Writing covered calls

[whitestick]

whitestick Today at 02:50:21 AM

RE: performance data in a down market

This looks like more double-speak to me ('weasel words' as Nords says ).

Self selected clients from Kim is not much of an indication of typical performance, as she says herself. How did the average client do? - no data. But it still might be interesting to hear from them.


I talked to Kim again, and she agrees that to try and answer your questions, and also offer some of the results from the students, you should call her directly (her number is on the website, or email her at kim@kimsnider.com and pose your questions, requests. It doesn't sound like you will be satisfied with any response, but at least you might get some satisfaction to ask the questions and receive answers.


Total return is a very simple calculation (a bit more complex if you have deposits/withdrawals): (End_Balance minus Start_balance) divided by Start_Balance. Compare that month-to-month variation with a bond fund as one measure of risk.

Alright, I went back and did the simple calculation that you requested. It is a bit more difficult in that I had to extract out the money that I added mid-stream and withdrawals that I did as well this year, to give a pure vanilla comparison. Barring any mistakes that I might have made cause there were a lot of trades to go through to check, for the last two years (and I know you are going to harp on an up market), my total percentage return is 41.142857% divided by 2 for the 2 years or an annual total return of 20.571429%. I didn't try to adjust between the years for NPV or anything like that, just the simple numbers. And before you ask, it was on available funds, not what was invested, and was a dollars available north of $175k. Obviously better then her percentages, but I'm sure it will be attributed to hot market and luck.


And, thanks for responding and for getting some input from Kim on these issues. I find it all very interesting. If I could get the data I need, I might consider an investment in her course. So far, that data has not been forthcoming.

-ERD50

And yes I need to read the book, and will when I get the chance, probably next year.

 

[ERD50]

I talked to Kim again, and she agrees that to try and answer your questions, and also offer some of the results from the students, you should call her directly

You know, my crystal ball told me this was the most likely response. I don't think Kim likes this sort of open discussion in public. Maybe there are just too many people on this forum with good insight? Most of the the people on this forum don't pay 3~4% in fees on their mutual funds like she says her typical clients do. Tough crowd, huh?

Well, I may contact her, but I will be posting the summary info here for further discussion and review. I won't be asking for any confidential info, just simple explanations to the public claims she makes. If she tries to 'muzzle' the info she shares, the conversation ends - and I'll let everyone here know about it. There are a few other forums that would be interested also.

what 'regulatory requirements' is she subject to? As I understand it, she is not under ANY regulatory requirements, as she is a 'publisher', not an 'investment advisor'. Maybe Kim could enlighten us in this area - we need some light here.

It seems she could have provided a direct answer to this simple question. Nothing confidential there, should be public information, should be on her web site. What's the problem?

Barring any mistakes that I might have made cause there were a lot of trades to go through to check, for the last two years (and I know you are going to harp on an up market), my total percentage return is 41.142857% divided by 2 for the 2 years or an annual total return of 20.571429%. I didn't try to adjust between the years for NPV or anything like that, just the simple numbers.

Nice returns, congrats. I won't 'harp' on it being an up market, but, the fact is that it was. And, as I said, I expect a method like this to work well in up markets - no big surprise.

I am a bit confused about your calcs though (' a lot of trades to go through to check') - I thought we were just looking at beginning and end values of the account? No need to look at individual trades - maybe this is not the number I was looking for?

Remember: (End_Balance minus Start_balance) divided by Start_Balance

No 'trades to go through'. Simple calc on total returns. This cuts through any flak - it's the 'real deal', money in the bank.

Well, you were not using the system during a down market, and Kim won't release numbers. We do have something though. Look at the data below. This is from my tracking of option contract periods since Jan 2005. The following months are the periods that BOTH the QQQQ and SPY were more than 2% down for the month (option month). Look at your balances on those specific dates, and see how you did in those down periods. That might give us a little insight. It is a limited amount of data, but it might be a peek into what might happen in an extended downturn. You might learn something.

QQQQ; SPY returns for these option contract periods:

17-Dec-2004 to 21-Jan-2005 -6.63% -2.23%
18-Mar-2005 to 15-Apr-2005 -4.85% -3.71%
16-Sep-2005 to 21-Oct-2005 -2.16% -4.34%
21-Apr-2006 to 19-May-2006 -6.31% -3.08%

FYI, my system of selling below strike puts/calls was negative in each of those periods, but less negative than either index. Logic tells me that selling at-the-money, or out-of-the-money calls would provide less downside protection, so see how you did those months. Share the results if you wish to.

-ERD50

 

[Alex]

I am so happy to see all the interest that this inane thread has gotten. It renews my faith in mankind which recently had been slipping.

