosure) I also, am guilty of occasionaly placing an extra put or so, something about testosterone kicking in - but only in my fully taxable accounts, not the IRAs.

Quote:
Originally Posted by ERD50
Wow, I really don't mean to pile on, but the more I read on that web site, the more 'interesting' it becomes.

Even those doubly questionable 'yield' numbers are subject to one more serious accounting flaw. They are the product of 'survivorship bias'. The say the yields are calculated from the accounts under management (2.5% fee thank you).
....

How clever.

-ERD50
I'm convinced, but always open to other opinions. Which is why I value this discussion so much. Oh and thanks for taking the time to read her stuff, to form your critiques and questions. It helps to know that your comments are really informed and not made without facts.
Thanks
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Re: Writing covered calls
Old 12-12-2006, 09:42 AM   #45
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Re: Writing covered calls

I suspect that covered call strategies really have provided a slightly higher risk adjusted return than just buying stocks and bonds. But only slightly, and only in the past. The secret is out, and my guess is that the excess returns are gone, or maybe are negative. I don't know enough about options to guess if part of the past excess returns were caused by lower than expected volatility, something which one shouldn't expect to be repeated. Perhaps excess return came from amateurs overpaying to buy calls. But it seems to me that with more individuals and funds persuing the strategy and selling more calls, the call premium would be driven down.

I think that ERD50 is doing a good service by intelligently challenging the lofty claims of a business that sells a secret strategy.
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Re: Writing covered calls
Old 12-12-2006, 10:01 AM   #46
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Re: Writing covered calls

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Originally Posted by lazyday
I suspect that covered call strategies really have provided a slightly higher risk adjusted return than just buying stocks and bonds. claims of a business that sells a secret strategy.
Part of the problem with the studies that show that is they looked at them in a mean-variance framework. The risk parameter they should be using is semi-variance, not standard deviation, since all the risk in covered-call stategies is on the downside.
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Re: Writing covered calls
Old 12-12-2006, 10:55 AM   #47
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Re: Writing covered calls

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Originally Posted by FIRE'd@51
Part of the problem with the studies that show that is they looked at them in a mean-variance framework. The risk parameter they should be using is semi-variance, not standard deviation, since all the risk in covered-call stategies is on the downside.
True. And beyond that, you need to use log-normal distributions, as stocks don't go below zero.

While it is 'fun' to play with these statistics, it can only give you kind of an overall guide, maybe a sort of relative merit number. When it comes down to it, the specific stocks you transact probably won't neatly fit the averages, the market conditions probably won't neatly fit the averages, etc, etc.

The old 'YMMV' was never more appropriate.

And whitestick - thanks for your replies. I *do* have some positive things to say about the system also. I'll try to get back to that later today.

-ERD50
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Re: Writing covered calls
Old 12-12-2006, 11:07 AM   #48
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Re: Writing covered calls

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Originally Posted by ERD50
And beyond that, you need to use log-normal distributions, as stocks don't go below zero.
Not to nit-pick, but when someone says mean-variance they mean that the returns (continuously compounded) are distributed normally. It is the stock prices that are distributed lognormally.

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Re: Writing covered calls
Old 12-12-2006, 11:13 AM   #49
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Re: Writing covered calls

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Originally Posted by lazyday
The secret is out, and my guess is that the excess returns are gone, or maybe are negative.

.....

Perhaps excess return came from amateurs overpaying to buy calls. But it seems to me that with more individuals and funds persuing the strategy and selling more calls, the call premium would be driven down.
RE: secret - Could be, but my gut feel is that it makes no difference that the 'secret is out'. Consider that it is no secret that lottery tickets and casinos are a bad 'investment'. Also, insurance, on average, will cost more than you get in return. But, people keep paying for them. Options (buying calls and puts) can be viewed like that.

RE overpaying, supply/demand - Also could be. Again, my gut tells me there is a very small minority following a covered call approach like this (just ask around!), I'd guess not enough to really impact prices. I really don't know how much the price of options is driven by the small investor - could be a lot, I really do not know.

