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Re: So much for ER in 2010... (longish)
Old 08-23-2006, 03:01 PM   #21
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Re: So much for ER in 2010... (longish)

Brewer,

thanks for the link.

Peggy, I am not insulted at all. Somewhere (may be in my dreams) I got the idea that CC are easier then trading stocks. I have a few mutual funds and don't know much about bonds either. Did I mention the whole ignorance thing? I love to read, so I at least have that going for me.

A CC strategy only works in certain market conditions when compared to a Buy & Hold strategyWould you elaborate?

Lena
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Re: So much for ER in 2010... (longish)
Old 08-23-2006, 03:32 PM   #22
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Re: So much for ER in 2010... (longish)

Quote:
Originally Posted by Lena
Would you elaborate?
CC works poorly if the stock moves up too quickly. This is because selling a call on a stock you own limits your upside potential. If the company gets a buy-out offer, the stock may jump by 20-40% in a day. If you've sold a call on the stock, you're limited to 5% or so.

CC works poorly if the stock declines rapidly. Imagine selling calls on an airline stock right before 9/11. Yes, the calls reduce your cost basis but not enough if the company goes belly up or has profit problems.

CC works best on a market that has low volatility. In other words, the market doesn't move up or down too quickly from month-to-month. The problem comes when you have to predict this low volatile time period. It didn't move last month; will it continue to be stagnant this month?


In the end, it's a trading strategy that works well. Until it doesn't. It requires a very, very, good crystal ball.
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Re: So much for ER in 2010... (longish)
Old 08-23-2006, 04:17 PM   #23
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Re: So much for ER in 2010... (longish)

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Originally Posted by Lena
Peggy, I am not insulted at all.* Somewhere (may be in my dreams) I got the idea that CC are easier then trading stocks.* I have a few mutual funds and don't know much about bonds either.* Did I mention the whole ignorance thing?* I love to read, so I at least have that going for me.
Suggestion: Start with bonds first. They are relatively simple and if you can understand simple math (calculator/computer will actually do it for you), you can easily understand bonds. Then read up on stocks. Then move on to options and other derivatives. I have a finance MBA and I am a Chartered Financial Analyst. I only dabble in options ocasionally because it is much easier to blow yourself up.
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Re: So much for ER in 2010... (longish)
Old 08-23-2006, 07:14 PM   #24
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Re: So much for ER in 2010... (longish)

Brewer,

I sure hope I can understand simple math, otherwise my BS in accounting could be slightly useless. Believe it or not, I deal with some of the derivatives thingies at work. But I do accounting for it, our Secondary Marketing Dept deals with their trading aspect.

OK. Bonds it is. Any good books on that? I don't think there are Bonds for Dummies, is there?

Lena
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Re: So much for ER in 2010... (longish)
Old 08-23-2006, 08:18 PM   #25
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Re: So much for ER in 2010... (longish)

Quote:
Originally Posted by peggy
I'll be 42 in 2010; DH will be 49.

I will; the detailed breakdown of subcategories is on the computer at home, not here at work, so I'll post it as soon as I get home tonight. Nitpicks are welcome, honestly. We're overloaded in stock funds (about 80%, IIRC), and had planned to shift over to a more balanced portfolio (60-40) about two years before ER.

To answer a couple of other posters, yes we are invested through a brokerage firm (AG Edwards), and the fees are higher than a Vanguard fund. The largest fee we have, though, is 1.8%, so I haven't felt any real urgency to switch over to no-fee funds. (You may now commence beating me about the head and shoulders for this statement, LOL.)

And when I said "flat" I was imprecise. There's been a slow uptrend, but not more than about 3%.

On preview:

Mickeyd - yes, exactly.

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Re: So much for ER in 2010... (longish)
Old 08-24-2006, 07:04 AM   #26
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Re: So much for ER in 2010... (longish)

Quote:
Originally Posted by Lena
Brewer,

I sure hope I can understand simple math, otherwise my BS in accounting could be slightly useless.* Believe it or not, I deal with some of the derivatives thingies at work.* But I do accounting for it, our Secondary Marketing Dept* deals with their trading aspect.

OK.* Bonds it is.* Any good books on that?* I don't think there are Bonds for Dummies, is there?

Lena
Here is a start: http://www.smartmoney.com/onebond/in...m?story=primer

As long as you stick to treasuries, munis and high grade (A rated or above) corporates, all you really need to master are the concepts of discounted cash flow, duration, and maybe convexity to understand what you are getting into. If you start looking at lower rated corprates (BBB and junk), you had better be prepared to do some serious credit analysis.
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Re: So much for ER in 2010... (longish)
Old 08-24-2006, 07:30 AM   #27
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Re: So much for ER in 2010... (longish)

Thanks.