BTW, remember-


Writing a covered call is identical to writing a naked put. Writing a covered call is identical to writing a naked put. Writing a ...

Still sound conservative and magical?

Ha

Amen! DO you remember the TED SPREAD? it was an options strategy that relied on the spread between T-bills and Eurodollars. It made me alot of money, unfortunately my clients lost their asses. Kinda like this scam strategy of writing naked puts covered calls!

 

[lazyday]

It makes sense to me that there must be some premium there to compensate the seller for taking the risk....It seems a premium is needed to 'make the market'.

I don't think one is always paid to take a risk.

Not the same situation, but let me make up a related story about commodity futures:

The old theory is that when a producer sold and the speculator bought a commodity future, the producer paid the speculator an insurance premium, to reduce risk of lower prices than expected.

But now it is conventional wisdom among institutional investors, that buying commodity futures offsets some stock risk, and total portfolio risk. And, institutions have much more money to invest, than the total value of commodities produced. It's plausable that institutional investors will pay producers (and speculators who sell futures) a premium, instead of recieving one. The investor buys a hedge for the portfolio and pays a premium, the producer gets paid(!) to get rid of risk, and the speculator gets paid to take risk of higher than expected prices.

If a speculator who doesn't own stocks buys a commodity future under this scenario, they are not getting paid to take the risk of lower than expected prices, like the old theory says they should be.

 

[ERD50]

I don't think one is always paid to take a risk.

lazyday, I do appreciate the input - I'm always looking for ways to think through these contracts and risk. But, I'm not sure I'm following you.

I think there is a fundamental difference between option contracts and futures. I know very little about futures, so correct me if wrong, but I skimmed some info here: en.wikipedia.org/wiki/Futures_contract.

The big difference is that commodity futures are an obligation to deliver, not an option to deliver. So, it appears to me each party is trading one type of risk for another - each gives up something, each gains something. So, I don't think either one needs to make money on the deal - they are exchanging risks.

Maybe Alex can chime in and tell us if this looks about right.

An example:

When farmers contract to sell their grain at a set price at a future date, they are doing two things. One, eliminating the risk that grain prices will be below the contract price (reducing risk for them), and two, giving up the opportunity of better profit if grain prices soar. I've never dealt with futures contracts, so I'm not sure who is the 'seller' here and who is the 'buyer' (maybe that is where I got lost). But, I would think, that on average, the farmer is trying to be risk adverse (can't afford to lose out if prices drop and miss his mortgage payment), so would be willing to accept just a bit less than expected average prices, just to guarantee against sharply falling prices. I know that I would consider the trade-off.

It would seem unreasonable to expect a guaranteed price to be (on average) higher than the expected price - that would be free lunch money.

On the other side of the contract, is probably a bread manufacturer who wants protection against rising grain prices, they would be willing to pay just a bit more than the expected average price, just to get the guarantee against soaring prices.

Falling prices bad for farmer, good for baker. Rising prices good for farmer, bad for baker. So, they exchange risks with a contract somewhere in the middle.

I'd assume the market makers are making money on the difference, they are being paid to bring the parties together and manage the contracts, like any wholesaler.

I guess speculators are betting that the assumptions on future prices are wrong.

For options contracts, it is very different. The buyer of the call puts their premium at risk (if it expires worthless), but it may only represent 5% of the stock price. The option seller is on the hook for the every penny that the stock price drops below the strike price (20x the option price in this case). The market will not price that option w/o the seller being paid a premium for accepting the risk. Now, whether that premium is sufficient for a small investor to take advantage of is what I am curious about.

There are many systems that would appear to be able to make excess profits in the long run, but, if you get wiped out along the way, it doesn't really matter, does it? Much of the book 'Fooled by Randomness' addresses that very issue.

Thanks - ERD50

 

[Texas Proud]

Many moons ago, one of the people I did taxes made about $250,000 per year with covered calls...

He had a few million shares of a company and sold calls on a certain amount of them... if they got called, so what, he wanted to sell some stock anyhow... he just know the price before it was sold...

To do so with only a few shares is probably not going to make you rich..

 

[lazyday]

I didn't mean to imply that commodity futures and stock options are similar. Was just trying to give another example where one used to be paid to take a risk, but because of supply or demand changes in the market, perhaps now would not. But maybe it just confuses things.

The market will not price that option w/o the seller being paid a premium for accepting the risk.

Unless there's too many investors who now believe that it's a great strategy to sell the option, and the number of people who want to buy the option is fixed, or somewhat inelastic.