-ERD50

PS to FIRE'd@51 - correct, my log-normal ref was to stock prices, not returns.
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Re: Writing covered calls
Old 12-12-2006, 12:25 PM   #50
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Re: Writing covered calls

I agree that sometimes, even when the "secret is out" an anomaly can persist. Your examples, and also January effect and value and small premiums continued to happen even when well known. (Though I'm not counting on those either. At today's prices, perhaps there's no value or small premium built in.) But don't most free lunches go away, once discovered?

Makes sense that some people would continue to be willing to overpay when buying calls. But if these are mostly unsophisticated speculators, then I doubt their demand for calls would rise much if the price drops a little.

My focus is on the increase in people and funds that want to sell calls. Sorry I don't have any facts... funny my post was right after whitestick thanked you for using facts. But I have noticed a relatively new fund by Bridgeway, and some new closed end funds that sell calls. Not sure, but I think at least one is over a billion dollars. If I cared a lot about this issue, might try to figure out what % of volume comes from these funds. Don't know if impact from individuals can be easily measured.

It may be a minority of people selling calls, but based on the articles I've seen on the topic and running into a few people socially who are either doing it or want to, I'll bet there's been significant growth. And if there's more people and funds selling calls, someone has to buy them.
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Re: Writing covered calls
Old 12-12-2006, 12:35 PM   #51
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Re: Writing covered calls

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Originally Posted by lazyday
And if there's more people and funds selling calls, someone has to buy them.
Well, I don't have any facts on this either - too hard to come by, and I'm not sure how to use them if I had them, but....

my gut tells me that most of the funds doing this are doing it on the big indexes (indeces?). I *think* that's the only way they can get the liquidity they need.

-ERD50
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Re: Writing covered calls
Old 12-12-2006, 01:42 PM   #52
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Re: Writing covered calls

Trouble with a lot of calls is the call premium...........not the juicy spreads like "back in the day"

So after transaction costs, how much can you make??
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Re: Writing covered calls
Old 12-12-2006, 11:42 PM   #53
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Re: Writing covered calls

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Originally Posted by ERD50
And whitestick - thanks for your replies. I *do* have some positive things to say about the system also. I'll try to get back to that later today.
Ok, for the positives on the 'Kim method':

1) So, it looks like the objective is to obtain ~ 13% annual *yield* with some type of covered call methodology (details are trade secret stuff). OK, that is much more sane than the 60% I've heard on some other infomercials. You can get ~1%~2% premiums per month on covered calls w/o needing to delve into highly volatile stocks. But, you do still take all the downside risk of owning those stocks. Or, you pay for insurance (buy protective puts), which lowers your return, forcing you into more volatile stocks to make the higher premiums to offset the added expense.

2) Calling it a 'synthetic bond' - ok, you could look at it that way. There are similarities - you are looking for the yield. To obtain 13% yield on bonds, you would need to get some pretty high risk bonds. Would a portfolio of stocks with 1% premium/month calls be less risky than bonds that pay that rate? - maybe so. But, just glancing at that list

http://www.kimsnider.com/reports/Clo...ons_200609.pdf

I see some very volatile stocks - not your grandma type holdings, tasr, snda, ostk, ffiv, medi to name a few ...

I'm sure there are a good number on that list that have not recovered from their 2000 peaks. Which is why I think it is too convenient, and too suspicious, that they don't have 'complete records' for those years.

The most misleading example I see on her site, is where she has a chart that compares the Snider 'yield' to the 'total return' of the stock market. That is just plain wrong and appears to me to be intentionally misleading! You can't put two dissimilar measurements on the same graph and say -look - we are better! Of course the market has down years - and of course the 'yield' from calls (or bonds) is positive. What purpose does that graph serve, other than to decieve? That is the kind of snake oil I'm talking about that is rampant if you look with a critical eye.

Compare that with bonds - A bond fund pays a positive yield each year, but can (and often does) have a negative total return because of fluctuations in the NAV of the bonds. It can't be ignored - it is a fact.