Do you have an opinion on ETFs?

Lena
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Re: So much for ER in 2010... (longish)
Old 08-24-2006, 07:40 AM   #28
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Re: So much for ER in 2010... (longish)

Quote:
Originally Posted by Lena

Do you have an opinion on ETFs?

Lena
Yes.
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Re: So much for ER in 2010... (longish)
Old 08-24-2006, 08:08 AM   #29
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Re: So much for ER in 2010... (longish)

Let me rephrase my question:

What is your opinion on ETF?

Lena
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Re: So much for ER in 2010... (longish)
Old 08-24-2006, 08:13 AM   #30
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Re: So much for ER in 2010... (longish)

Quote:
Originally Posted by Lena
Let me rephrase my question:

What is your opinion on ETF?

Lena
I think they can be useful, but most of them just duplicate existing index funds. If you are a Vanguard customer, they are kind of redundant. Since I am at Schwab with all my accounts, ETFs are a godsend because Schwab doesn't have rock-bottom pricing on its index funds. I also think they are useful because from time to time I hedge part of my portfolio by buying puts on QQQQ and IWM.
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Re: So much for ER in 2010... (longish)
Old 08-24-2006, 08:16 AM   #31
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Re: So much for ER in 2010... (longish)

I think they can be useful, but most of them just duplicate existing index funds. If you are a Vanguard customer, they are kind of redundant. Since I am at Schwab with all my accounts, ETFs are a godsend because Schwab doesn't have rock-bottom pricing on its index funds. I also think they are useful because from time to time I hedge part of my portfolio by buying puts on QQQQ and IWM. Thanks. Most of this was in English, whatever wasn't I'll have to translate later as I become less ignorant on the subject

Lena
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Re: So much for ER in 2010... (longish)
Old 08-24-2006, 09:40 AM   #32
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Re: So much for ER in 2010... (longish)

Quote:
Originally Posted by Lena
Thanks.* Most of this was in English, whatever wasn't I'll have to translate later as I become less ignorant on the subject
One translation:
"Bond ETFs can have lower expense ratios than bond index mutual funds, but Vanguard's bond index mutual funds have lower expense ratios than just about everything (including ETFs).* So I invest in bond ETFs since my account is with Schwab (not Vanguard) and Schwab's bond index mutual funds are expensive to buy, but if you're a Vanguard customer then you're better off with Vanguard's cheap bond funds."

"Purchasing options on stock ETFs like the NASDAQ index (QQQQ) and a Russell 2000 index (IWM) are also useful ways to limit the downside on my portfolio volatility.* The ETFs have greater liquidity and so the options are priced better.* But few investors need to worry about purchasing options on bond indexes, so Vanguard's bond index mutual funds are a better way to invest in bond index funds."
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Re: So much for ER in 2010... (longish)
Old 08-24-2006, 10:02 AM   #33
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Re: So much for ER in 2010... (longish)

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Hey hey hey what are you doing on this website at WORK! 8)
Doing something constructive with my day since I'm caught up with my duties at the moment.
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Re: So much for ER in 2010... (longish)
Old 08-24-2006, 10:20 AM   #34
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Re: So much for ER in 2010... (longish)

Quote:
Originally Posted by brewer12345
Here is a start: http://www.smartmoney.com/onebond/in...m?story=primer

As long as you stick to treasuries, munis and high grade (A rated or above) corporates, all you really need to master are the concepts of discounted cash flow, duration, and maybe convexity to understand what you are getting into.* If you start looking at lower rated corprates (BBB and junk), you had better be prepared to do some serious credit analysis.
I think "convexity" is beyond a lot of folks on here.......... However, DURATION is the real key to bonds.............in relation to interest rate cycles.............
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Re: So much for ER in 2010... (longish)
Old 08-24-2006, 10:36 AM   #35
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Re: So much for ER in 2010... (longish)

I wasn't familiar with the term convexity so I looked it up.

After reading the definition of bond convexity, I can see what you mean that convexity may be beyond many of the mathematically challenged on this forum.

- Just for fun I posted the definition from Wikipedia...

