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Old 01-15-2011, 01:43 PM   #61
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I hate to be the resident dream-shatterer... but I feel obliged to point out bluntly what others seem to be casting aside.

The notion that you can reliably earn 9% annualized (7.5% real) by picking your own stocks is ludicrous and you are going to get wiped out.

Why do you think that the oft-quoted safe withdrawal rate is no more than 4%? If people could acheive better returns then that reliably they would.

Read Otar before you hurt yourself.

If the best active fund managers in the world cannot improve on this cold truth what makes you think you can outdo them?
+1. Funny enough, the MRK example above - it is down ~10% since that post was made. There goes that!
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Old 01-15-2011, 01:52 PM   #62
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+1. Funny enough, the MRK example above - it is down ~10% since that post was made. There goes that!
I think you're missing the point of selling the covered calls. The idea is that the 13% return on the stock will come from covered-call premiums and dividends. There's no intent to sell the stock, so whether it goes up or down is largely irrelevant as long as it stays stodgy enough to keep selling out-of-the-money calls without getting called away too often.

The fact that it's 10% cheaper is actually raising the yield-- as long as the dividend isn't cut.

The challenge is getting good prices for the covered calls, as well as not getting eaten alive by short-term taxes.

I'm still looking for a good text or investment book on combining dividend investing with covered calls, but I suspect that it's a pretty narrow niche for a publisher.
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Old 01-15-2011, 01:55 PM   #63
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I understand covered calls, I have traded them many times myself. The problem is that, once a stock drops, if you sell calls on it, you are locking in that loss - so "whether it goes up or down is largely irrelevant" is not the case. Heck I wish as much as anyone that this strategy could return 10-20% a year, but I know it does not always work that way.
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Old 01-15-2011, 02:54 PM   #64
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+1. Funny enough, the MRK example above - it is down ~10% since that post was made. There goes that!

No, the MRK example is beauty. In fact in this case you are probably going to get the dividend this quarter plus the money you obtained from the covered call. The volatility has also gone up because of the drop in price, so now you can write a new call for even more out of the money for close to the same return.

And actually Merck is way oversold and will be bouncing back up to the $36 area very soon. They are a much larger company than one drug.

And actually, did you check VWITX (Vanguard municipal bond fund)? Considered a very safe place for your money and yet it is down 1.5% this year. How is that working out? At least the MRK covered call strategy still has you making money instead of losing it.
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Old 01-15-2011, 07:31 PM   #65
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The British have a tradition of taking a "year out" between graduating school (either high school or college) and starting life in the work force. Traditionally, this is when young adults go on their grand tour of the world, work just enough to keep them in food and booze, and get their wild oats out of their system. I've known young men who rode their bicycles from Paris to Beijing (yes, pedal type), spent a year in Australia, harvesting wheat and partying, etc. They can make this work because they have national health to cover emergencies and they have work permits for anywhere in the British Commonwealth.
All of the ones I talked to considered this a life changing experience that let them sort out what they really wanted to do with their lives.
It sounds to me like you need something like this.

The odds against being able to retire at your age and financial situation are about the same as winning the lottery. Not zero but very small. However, one year sabbatical probably won't kill your career and will let you get the wanderlust out of your system. Your likely to find halfway through it that the young retired life isn't as good as you think it is but you'll never know unless you try.

I suggest strongly that if you do this, you don't burn any bridges at your current employer. Ask for a sabbatical and tell them that you're coming back in a year. If you don't, this won't hurt. If things go other than as planned, you'll have a safety net.

Lorne
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Old 01-16-2011, 12:35 AM   #66
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I understand covered calls, I have traded them many times myself. The problem is that, once a stock drops, if you sell calls on it, you are locking in that loss - so "whether it goes up or down is largely irrelevant" is not the case. Heck I wish as much as anyone that this strategy could return 10-20% a year, but I know it does not always work that way.
I didn't get the "locking in a loss" impression from McMillan's textbook.

If you buy the stock and sell calls on it, then you're essentially doing nothing but banking the premium and collecting dividends until the call expires. The calls were sold OTM so were above your purchase price. The collected premium has essentially reduced your cost basis by a buck or two a share. You've capped your upside (if the shares get called away) but I'm not seeing how a loss is locked in.

If the call expires and the stock is still at a loss, then selling OTM calls at less than the original cost basis could lock in a loss-- if the stock was called away. But the owner has a choice whether or not to sell calls at those prices and isn't locked into a loss there either.

We haven't even gotten into rolling the calls forward or groping for other complicated options strategies.