Now, some people do buy individual bonds with the intention to hold until maturity (and the liquidity to back it up). If they can do that, there is some rationale for mentally ignoring fluctuations in the bond price (barring defaults). But, no bond fund could represent itself that way. Holding a bond to maturity does assure (barring default) that the NAV will return to par. There is no such guarantee at all in any way on a stock. And bondholders are paid before stock holders.

OK, so you said you looked at your liquidation balances and they are positive -good. But, did they go up 13% a year (they should in this rising market)? And, now that I hopefully have you thinking about total return, do you think the value would really hold up so well in a 2000~2002 market? I don't know how many positions you diversify across, but one occasional large loss can wipe out a lot of small gains.

Bottom line - the method might work in some markets, but any attempt to ignore total return is trying to pull the wool over someone's eyes. And $3175 provides a lot of incentive to do just that. If the system worked so well, the total return numbers would look good also - what are they hiding them for?

-ERD50

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Re: Writing covered calls
Old 12-13-2006, 02:32 AM   #54
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Re: Writing covered calls

Thanks ERD50 good comments. I certainly appreciate a reasonable and sane discourse on ideas.

Quote:
Originally Posted by ERD50
.....

The most misleading example I see on her site, is where she has a chart that compares the Snider 'yield' to the 'total return' of the stock market. That is just plain wrong and appears to me to be intentionally misleading! You can't put two dissimilar measurements on the same graph and say -look - we are better! Of course the market has down years - and of course the 'yield' from calls (or bonds) is positive. What purpose does that graph serve, other than to decieve? That is the kind of snake oil I'm talking about that is rampant if you look with a critical eye.

Honestly I never paid much attention to the chart and comparison. I saw no purpose either, but thought someone might be interested in it. I tend to glaze over on charts and graphs anyway, preferring to look at spreadsheet numbers.

...

OK, so you said you looked at your liquidation balances and they are positive -good. But, did they go up 13% a year (they should in this rising market)? And, now that I hopefully have you thinking about total return, do you think the value would really hold up so well in a 2000~2002 market? I don't know how many positions you diversify across, but one occasional large loss can wipe out a lot of small gains.

Actually it's better then that, I think I mentioned before that the 13% was the worst performers by position. Overall, it's been between 20-22%. I wasn't doing it in the 2000-02 market, so I can't compare then, but I can state that during the last year, when the stocks (at least some of the ones that I picked) were declining, I stll made money. Not 13% every month, but when they closed out, it was over 13% per year, for the time that I held them. Number of positions varies by level of money invested in an account (obviously you have to seperate IRA from taxable). Full disclosure, I did have a couple that I closed for a loss, but it was intentional, that I violated her rules, and was primarily done to cover the huge tax bill I had run up on the other positions. I'm not ready to take money out just yet, so I have to pay taxes on all the gains, in the year that I close those positions, and between that and some stock I liquidated and paid the capital gains on, from another broker that wouldn't let me trade the options like her plan and I really needed to take the losses. I figure to wait till the wash rule time frames pass, and buy back into them anyway, and resume the rules. She highly discourages this kind of behaviour, but the testosterone kicked in, and I wanted to do it before the cap gains reverts back. I planned to do some of that each year as well. That rule breaking aside, the results are as I stated earlier. I suspect a lot of people do break the rules for their own unique situation, which is why she continually tells us to follow the book.
Thanks for an extremely interesting discourse, and I will continue to take your skepticism to heart and remain cautious.

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Re: Writing covered calls
Old 12-13-2006, 11:11 AM   #55
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Re: Writing covered calls

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Originally Posted by whitestick
Honestly I never paid much attention to the chart and comparison. I saw no purpose either, but thought someone might be interested in it. I tend to glaze over on charts and graphs anyway, preferring to look at spreadsheet numbers.
Wow, that is some prescription you have for 'rose-colored-glasses' ??!!!