But I think we're using the word "premium" differently. By premium, I basically mean expected profit. Like the risk premium in the stock market, where the long run expectation is that it will return more than a risk free investment.


I may read Fooled by Randomness someday. Jeremy Grantham wrote about the "hundred year flood," where some (all?) of the small cap premium is lost all at once, such as in the great depression where smallcaps lost much more than large.
I question people who push the Vanguard Prime money market, even when it pays less than popular savings accounts that are backed by the U.S. government. (When they say it's the same, not if they are talking about convenience.)


As an aside on the commodity futures--part of the theory is that the baker usually won't bother trading futures, since the cost of wheat is a small part of the cost of business, and/or he can raise prices quickly if wheat costs go up. So, a speculator has to step in to do the other side of the trade, and wants a profit.

(lazyday's commodity story) - lazyday's covered call story

(producer, selling futures to reduce risk) - aggressive investors using leverage, buying calls
(speculator buying futures) - someone who was selling covered calls years ago, for profit
(institutional investor, buying futures) - new money attracted to covered call strategies
(speculator selling futures) - smart money that steps in when calls get too cheap, buying calls for profit

In my commodity story, the institutional investors overwhelm the producers, and new speculators must step in and sell futures for profit. In my covered call story, new funds and individuals selling calls overwhelm the aggressive investors who like leverage, and options speculators must step in to buy the calls at a price low enough to profit.

I don't know much about stock options, so I may not understand who's really buying and selling. When you sell a covered call, who's on the other side of the trade?

 

[whitestick]

You know, my crystal ball told me this was the most likely response. I don't think Kim likes this sort of open discussion in public.
Well, I may contact her, but I will be posting the summary info here for further discussion and review.
..I'm sure she won't have a problem with that. She talks all the time on radio, and other appearances, along with her open invites to her introductory sessions, so answering range of questions should work well with her. Please tell her the background of what we have been talking about though, so she knows which conversation this was related to. She gets a dozen calls a day or more, so you might expect that this one won't be on the top of her mind, when you call.

I am a bit confused about your calcs though (' a lot of trades to go through to check') - I thought we were just looking at beginning and end values of the account? No need to look at individual trades - maybe this is not the number I was looking for?

Remember: (End_Balance minus Start_balance) divided by Start_Balance

No 'trades to go through'. Simple calc on total returns. This cuts through any flak - it's the 'real deal', money in the bank.
That's why it sounds simple, but if I did it correctly, it takes a bit of time. I added money, and did withdrawals throughout the period, so I had to add and subtract them to get it to an apples to apples comoparison. Also, I had to remove the income from the added money, as that wouldn't be a fair comparison, since that money was not there throughout the whole period. Also some positions weren't closed at the end of this month yet, and some closed that were started before the period of Jan of 05, again to get a fair comparison you have to look at the same money going in as coming out. If I understand this "total return" thing correctly. What I didn't do, is take out the additional money that came in from the non-closed positions up front, assuming that it would balance out on the back end for the positions still to close. Dollar wise, they are about the same

-
Well, you were not using the system during a down market, and Kim won't release numbers. We do have something though. Look at the data below.
Not to be beligerant, and as they say "all due respect", but, I don't track the total return, only the individual stock position yields when they close, a completely different tracking period. The things that I had to do, as mentioned above, you are now asking me to do on those individual months. I don't see the value other then to "feel good" about something I am already doing. That's a lot of work, and given her system requires me to spend no more then 2 1/2 hours a month in tracking the individual position yield, the work you are asking for is a whole lot more, for no increase in income. I'm not RE yet, and while this is enjoyable discussion, enough is enough. Please take the course, or don't! You would be in a better position to critique it then. Or ask Kim, as she gets paid to deliver the course, and that may help you decide, or not. I was offering my experience for another viewpoint to consider. If others wish to ignore, or call me a fool, that's okay. I still spend the money each month. Actually, I reinvest it for now, but you understand the metaphor.


-ERD50

 

[whitestick]

It made me alot of money, unfortunately my clients lost their asses. Kinda like this scam strategy of writing naked puts covered calls!

Except that unless you were teaching the course up front, and that was the end of you income stream from the clients, it's a different thing. And let me assure you, that I'm not getting a dime out of this either. The course says here's the information, and here's the detailed process, and here are the alumni doing it. Either do it or not. Your choice. Either way, Kim doesn't get another dime from her clients. Maybe you need to teach her how to make all of that money you are talking about.

 

[ERD50]

Not to be beligerant, and as they say "all due respect", .