Meanwhile the stock can drop all it wants if the owner can continue to collect dividends and call premiums. But as others have pointed out, the owner has to be right every time-- or the dividend is cut, or they sell a call option too close to the stock's volatility.
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Old 01-16-2011, 06:28 AM   #67
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If you exit the job market for 10 to 15 years.... you run a high risk of being very unmarketable. Think not.... talk to some mothers that stopped working to raise children and return to work 10 to 15 years later. Sure, they find jobs... but often at a lower wage.
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Old 01-16-2011, 10:42 AM   #68
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I didn't read the whole thread... But I'd say take a couple years off. Don't consider it a retirement, but do some low cost traveling for a couple years and see the world. That way, you have a good excuse for not working when you seek future employment, and you can get the bug out of your system. If you are just planning on sitting around, I would not pick now to take a couple years off. I'm 30 years old and unattached, and I wish I could do the above myself.
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Old 01-16-2011, 11:26 AM   #69
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I stumbled into some severance and took a year off when I was 33. Traveled a lot, fortunately got a job when I returned, I'm glad I did it.

I think you should look for an opportunity to take a year off rather than trying an underfunded permanent retirement at 27.

I'm 39 now and would like to take another year off soon. I wish I had done more traveling when I was younger.
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Old 01-16-2011, 07:09 PM   #70
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I didn't get the "locking in a loss" impression from McMillan's textbook.

If you buy the stock and sell calls on it, then you're essentially doing nothing but banking the premium and collecting dividends until the call expires. The calls were sold OTM so were above your purchase price. The collected premium has essentially reduced your cost basis by a buck or two a share. You've capped your upside (if the shares get called away) but I'm not seeing how a loss is locked in.

If the call expires and the stock is still at a loss, then selling OTM calls at less than the original cost basis could lock in a loss-- if the stock was called away. But the owner has a choice whether or not to sell calls at those prices and isn't locked into a loss there either.

We haven't even gotten into rolling the calls forward or groping for other complicated options strategies.

Meanwhile the stock can drop all it wants if the owner can continue to collect dividends and call premiums. But as others have pointed out, the owner has to be right every time-- or the dividend is cut, or they sell a call option too close to the stock's volatility.
Right - I was saying that, once the original calls expire, if the stock is still down and you want to write more calls on it, you will probably have to write them at a strike price lower than your original cost. It's either that, or don't rewrite. Timing this stuff is not easy.

Continuing with the MRK example, it was at 36.95, was paying 0.92 for the April 38 calls, and will throw off 0.38 in dividends between now and April. All together, your true cost is 35.65. The stock is now at 34.23. Oh, and don't forget the stock price will drop when it throws off the dividend, so think of the stock as being at 33.85 right now. That's essentially $2/share under water, and you can't write more calls on it until April (unless you roll them forward).

Say you wait until April - two things happen: 1) The stock has recovered and you're ok. 2) The stock is still around where it is now. Volatility is down since the price hasn't moved much in a few months. Do you choose to rewrite slightly OTM calls and lock in a loss? Or do you wait it out? Either way, you are not getting the 10-20% a year return that was mentioned.

79protons said "The volatility has also gone up because of the drop in price, so now you can write a new call for even more out of the money for close to the same return" - not true. When the stock was at 36.95, the 38 calls were going for 0.92. That's 1.05 out of the money plus 0.92 for the calls (1.97 total). If you look at the current stock and call prices, the stock is at 34.23 and the April 35 is going for ~$1. That's only 1.77 total, which is lower than before even though the volatility is higher.

I am only saying these things because I have tried this strategy plenty of times in the past and it doesn't always work out as well as it sounds.
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Old 01-16-2011, 08:47 PM   #71
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The challenge is getting good prices for the covered calls, as well as not getting eaten alive by short-term taxes.

I'm still looking for a good text or investment book on combining dividend investing with covered calls, but I suspect that it's a pretty narrow niche for a publisher.
I did this last July-Nov (6 month) with about 110K. Return 8K, 14% APR. I eliminated the tax issue by using IRA account. I am sill living from taxable acct. I spent 1-2 hours a day. In small volumes the commision percent is high on options at some brokers. I also tracked the 3 month cycle on ex-div date price changes. My goal was to turn over 15K @ 3%(Div+ option +_ Price) in 60 days 4 times per year. Not sue yet how repeatable this is. I am sure the broker is happy with all the trades. My next goal/guts is to trade in 30K chunks for less watching and trade expense. I am confident I could get 1.5x Div using covered options to reduce risk and increase return.
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Old 01-17-2011, 12:31 AM   #72
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Do you choose to rewrite slightly OTM calls and lock in a loss? Or do you wait it out? Either way, you are not getting the 10-20% a year return that was mentioned.
I am only saying these things because I have tried this strategy plenty of times in the past and it doesn't always work out as well as it sounds.
I agree with the skepticism but you keep using the term "lock in a loss".

Writing a new call after April's expiry will drop the cost basis a tad more, so let's say it went from $33.85 to $33... including possibly another dividend to bring it down to $32.80.