So let's re-cap - you have no problem understanding:

- covered calls and puts,
- their interaction with stock prices,
- annualized yield calculations,
- stock filtering algorithms,
- 'synthetic bonds',
- and paying > $3,000 for details on implementing this information, but....

Yet, you say you don't understand the basic concept of:

- total return? (as basic as it gets for an investor)
- unrealized capital loses?
- 'yields' are almost always positive - 'total returns' may not be
- investment comparisons must be apples-to-apples

and you can just sweep under the rug the fact that:

- kim does not disclose 'total returns'
- her performance figures conveniently do not include a down market
(even though she was teaching and using the method at the time)
- she presents misleading data
(comparing total returns of other investments against her 'yields')

You can read her patent application here:

http://www.uspto.gov/patft/index.html

type: 20050216390 into the 'Publication Number Search' box under 'Published Applications (AppFT)'

That sure looks like a pretty basic covered call strategy to me. Which, I believe, can actually be a reasonable investment approach. My major problem is the smoke and mirrors used to try to hide the risks.

I'll follow up with a little example game to demonstrate that, since you don't like charts.

-ERD50


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Re: Writing covered calls
Old 12-13-2006, 10:18 PM   #56
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Re: Writing covered calls

OK whitestick - the small gain vs large risk story I promised. This demonstrates the potential problem with a 1% per month out of the money covered call strategy. An out of the money, or at the money call (as described in her patent application) exposes you to all the risk of stock ownership (minus the small premium).

Imagine a hypothetical lottery. Instead of the usual one big winner, this one is reversed and has many small winners, and only one loser. And that loser only loses half the money that was put up.

Each month, 50 tickets are sold for $100,000 each. Only one person loses, 49 win. That $50,000 from the one loser is split, $1000 to the operator and $1000 to each of the 49 winners. So, the vast majority of players make 1% gain per month, and are very happy. They have their original $100,000 to buy a ticket next month, and they have a $1000 extra cash flow each month they play. They take turns buying the operator drinks after each game, they are so happy.

Each month, a new player joins to replace the one loser. He is thrilled by the stories of the 49 winners. After a year (12 games), there are 38 players that have won 12 times in a row, and made a 12% yield - it seems like easy money. And, there are 11 players that have won anywhere from 1 to 11 games (simplified a bit - assume that one of the new players does not lose during the first year). So, there are 49 consistent winners at the end-of-the -year 'winners party' - and just 12 losers that have gone away over the past 12 months. Pretty impressive that the winners outnumber the losers by such a wide margin - this must be a great game!

But, each year, the ongoing players have a 12/50 chance to lose. Only a very few lucky ones will survive the game long enough to make more than $50,000 in winnings, to replace the $50,000 they will eventually lose.

Now, of course an investment is not exactly like a lottery, and the loses don't go to the winners (they do in options, but stocks actually change in value), but I use this to demonstrate how easy it is for small steady winnings to be wiped out by some loses. And how there are so many winners in the game, that they can feed each other's confidence.

The stocks I see listed in the performance numbers are volatile stocks. They probably move in aggregate similar to the NASDAQ. The NASDAQ is still down below half it's 2000 peak almost seven years later. So, if you could still get 1% monthly premiums on them, it would be 1% of half their previous value - only 6% per year on your original investment (but 12% of the new, smaller value). It would take a long time indeed to recover from a 50% drop (that takes a 100% increase) at 12% per year - just to break even.

But, apparently, all this time, Kim would be telling you - don't look at that drop in value - look at the 13% per year in 'cash flow' you are making!

You don't really buy that line, do you? Do you see why I am so suspicious that she does not report 'total returns' or does not have 'complete data' for the years when the market was down, but does have data for the up years?

Check out Wade Cook's history - he had plenty of people in line saying how well his systems worked also - until it didn't.

-ERD50
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Re: Writing covered calls
Old 12-14-2006, 02:27 AM   #57
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Re: Writing covered calls

Quote:
Originally Posted by ERD50
OK whitestick - the small gain vs large risk story I promised. This demonstrates the potential problem with a 1% per month out of the money covered call strategy. An out of the money, or at the money call (as described in her patent application) exposes you to all the risk of stock ownership (minus the small premium). ....