OK, whitestick, I'll slow down here. I am sincerely trying to help you, and trying to provide you some valuable information. I admit, I might take a bit of a mocking tone with my comments sometimes, but I get that way when I see products touted with all the positives in a bright light and (IMO), the negatives swept under the rug.

Let's remember, you joined into this thread with comments about getting results that 'Overall has been a bit above 20%.', only 'taking about 2 hours per month', buying filtered stocks that 'usually all go back up', and you brought up Kim's system (http://www.kimsnider.com), and all the happy talk about her successful clients.

You said you were 'every bit as distrustful and disbelieving as you are, and kept looking for that (snake) oil as well, but to date, haven't found any' .

But, every time we try to discuss the potential pitfalls of this system, a teflon shield goes up:

I reference a chart on her site that I consider misleading, and you say 'I tend to glaze over on charts and graphs anyway,'.

You won't define risk or how you measure it, but you say 'that it is as safe as or safer then any other investment in the stock market.'

You describe this as a 'synthetic bond', but when we try to measure total return against bonds, you say ' i don't compare to the total return either, as I haven't tracked that.'

And of course, Kim provides no data on performance when the system was used in the down market of 2000-2002, citing some vague regulatory issues, but you find nothing to distrust or disbelieve there.

So, you seem to be blind to the risks. I am trying to give you clues as to how to quantify that risk. I'd hate to see you get hurt in a prolonged down market.

So, here is my suggestion. First, you are making the total return calculation far too complex - there is no adjusting for 'open' or 'closed' positions - it is all just 'money'. If you don't have the historical figures, I recc this going forward:

A) On the weekend of options expiration, make a note of your Account Balance - simple.

B) Make a note of Friday's closing price on the SPY and QQQQ - simple.

C) Do it again at the next options expiry.

D) Calculate the % differences on each. A couple minutes work.

If you consistently see positive gains (total returns) in your account on those months when the SPY and QQQQ are down several percent, I would be surprised. This should give you a little bit of an idea of what could happen in a prolonged bear market.

OK, deposits/withdrawals do complicate this somewhat. I keep my trades in an account that I do not tap or add to right now, so it is 'pure'. But, a simplified method (you can do this with SW, I never have), is to do this:

A) Add up your withdrawals. Add up your deposits.
B) Add half the deposits to the start balance, subtract half from the end balance.
C) Subtract half the WD from the start balance, add half to the end balance.

Calc your gain - it's an estimate, but should get you close enough (esp over a one-month time frame) to see trends.

I am just trying to open your eyes to the potential risks. Those are a volatile group of stocks that I see in her open and closed positions. If averaging down consistently reduced the risk, you would see it used widely in mutual funds. It can help (if the stock does recover), or hurt (good money after bad if the stock sinks further). It's no silver bullet.

It is your money, if you lose a big chunk of it in a down market, it could hurt. Kim will find more students from the pool of people that pay 3% to 4% fees on their mutual funds. There are plenty of them.

-ERD50

 

[whitestick]

Ok, sorry for being a bit testy, It was a bad day at work, and at this time of the year, there are not enough bodies still at work to get everything done that people expect before the end of the year. No excuse, as I'm usually more calm, but some poeple are idiots. Not you, the one's at work.\

OK, whitestick, I'll slow down here. I am sincerely trying to help you, and trying to provide you some valuable information. I admit, I might take a bit of a mocking tone with my comments sometimes, but I get that way when I see products touted with all the positives in a bright light and (IMO), the negatives swept under the rug.

Let's remember, you joined into this thread with comments about getting results ...
all true
But, every time we try to discuss the potential pitfalls of this system, a teflon shield goes up:

You won't define risk or how you measure it, but you say 'that it is as safe as or safer then any other investment in the stock market.'
I measure risk by individual stock position - money allocated for a stock position till closed, with limits that are measured out to around two years before I get "nervous" about a recovery on that position. Even then, if I have been making a reasonable return 12% or so on that allocated money, then it is okay. It's only if the allocated money has been sitting there with no return for two years, that I would look to possibly claiming it for tax losses. Which has not happened in any position to date. IF all allocated money that I have in the method, is in that position of no return, then obviously I would have a major problem, but to date, when some positions were not making that much, others were making more then that, to give a consistent yield of 12% or more, overall. A cash flow measurement, not a capital valuation measurement. If I haven't been able to communicate that so far, then I guess we will have to agree to disagree on that point.

You describe this as a 'synthetic bond' not my words, but when we try to measure total return against bonds, you say ' i don't compare to the total return as measured by capital valuation, as I haven't tracked that.' Again, see above.

And of course, Kim provides no data on performance when the system was used in the down market of 2000-2002, citing some vague regulatory issues, but you find nothing to distrust or disbelieve there.