In finance, convexity is a measure of the sensitivity of the price of a bond to changes in interest rates. It is related to the concept of duration.

here's the link if you are really interested

http://en.wikipedia.org/wiki/Bond_convexity
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Re: So much for ER in 2010... (longish)
Old 08-24-2006, 10:38 AM   #36
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Re: So much for ER in 2010... (longish)

Dude,

you gotta give people some credit. They might surprise you. Then again, may be not

Lena
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Re: So much for ER in 2010... (longish)
Old 08-24-2006, 10:47 AM   #37
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Re: So much for ER in 2010... (longish)

Since this thread has talked about ETFs, bonds, and covered calls ...
I forget who posted this link originally, but it is very educational:

www.radicalguides.com

There is an online book about investing with ETFs and a book on investing with bonds. * I found these more informative and more succinct than books you could purchase.

As for covered calls, I have used them to make lunch money, but that's about it. *The strategy I used was to sell a call option of about one month duration with a strike price above the current stock price by about 5% and a premium of at least 1% to 2% depending on the underlying stock. *(I have used non-option vocabulary in the previous sentence.) *If one could get a consistent 1% to 2% a month from selling covered calls, then once could goose their return by 12% to 24% a year.

Reality is a little different. *Let me give an example.
Altria (MO) is selling for 84 now. *The Sep 85 call can be sold for 0.85 to 0.90 now. *So you can sell the call, pocket 1% and wait. *If on Sept 16, the price of MO is 85 or above, your stock gets sold. *So you get the 1% from the option, plus the $1 from the gain in the stock or a total of 2%. *That's like a 24% a year gain. *Rinse and repeat.

But if MO goes to 88. *You still only get the 2% gain.
If MO stays under 85, you get the 1% call premium and keep the stock.

Not every stock you own will have a decent premium to make it worth your while to sell a covered call. *And the premium can change quickly and the profitability can be fleeting.

Another example:

Citicorp sells for 48.57 now. *The Sep 50 call sells for 0.15 to 0.20 now. *The 0.20 that you would get looks like free money because we all doubt C will reach 50 by Sept. 16. *But, it might and the less than 0.4% profit from selling the covered call might not even cover the commissions of selling the call in the first place.

Full disclosure: I own MO and I am not doing any of the trades suggested in this message.
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Re: So much for ER in 2010... (longish)
Old 08-24-2006, 10:54 AM   #38
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Re: So much for ER in 2010... (longish)

LOL!, thanks for the link.

I like eating lunch, so making lunch money would be great. From what was explained to me about covered calls, I got this: you really can't "loose" money. You might not make a whole lot, but since you are getting premium upfront, you will make at least small profit. You can "loose" by not getting more for your stock if selling price gets much higher then the call price.

I haven't tested any of this in practice because don't have enough knowledge on how to buy stock on which to write cc. But I am still young.

If you get a chance to point me in the direction of online book you mentioned, it would be greatly appreciated
Lena
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Re: So much for ER in 2010... (longish)
Old 08-24-2006, 11:01 AM   #39
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Re: So much for ER in 2010... (longish)

Covered Calls...

The way I see it is you are taking all of the downside risk in holding a stock and limiting your upside potential to 1 or 2 percent.

If the stock remains unchanged maybe you can make a few cycles and a couple of percent on the stock.

However I don't see the big advatage of writing covered calls.

Another way to look at it is that historically stocks have moved up (on average over very long time periods) around 1 percent a month. So if I just hold the stock (on average) long enough I will make at least what some covered calls pay. And without the transaction costs and without the income tax penalty.

Writing covered calls, in my opinion is not a smart move. Basically you have all of the downside risk, and really no more (expected) gain.*

If I am missing something here please educate me.
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Re: So much for ER in 2010... (longish)
Old 08-24-2006, 11:16 AM   #40
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Re: So much for ER in 2010... (longish)

Quote:
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Covered Calls...

The way I see it is you are taking all of the downside risk in holding a stock and limiting your upside potential to 1 or 2 percent.

If the stock remains unchanged maybe you can make a few cycles and a couple of percent on the stock.

However I don't see the big advatage of writing covered calls.

Another way to look at it is that historically stocks have moved up (on average over very long time periods) around 1 percent a month. So if I just hold the stock (on average) long enough I will make at least what some covered calls pay. And without the transaction costs and without the income tax penalty.

Writing covered calls, in my opinion is not a smart move. Basically you have all of the downside risk, and really no more (expected) gain.*

If I am missing something here please educate me.
I'm not a fan of the strategy because I am trying for home runs. But bear in mind that most calls expire worthless. Someone is raking in that dough. If you are a more active trader you can play goames. For example, stock X generally stays between 25 and 30. So if I own it and it drifts up to 29.50, I might sell the 30 call that expires in a month knowing that in all likelihood the call will expire worthless. If stock X pays a dividend n the meantime, so much the better.
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