So, if you could still get 1% monthly premiums on them, it would be 1% of half their previous value - only 6% per year on your original investment (but 12% of the new, smaller value). It would take a long time indeed to recover from a 50% drop (that takes a 100% increase) at 12% per year - just to break even.

The 13% is calculated on the money committed for that position, so it is irrespective of the underlying stock price. In other words, once you allocate that money for that position (it's not a 1 time buy - rather a series of buys), that becomes the calculation's divisor, with the sum of the incomes being the dividend, then that percentage is prorated to become an annual number.

But, apparently, all this time, Kim would be telling you - don't look at that drop in value - look at the 13% per year in 'cash flow' you are making!

Absolutely true, and when the followers get nervous because the values do in fact go down on some for a varying period of time, it's a constant reiteration. When the price returns to a point that you can sell for more then your average price, you close/get called away, and calculate the yield as above. I can only report my experience and the ones that I have talked to - and perhaps we are one of the 38 you mention, which would be about 76% chance of winning per year. To add to your calculations, you would add in somewhere around 15 -20 positions carried at one time, to exacerbate the problem, or dilute the odds, depending on which side you are standing. It does have the effect of allowing some positions to go down, while others are up, classic asset allocation principles. And of course, each position is not "just" making the 13% at all points in time, but something higher. The average she describes is across all of the positions uniformly, to make the cash flow that you will withdraw and spend.

You don't really buy that line, do you? Do you see why I am so suspicious that she does not report 'total returns' or does not have 'complete data' for the years when the market was down, but does have data for the up years?

Check out Wade Cook's history - he had plenty of people in line saying how well his systems worked also - until it didn't.
Let's not forget some others that met that criteria as well - Kenneth Lay, Ken Skilling, Charles Keating, the accounting firm of Arthur Anderson, and other mainstream (at the time) leaders.
and some interesting reading http://en.wikipedia.org/wiki/Mutual-fund_scandal_(2003)

Not saying that you don't have excellant points, just saying, I guess that I'm one of the "lucky 38" so far. Time will tell. If nothing else, I mention the plan as a way to broaden the opportunities available, and have an interesting conversation about it's merits. It's so boring talking with the alum from her plan, as they only have positive things to say. They spend so little time on the trading and paperwork, that it doesn't give them a desire to discuss it, The'd rather be off chasing butterflies or whatever they do for recreation all month.
Thanks for the discourse.


-ERD50
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Re: Writing covered calls
Old 12-14-2006, 12:23 PM   #58
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Re: Writing covered calls

Quote:
Originally Posted by whitestick
The 13% is calculated on the money committed for that position, so it is irrespective of the underlying stock price. In other words, once you allocate that money for that position (it's not a 1 time buy - rather a series of buys), that becomes the calculation's divisor, with the sum of the incomes being the dividend, then that percentage is prorated to become an annual number.
As it should be, your yield is based on the amount invested.

I was only trying (probably did a poor job of it) to point out that once a stock drops 50%, you now need to get a 2% actual premium, in order to get a 1% premium on your original investment. But, as you say, this could factor in to an average 1% - higher on some, lower on others, as would averaging down (but that starts to impact diversification).

Quote:
When the price returns to a point that you can sell for more then your average price, you close/get called away, and calculate the yield as above.
I consider this too rosy. So, take a look at the stocks that were being traded on this system back in Jan-March 2000 (you would not need complete records for this) - see how many of them dropped and never returned. Again, I am more than a little suspicious that Kim is 'unable' to provide data for the down years.

Quote:
To add to your calculations, you would add in somewhere around 15 -20 positions carried at one time, to exacerbate the problem, or dilute the odds, depending on which side you are standing.
Diversification is good - it does not strictly change the odds, but would smooth out the data. Individual investors absolutely need diversification.