When you talk to her, please ask her about this. I forgot to ask about this. I believe that the concern around regulatory isseus are related to their using data from Chromium investments, which is a regulated company not part of Kim Snider, not her personal accounts or her company's role as a publisher. But please do ask her, for your concerns.

So, you seem to be blind to the risks. I am trying to give you clues as to how to quantify that risk. I'd hate to see you get hurt in a prolonged down market.
I do appreciate that. Honestly, it's perhaps that I have glossed over them, as it didn't seem relevant in the way that I measure the risk. I was concerned the first couple of months, but then it didn't seem to matter, as the results were continuing to go up. At that time, I only had a small amount of money and positions involved. You point out, that maybe I have a blind eye, and maybe I do. But if the individual positions are positive, albeit at different times, and over different periods, then it would seem that the overall results will also be positive. A position is only closed out when it's capital price is positive, or nearly so, compared to it's cost. The option premium is the income that creates the value. I do understand your comments about a general downturn in the overall market, and how that could cause perceived major overall unrealized losses. In her examples in her course, Kim points out her results, tracking individual stocks that happen to cross over those time periods, however, when the individual yield results are still positive when she closes them out, and she does close them out at a capital price above her average cost, then that seems to fit in with the total return you are looking for, just not conviently calculated like you are asking for. I really hope that you do talk to her, and get the assurances you are looking for, to give you the opportunity to follow her system, and see the positive results for yourself. I suspect that a good bit of her course will be too basic for you, but, there are nuggets that will strike your interest.

So, here is my suggestion. First, you are making the total return calculation far too complex - there is no adjusting for 'open' or 'closed' positions - it is all just 'money'. ..
..OK, deposits/withdrawals do complicate this somewhat. I keep my trades in an account that I do not tap or add to right now, so it is 'pure'. But, a simplified method ...

Calc your gain - it's an estimate, but should get you close enough (esp over a one-month time frame) to see trends.

After numerous edits to answer that question, I realize that it's the same as above, and we have already agreed to disagree on that. I gave an answer already, and of course there will be individual months that are better then others, and some worse then others. I've provided a measurement that spans two years, and should work. Just to point out the problem with your method, I have percentages from one month to the next, using your formula, of 78% to 180% reflecting unrealized capital gains and losses intermixed with income. Obviously those are both meaningless. My purpose was, and remains, a source of income for retirement, that remains relatively consistent and stable. That is what I get from her method. I can't spend paper gains or losses until realized. Perhaps that is where we are mis-communicating. The capital valuation of the stock when called away is always at or near the average cost of the underlying stock. The premium from the options sold, are the source of income. I'm really uncomfortable in describing it any further due to her non-disclosure. I would strongly suggest that you talk to her, or even better take her free introductory session, and pose your questions there. At least if she reveals them, then I won't be on the hook for having exposed them. I know this sound like I'm putting you off, but the non-disclosure really protects her, and probably with good reason. She has a whole diatribe on why stock brokers are not your friends, and fund mangers are only in it for themselves. That's why she developed this method. I really believe that you would bring a great deal of discussion and value to the alumni group.

I am just trying to open your eyes to the potential risks. Those are a volatile group of stocks that I see in her open and closed positions.
Acutually volatility is what drives this system (this is my interpretation). Within a pre-filtered selection process that reduces (I didn't say eliminate) chance of a stock completely failing. Also, Kim is sponsering a forum among her students to improve the selection process, based on their experiences. Her method might not be perfect, but she is interested in improving it, when and where possible. And of course the market and the world environment is constantly evolving, requiring updates to any system.

It is your money, if you lose a big chunk of it in a down market, it could hurt.

Absolutely true, and that is why I continue to share ideas and attempt to learn. If I have given the impression that I have put up a teflon shield to prevent my learning and gaining insight from your comments then for that I do appologize. I have attempted to answer what I have experienced or done, not what I think could/would happen. I offered my experiences as a strawman to learn from. That being said, they are my actual experiences.

-ERD50

 

[ERD50]

whitestick - it sounds like we are on better 'speaking' terms now, that is good.

OK, so you really do not want to look at 'total return' - so be it. But, this morning I realized I could present some data that you should find very relevant. Will you humor me, just one more time? These are actual results from my own option sales (not really all that different from the SIM approach in the basics).