I agree that a snappy recovery in the price could still leave an investor called away below their cost basis. A $35-$36 call also wouldn't bring in much money. However it's far more likely that the stock could flatline for months while investors & management try to figure out what to do. Eventually the dividends and call premiums add up (or the cost basis keeps dropping), so I wouldn't call that "locking in a loss". In fact the trick would be to patiently collect the dividend while not getting greedy-- keeping the calls far enough OTM (10-15%?) and short enough in duration (3-6 months?) to avoid getting called while the share price recovers.

Doing this across 20-30 stocks will "probably" work out to double-digit returns, especially if the stocks are chosen for high dividend and not much growth. But every dividend-stock-picking book I've ever read is almost as focused on a growth in share price as much as in the dividends, so it might not be that easy to screen for.

Doing it in an IRA is a nice touch too. I hear a lot of complaints about the taxes and about the tax returns.

I'm not claiming that it's easy-- in fact I suspect it's at least as much work as angel investing, and perhaps more work because there are so many more apparently tasty candidates. Besides, if it was easy then even Wade Cook & Jim Cramer would be making money at it.

But perhaps the reason it fails is not because it doesn't work-- it might be because it's more work than people are willing to put into it. For a nuke like me, with an extraordinarily high pain tolerance, that's a critical distinction-- especially if most of the work is up front on the stock picking and the rest is just being patient without getting greedy. I don't think it's a method that would get much attention for a Wall Street trader or a hedge-fund manager, either, but it'd work out great for the itty-bitty retail investors. We have plenty of resources to help us pick good dividend-paying stocks. The trick is finding the overlap of stocks with good call premiums.

I'm also encouraged by the lack of books & studies on the concept.

Maybe I should just stop debating the concept on a popular Internet discussion board and go do my own due diligence...
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Old 01-17-2011, 08:17 PM   #73
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I'm not sure why the 7.5% withdrawal rate is being put into question.

I'm saying that I have to earn 9% a year (2.5% inflation) and then take the 7.5% of earnings and that would cover my expenses.

I am not talking about going into the current savings at all.

9% is a high number but I think it's possible to return 9% a year if you pay attention to your finances and take advantage of opportunities.
You are missing the variability of returns which Nords pointed out and which is inherent in the Monte Carlo simulations that you do not like.

No one makes the same return consistently unless they are Bernie Madoff and we know how that worked out

The problem when you are withdrawing is that 3 down years and one big year may equal 9% over 4 years, but the fact that you had losses and living expenses leaves your nest egg smaller than before. Rinse and repeat for a decade with the internet bubble bursting and the financial collapse and you end up lower in value and 10 years behind inflation even though you earned 9%. Or you could have lost 50% and really been screwed

Of course, you could also catch three 30% years in a row to start and be golden. Are you willing to bet your future on what returns will be in the next 5 years? Best to have enough money to ride out the variability.
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Old 02-21-2011, 01:43 PM   #74
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Gave notice today

I gave my notice today at work.

I'm not quiet at the FIRE stage but I think I'm going to take a few months to decide what I want to do next.

I think I'm going to try and live the FIRE life a bit.

A bit nervous but also excited.
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Old 02-21-2011, 01:57 PM   #75
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Good luck Banker!
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Old 02-21-2011, 08:26 PM   #76
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I gave my notice today at work.
I'm not quiet at the FIRE stage but I think I'm going to take a few months to decide what I want to do next.
I think I'm going to try and live the FIRE life a bit.
A bit nervous but also excited.
Congratulations... this is a great opportunity.

The "fog of work"
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Old 02-24-2011, 04:51 AM   #77
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Congrats and enjoy!
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Old 02-27-2011, 12:32 PM   #78
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Lots of great advice here - I would also vote for a year off or so and then a re-entry into the workforce. I work for an enormous company and have for years been suggesting they add a "sabbatical" benefit of some sort - six paid months off every ten years or so for professionals at a certain level over and above normal vacation benefits. I would think it would be a great tool for retention. Can you imagine leaving a job knowing you were just a year or two away from 6 months of paid leave? What a great opportunity to clear your mind.

As some other folks have said, re-entering the workforce in mid-life can be a ticket to starting over at the bottom. The reason you see people in their 40s and 50s making the big bucks is they have had years and years of experience in the same field. Many companies will pay experienced people double what they pay inexperienced people to do the same job.
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Old 02-28-2011, 07:23 AM   #79
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Thanks for all the well wishes.

I am also thinking about business school, but I feel like that may just delay my FIRE. If I spend $100,000 on business school it will require more years to make that money back.
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Old 03-11-2011, 12:43 PM   #80
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Im in a similar age / $ situation as you are and have had similar thoughts. However, I would never think of going back to school, the implied costs are to great if your goal is retirement. Personally my plan is to grind it out for another 5 years before heading to a part time gig -- or maybe even just switch to part time work. If I can work part time and make 25K a year that could give me the freedom I need, subsidise my health insurance and still allow my nest egg to grow.
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