Quote:
Quote:
Originally Posted by ERD50
Check out Wade Cook's history - he had plenty of people in line saying how well his systems worked also - until it didn't.
Quote:
Let's not forget some others that met that criteria as well - Kenneth Lay, Ken Skilling, Charles Keating, the accounting firm of Arthur Anderson, and other mainstream (at the time) leaders.
and some interesting reading http://en.wikipedia.org/wiki/Mutual-fund_scandal_(2003)
I don't see Vanguard or Fidelity in that list.

Quote:
It's so boring talking with the alum from her plan, as they only have positive things to say.
Have you run into any alumni that were using the system in 2000, 2001 and 2002? And if you do, to eliminate survivorship bias, find out how many fellow alumni they have kept in contact with over the years - just the 'lucky ones'? That would be enlightening.

I truly would like to hear some reports of people using the system in a down market - I fear it would be bad news. I am interested, because I do some trading along these lines, and I also am not sure how it would handle an extended down trend. The difference for me is, I sell calls with a strike price below the stock price, and try to get 2~3% premiums for the month. This generally gives me about 5% average downside protection on my basket of stocks each month. Of course, one big loser in that group can hurt also. It's no panacea.

It is too bad Kim does not have total return data to present for those down years. If the system truly got 13% returns (or even close) in a down market, I would definitely consider investing $3175 in her class. But, w/o that data - no way.

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Re: Writing covered calls
Old 12-14-2006, 01:21 PM   #59
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Re: Writing covered calls

Let's say you buy a stock at 100 and write a one-month at-the-money call at 3. Stock drops to 90 and call expires worthless. Now, what do you do? You might get, say 0.25, by selling another 100 strike call - not much premium. So you sell a one-month call struck at 95 for 1.00. Stock drops to 85 and call expires worthless. You sell another 1-month call struck at 90 for 0.85. Stock rallies and is called away at 90.

Total call premiums taken in = 3 + 1.00 + 0.85 = 4.85

Loss on stock = 100 - 90 = 10

Total return on closed-out position = (4.85 - 10) / 97 = -5.15 / 97 = -5.3%

Isn't this what tends to happen in falling markets? You have a portfolio full of "underwater" positions that potentially end up getting called away at losses. This is why, as ERD50 says, you have to mark the whole portfolio (including the stock) to market each month, so you know what's really going on. You took in a lot of premium, but you are sitting there with a substantial unrealized loss in the stock.
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Re: Writing covered calls
Old 12-14-2006, 02:34 PM   #60
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Re: Writing covered calls

Quote:
Originally Posted by FIRE'd@51
This is why, as ERD50 says, you have to mark the whole portfolio (including the stock) to market each month, so you know what's really going on. You took in a lot of premium, but you are sitting there with a substantial unrealized loss in the stock.
As a point of reference, I selected this from Vanguard's 'Junk Bond' fund prospectus. Yield is always positive, Total Return is variable, sometimes negative. Their charts focus on total return.

HIGH-YIELD CORPORATE FUND INVESTOR SHARES YEAR ENDED JANUARY 31,

......................................... 2006 2005 2004 2003 2002

(Yield*)................................7.01% 7.26% 7.65% 8.42% 9.02%

NAV, BEGINNING OF PERIOD $6.39 $6.40 $5.93 $6.29 $6.96

TOTAL RETURN......................3.89% 7.34% 16.47% 2.55% -1.10%

* Ratio of Net Investment Income to Average Net Assets

Why should something called a 'synthetic bond' be any different?

Quote:
Originally Posted by [url]http://themethod.kimsnider.com/qa.php?archive_id=366
The[/url] Snider Investment Method is a synthetic bond strategy. The Snider Investment Method combines stock and options together in a very specific sequence that causes them to mimic the most desirable characteristics of an investment grade corporate bond while improving on the undesirable characteristics.
I'd bet, if you tracked the actual NAV of a snider portfolio month-to-month, it would be much more volatile than an 'investment grade corporate bond' fund. That Vanguard fund above is below investment grade, but yet, the NAV has only dropped 15% from it's peak to it's low over that time.

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