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Old 09-19-2015, 02:06 PM   #641
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You take the $1,000,000 in the IRA and sell 60 September 2016 $SPY call contracts at Friday’s closing bid price of 33.55, simultaneously buying 6,000 shares of the $SPY ETF at Friday’s closing ask price of 192.59. If the S&P remains above 1650 at expiration, the calls will be executed, your shares will be sold away, and your one-year return will be 6.05%, or $60,500. That includes $SPY’s ~$4.00 annual dividend...
Or here's how I see it, ignoring transaction costs.

Start with $1M. Sell 6000 calls (60 contracts) at $33.55 = $201,300. You now have $1,201,300.

Buy 6000 SPYs at $192.59 = $1,155,540, leaving you with $45,760 cash.

The S&P most likely stays above 1677.5, which corresponds to SPY at 165. Your calls get exercised.

You get 6000 x $165 = $990,000, plus the $45,760 cash, plus the dividend $4.03 x 6000 = $24,180, for a total of $1,059,940.

That's a 6% return over the original $1M.

PS. Because this is a deep-in-the-money call, it may be assigned early. Then, you do not get the dividend, and only get as little as $990,000+$45,760 = $1,035,760. But then, it's 3.5% return over a time period shorter than 1 year.
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Old 09-19-2015, 02:21 PM   #642
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By the way, the above is a good example showing options can be used to make a very conservative strategy, instead of a leveraged bet that can cost you more than what you put down. Options are just a tool, and can be used in many ways.

In essence, you are willing to give up the potential of a big win in exchange for a smaller but surer gain. It all makes sense.
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Old 09-19-2015, 02:26 PM   #643
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Now it's starting to be an equity-indexed annuity. How to Build Your Own Annuity
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Old 09-19-2015, 02:31 PM   #644
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You guys are showing returns for a covered call strategy. The article shows returns for selling puts and I dont see how he calculates those returns.
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Old 09-19-2015, 02:33 PM   #645
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Now it's starting to be an equity-indexed annuity. How to Build Your Own Annuity
That's exactly what his strategy is, but the beauty of it is that youre not locked into it for life like you are with an annuity. Its year by year (and you could actually get out anytime you want if you close the positions early)....and there are no exorbitant fees
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Old 09-19-2015, 03:56 PM   #646
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You guys are showing returns for a covered call strategy. The article shows returns for selling puts and I dont see how he calculates those returns.
Hes decided that its not a good idea to sell puts in an IRA so his example IS selling calls.
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Old 09-19-2015, 04:02 PM   #647
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+1

But in a table, he shows the 165 SPY put as having a return of 5.33%. This put has a bid of $8.79, and 8.79/165 = 5.33%. This is because he keeps the $165 cash to back up his option, else it would be a leveraged bet. It is also how I would compute the return of a put.
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Old 09-19-2015, 05:32 PM   #648
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+1

But in a table, he shows the 165 SPY put as having a return of 5.33%. This put has a bid of $8.79, and 8.79/165 = 5.33%. This is because he keeps the $165 cash to back up his option, else it would be a leveraged bet. It is also how I would compute the return of a put.
OK, now I get it. Like I said, there are lots of different way to figure returns when you are shorting something. This is a method I haven't seen before, but it makes sense for what hes trying to accomplish.
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Old 09-20-2015, 06:35 PM   #649
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Heres another question for you smart guys. Im thinking of his idea of selling the 135 calls as part of my fixed income portfolio. In other words I sell some covered calls and get the 4% per year. The only way this can go bad is if the SPY goes below 1350. However, if the SPY went below 1350 I would be rebalancing out of fixed income and into stocks anyway. The market would have to fall over 30% for that to happen, and in a 50/50 portfolio I would be selling about about 15% of my FI and buying stocks. So Im wondering if alloting 15% of my present FI to this idea is a no brainer here.

Can you guys punch holes in this?

Thanks
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Old 09-20-2015, 07:06 PM   #650
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Heres another question for you smart guys. Im thinking of his idea of selling the 135 calls as part of my fixed income portfolio. In other words I sell some covered calls and get the 4% per year. The only way this can go bad is if the SPY goes below 1350. However, if the SPY went below 1350 I would be rebalancing out of fixed income and into stocks anyway. The market would have to fall over 30% for that to happen, and in a 50/50 portfolio I would be selling about about 15% of my FI and buying stocks. So Im wondering if alloting 15% of my present FI to this idea is a no brainer here.

Can you guys punch holes in this?

Thanks
Actually SP500 has to fall 30% plus the 4% premium you will bring in, or 34% before you lose any money. How many times has the SP500 dropped more than 34% in a one year period? I'm guessing 3-4 times in the last 100 years?

If it drops 50% which I think has happened twice ever....you lose 16%. If you do this with 15% of your portfolio, you will only lose 2.4% of your portfolio in this once in a lifetime scenario.

Basically you will make 4% almost every year.

If you make 4% 49 years and then lose 16% one year, you have an avg return of 3.6%.

Of course you aren't limited to the 135 and 165 strikes that the author mentions. You can use any strike you want which of course changes your return and risk.