So, I looked again at my own spreadsheet I use to track my option sales. Now, I always measure myself by total return, and compare that to the market to 'benchmark' my performance. I just realized, that one column of my spreadsheet consists of the premiums by themselves - equivalent to the 'yield' or 'income' number that you prefer to use as a measurement. What I found surprised me, eye-opening really - I had to triple check my numbers before typing here:

TOTAL RETURN 12/17/2004 to 12/15/2006:

SPY 22.83%
QQQQ 13.31%
ERD50 26.48% 'average return' of 13.24% per year (12.46% compounded)

OK, a bit better than the market, and with less month-to-month variability in NAV. Nice, but not too exciting, and certainly little assurance that I can replicate that in the longer run. But, now lets look at my 'yield' numbers:

Average monthly premium collected (AKA: 'cash flow', 'income', 'yield'):

2.876% of the account value, times 12 months =

34.51% per year; 40.53% if you compound it.

Or, 66% in 'income' over the 23 option periods (91.97% compounded)! Hmmmm, maybe I should buy a couple his-and-hers BMWs to put under the tree with all my 'income'!

So, seriously, which number should I 'believe' - the balance in my account, which, after two years, matches my 26.48% total return number, or, the 'cash flow' generated from my option sales, w/o regard to the underlying stock prices? Which money can I spend, or use in an emergency - the balance in my account, or my 'cash flow' - some of which seems to have gone into some stocks that dropped, or in the SIM approach, into 'open positions' that are not accounted for until they 'close'?

You said you want to keep your eyes open - you make references to the stocks returning to their average value and then closing them, so realized losses are few. OK, again, if this is occurring, then why is Kim biased away from 'total return' measurement in the client accounts? Clearly, total return WILL look good if this is happening regularly. So why not use a method that can be compared apples-apples to other investments?

I think I know why - in an extended downturn, clients won't be looking at that account balance - they will be directed to look at that 'yield'. And, that goes on for at least two years (maybe longer - averaging down is one way to stretch out a losing position). Well, if a client gets concerned about their dropping account value, and wants to get out of volatile stocks in a down market, Kim will be able to say 'they didn't stick with the plan'! IMO, it is all part of a strategy to push the realization of losses out as long as possible, to keep the 'confidence' up in the approach. Yet, I don't think there is anything in the underlying approach to really avoid those losses. Look again at my 'yield' compared to the money I actually made. Think about that 'two year' number - and look again what the nasdaq did in the two years 2000-2002, and what it has done since.

And remember - my numbers are in an UP market! The 'yield' would not change much in a down market, but my account value sure could.

I think there is a bit of a 'shell game' being played with the 'yields' and the 'unrealized losses'. Think about it.

I hope this has opened your eyes and your mind a bit to evaluating the true performance of your investment. I will contact Kim, but, crystal ball says I won't hear anything that is not already on her web site, we will see. That will be after the holidays, I want to get a few more bits of data organized first.

All the best - ERD50

 

[youbet]

ERD50.....

This explanation/example is truly excellent! I think understanding the difference between yield and total return in these heavily marketed covered call "systems" being sold in the media is key to keeping potential "followers" out of trouble. Your efforts are greatly appreciated by those of us who have been following along.

Moderators: Please move this thread to "the best of" category!

 

[whitestick]

whitestick - it sounds like we are on better 'speaking' terms now, that is good.

OK, so you really do not want to look at 'total return' - so be it. But, this morning I realized I could present some data that you should find very relevant. Will you humor me, just one more time? These are actual results from my own option sales (not really all that different from the SIM approach in the basics).

Seems like reasonable wo/men will always come to terms eventually. I think we are probably close to being in violent agreement.

2.876% of the account value, times 12 months =

Slight difference is that I use allocated dollars, rather then account value, as that will fluctuate daily based on underlying stock price, rather then the allocated dollars which is "hard" cash. Otherwise it seems the same calculation.
34.51% per year; 40.53% if you compound it.

Or, 66% in 'income' over the 23 option periods (91.97% compounded)! Hmmmm, maybe I should buy a couple his-and-hers BMWs to put under the tree with all my 'income'!

So, seriously, which number should I 'believe' - the balance in my account, which, after two years, matches my 26.48% total return number, or, the 'cash flow' generated from my option sales, w/o regard to the underlying stock prices? Which money can I spend, or use in an emergency - the balance in my account, or my 'cash flow' - some of which seems to have gone into some stocks that dropped, or in the SIM approach, into 'open positions' that are not accounted for until they 'close'?
The purpose of the two years is also to avoid the "emergency" sell off, but the cash flow would be the one that you should be able to draw off and spend each year. Prudence would dictate that you draw off the 2 years worth of required expenses and put in liquid investments (MM, Short term CDs, etc) to keep from impacting the process of the options and the underlying stock returning to a closing price above the average cost. If your cash flow dollars exceed your required living expenses by a 4% to account for inflation, then you will be able to live and enjoy life. Obviously there has to be some allowance for part of that cash flow/required living expenses to go into savings for big ticket purchases and other unbudgeted items, just as in any budget. As to the BMWs, if you are budgeting for them in your required expenses via payments, then make sure to pick at least one of them in a convertible to enjoy the sun.

You said you want to keep your eyes open - you make references to the stocks returning to their average value and then closing them, so realized losses are few. OK, again, if this is occurring, then why is Kim biased away from 'total return' measurement in the client accounts? Clearly, total return WILL look good if this is happening regularly. So why not use a method that can be compared apples-apples to other investments?

I think I know why - in an extended downturn, clients won't be looking at that account balance - they will be directed to look at that 'yield'. And, that goes on for at least two years (maybe longer - averaging down is one way to stretch out a losing position). Well, if a client gets concerned about their dropping account value, and wants to get out of volatile stocks in a down market, Kim will be able to say 'they didn't stick with the plan'! IMO, it is all part of a strategy to push the realization of losses out as long as possible, to keep the 'confidence' up in the approach. Yet, I don't think there is anything in the underlying approach to really avoid those losses. Look again at my 'yield' compared to the money I actually made. Think about that 'two year' number - and look again what the nasdaq did in the two years 2000-2002, and what it has done since.

And remember - my numbers are in an UP market! The 'yield' would not change much in a down market, but my account value sure could.
Exactly my point, and when withdrawing the money to live off, as I said above, the yearly cash flow is more consistent. This is what I have been stressing all along, or at least I tried to.

I think there is a bit of a 'shell game' being played with the 'yields' and the 'unrealized losses'. Think about it.

I hope this has opened your eyes and your mind a bit to evaluating the true performance of your investment. I will contact Kim, but, crystal ball says I won't hear anything that is not already on her web site, we will see. That will be after the holidays, I want to get a few more bits of data organized first.
And please report back what you learn from that communication. I will certainly quiz her as well, afterwards to get her perspective, she may learn something as well, and incorporate into her method. Wouldn't that be something?

All the best - ERD50

 

[ERD50]

ERD50.....

This explanation/example is truly excellent! I think understanding the difference between yield and total return in these heavily marketed covered call "systems" being sold in the media is key to keeping potential "followers" out of trouble. Your efforts are greatly appreciated by those of us who have been following along.

Moderators: Please move this thread to "the best of" category!

Thanks youbet - but it seems I'm 'preaching to the choir'. Oh well, I tried. Hopefully, there were some lurkers out there that will use the info to see through the 'smoke & mirrors' of these highly advertised 'systems'.

Looks to me like whitestick really wants so strongly to believe in the tooth-fairy, or has just drunk too deeply from the Cup of Kim's Continuous-Yields Kool-Aid, or (well, you decide).

I will post a follow-up later - not another attempt to convince whitestick, I've already beaten that dead horse, but just another note on evaluating the system going forward. After our almost five year bull market, what is next?

One thing that is 'funny' - I hesitated to use the 'shell game' reference in that post, as it might come across as condescending. Adding it was my final edit before posting. But, afterwards, I realized that really is the most apt description - the crux of the biscuit, if you will.

There is a shell game going on here - the 'winner' gets the 'total returns', the market value of their account. But, the person running the game keeps distracting the players from the prize - hiding it under the shells of 'income', 'yield', and 'unrealized losses'. That is exactly what is going on here - and in far fewer words than my previous posts!

It's been educational for me. These scams work because there is always some subset of people who want to believe that they can get rich with the right 'system', they can beat the big guys in the market - and do it in only 2 hours a month no less! Gee, all those guys on Wall Street must be really stupid to give their money away - they are willing to take a pass on these high option premiums on stocks that 'mostly go back up'- hope springs eternal, and clouds reality. Ooops, I'm trying to use reason and logic and basic economics again, sorry. This is a 'faith based' system.

Thanks again for the comments, and sorry I got long-winded again - hope it helped someone - ERD50

PS - on a side note, I am interested in the whole theory and results of 'averaging down' on stocks - my gut says it is just another distribution of normal specific stock risk. Is that worthy of a thread of it's own?

 

[youbet]

Looks to me like whitestick really wants so strongly to believe in the tooth-fairy, or has just drunk too deeply from the Cup of Kim's Continuous-Yields Kool-Aid, or (well, you decide).

I didn't look at the discussion as a debate over right or wrong....... but rather two ways of quantifying results. By the time you guys went back and forth several times, I think I get it , especially in the example where you showed your actual results based on total return vs yield.

 

[ERD50]

RE: 'yield' calculation

Slight difference is that I use allocated dollars, rather then account value, as that will fluctuate daily based on underlying stock price, rather then the allocated dollars which is "hard" cash.

I don't see how you can say that some number on your worksheet ('allocated dollars') is 'hard cash'? The account balance is hard cash - no other number is or can be 'hard cash'. Try to tell your broker you would like to take out your 'hard cash' - to the broker, that is your account balance, your 'liquidation value', not some other number on your worksheet.

And, if you are saying that your 'allocated dollars' is a number that is less than the account balance ( I think this is covered in the patent app, I'd need to look again - but it makes sense - allocate some portion of your account to these stocks, leave some in reserve) - well if you are using a smaller number in the denominator of your yield calculation, that makes your yield number look even higher (better) than it really is. So, it appears that my 'yield' calculation is more conservative than the one you use. I base the yield calculation on the starting balance of the account - the amount I put in. Pretty basic - equivalent to the 'coupon' rate of a bond. Again, total return (including the NAV of the bond in this comparison) is a different number.

but the cash flow would be the one that you should be able to draw off and spend each year.

Fine, just keep doing that. But if your yield number is greater than the 'total return' number, as it was in my example, (that you want to ignore), and you keep tapping off your yield, your account balance *will* dwindle. It is basic math - nothing can change that. It might dwindle slowly in an up market, or even rise, but I am afraid that you can expect a basket of volatile stocks to dwindle quickly in a down market. Eventually, that chicken comes home to roost. You can't keep drawing a yield greater than the total return (no matter how 'consistent' that yield is), and not end up broke - that is why I am telling you that the total return number is important, and a basic measurement of any financial investment.

If your total return is not consistently positive, or at least as positive as the market or a bond fund or whatever investment you want to benchmark it to - then you should be in the benchmark. It is just that simple. You cannot ignore total return, unless you want to lull yourself into complacency, and potential bankruptcy.

-ERD50

 

[lazyday]

Hopefully, there were some lurkers out there

I hope so.

A poster at http://answers.google.com/answers/threadview?id=563829 said they couldn't find anyone unhappy with the method. Makes me wonder if you have to sign statements saying you won't complain in public. Or, maybe everyone's still happy because the market is up, and they haven't yet noticed the problem of unrealized losses.

This thread is searchable in Google, so maybe someone can be helped by it.


I did a quick search myself, and didn't see much commentary. Looks like she has a radio show. And this seemingly legit (and otherwise decent) blog from an "Asst FinanceProfessor" even links to her blog: http://financeprofessorblog.blogspot.com/
Link says "Kim Snider is not your ordinary radio reporter! Good stuff"
Wow.

 

[lazyday]

correction--looks like only part of the thread is in google, but maybe the whole thread will be eventually...

 

[REWahoo]

Moderators: Please move this thread to "the best of" category!

It appears this continues to be an active thread, and once moved to the "best of" category it will be locked. We've taken some criticism in the past when we (OK, when I) moved a thread too early.

How about some input from those of you following this thread. Are you done with it? As youbet suggests, has it reached the level where it should be included in the "best of" category?

 

[lazyday]

I've revisited the first few pages of the thread, and think it deserves to be in best of.

I may get around to quoting strategies of Bridgeway's fund and/or closed end buy-write funds, as part of my argument that there's more money chasing the strategy today, but if I don't before thread closes, that's ok.

Would it be a good rule-of-thumb for closing and moving to "best of," to wait til no new posts in thread for X days?

 

[haha]

How about some input from those of you following this thread. Are you done with it? As youbet suggests, has it reached the level where it should be included in the "best of" category?

This thread could not possibly reach the "Best of" category. Best of what? Best example of persistent and tediously explained delusions?

Ha

 

[REWahoo]

Would it be a good rule-of-thumb for closing and moving to "best of," to wait til no new posts in thread for X days?

Yep. That's what we've generally done, but since no one responded to youbet's suggestion, I thought I'd try to get some input.

 

[Texas Proud]

I have read parts of this thread and wonder where some are coming from....

Let's see... convert some of your principal to income so you can boost your "yield"...

Have less principal the next year so even though you have a high yield, less income... continue until broke....

Is this what I am reading

PS.... I don't think it is the best of anything... If someone doesn't know it is total return that you need to worry about, let them go broke.

 

[lazyday]

Topic of covered calls comes up every so often, with people overly excited about them. The first 3 or so pages of this thread brings it back to earth. The last pages do a good job of countering the glorious claims of a covered call cult.

But it doesn't matter much to me where the thread goes, so won't protest any more, either way.