If I was going to do this I would adjust my strike based on how the SP500 was doing at the time you were starting (or the time your option expired and you were starting a new cycle). Since the Sp500 is already down about 10% from its high right now, I would adjust my strike upwards towards 145 or so giving me a better return for this cycle.
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Old 09-20-2015, 09:01 PM   #651
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One can try to sell those calls, but who would pay 4% premium to buy them? I didn't look, but when I did options in the past, volume could be zero and open interest could be 0 for things that were too good to be true.

That is, you cannot use any strike you want because somebody else has to want it and pay for it, too.
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Old 09-20-2015, 09:04 PM   #652
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One can try to sell those calls, but who would pay 4% premium to buy them? I didn't look, but when I did options in the past, volume could be zero and open interest could be 0 for things that were too good to be true.

That is, you cannot use any strike you want because somebody else has to want it and pay for it, too.
Open interest in the Sept'16 135 puts is 993 contracts. Its 8195 for the 150s. Lots of people pay premium to hedge their portfolios. There is zero open interest for the calls. I don't trade covered calls. I sell puts instead. The profit profile is the same but the puts are normally priced higher.
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Old 09-20-2015, 09:07 PM   #653
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One can try to sell those calls, but who would pay 4% premium to buy them? I didn't look, but when I did options in the past, volume could be zero and open interest could be 0 for things that were too good to be true.

That is, you cannot use any strike you want because somebody else has to want it and pay for it, too.

I did the calculation today using Friday's bid/ask prices. They were a little less than the original article due to the fact (I assume) that the vix is lower at 21 than when he wrote the article at 27, but very close. This also makes the point that it's best to place this bet when the vix is higher.


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Old 09-20-2015, 09:14 PM   #654
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Options on individual stocks may be very thinly traded, particularly of smaller companies.

However, options on the S&P can have huge volumes. I just looked and at some strike price, there's nearly 100,000 contracts out. That's 100,000 contracts x 100 shares/contracts x $190/shares = $1.9 billion worth, just at one price.

But then, the market value of all S&P 500 stocks is near $20 trillion, so the total option values may be just a few percent of the assets. I guess institutional investors use them to hedge.
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Old 09-20-2015, 09:37 PM   #655
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However, options on the S&P can have huge volumes.
Of course there are popular options. I'm saying that it would be unlikely that someone would pay you a lot of money for an improbable event. They might pay you a little bit of money for something that was unlikely to happen.

So when when the trade is made, let us know.
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Old 09-20-2015, 10:29 PM   #656
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Hold on. Let's get this right.

The author of the article shows only 1% as coming from the call premium. The other 3% comes from the S&P dividend plus the effect of reinvestment of the call proceed.

And at the bid/ask price quote, one can usually have an order of a few contracts filled. I have never done as many as 60 contracts of a stock worth $190/shares (million dollar worth!), so do not how deep the queue is. Perhaps one needs some time to build that position. But as I showed, some strike prices already had 100,000 contracts outstanding.
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Old 09-21-2015, 07:23 AM   #657
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This is how I see it:


Outlay:

1155540
- 201300
=====
$954240

Money Back:

990000 Stock at 1650
+24000 Dividends
=====
1014000


Total Return = 1014000 - 954240 = 59670
% return = 59670/954240 = 6.26
Can you explain this in detail? I always sell puts, not covered calls so I dont understand where these numbers are coming from.

Hes buying 100 shares at 195 and then selling a 165 call for 60? (round numbers) I dont understand his, or your, numbers.
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Old 09-21-2015, 07:34 AM   #658
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Sure. Hope this explains it better.

Hes buying 6000 shares of SPY and selling 60 calls at 165 strike price.



Outlay:

1155540 this is the cost of 6000 shares of SPY
- 201300 this is what he gets from selling the 60 calls
=====
$954240 total cost of doing both trades

Money Back:

990000 Stock at 1650 Expiration day value of the 6000 shares
+24000 Dividends Dividends he received during the year
=====
1014000
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Old 09-21-2015, 07:47 AM   #659
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Heres an example of the 135 calls from Fridays prices



Fridays close of SPY = 195.45
Bid price of the 135 calls = 62

1172700 this is the cost of 6000 shares of SPY
-372000 this is what he gets from selling the 60 calls
=====
$800700 total cost of doing both trades

Money Back:

810000 Expiration day value of the 6000 shares at 135
+24000 Dividends Dividends he received during the year
=====
$834000

Profit = 834000 - 800700 = 33300.
%profit = 33300/800700 = 4.159%
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Old 09-21-2015, 08:30 AM   #660
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Sure. Hope this explains it better.

Hes buying 6000 shares of SPY and selling 60 calls at 165 strike price.



Outlay:

1155540 this is the cost of 6000 shares of SPY
- 201300 this is what he gets from selling the 60 calls
=====
$954240 total cost of doing both trades

Money Back:

990000 Stock at 1650 Expiration day value of the 6000 shares
+24000 Dividends &nbspividends he received during the year
=====
1014000
OK, I dont get 6% return from this. He's calculating his return based on a starting value of $954,240, when his actual starting value is $1,115,540 which he doesn't have. He only has $1,000,000. Since this is an IRA he cant go on margin to buy the 6000 shares. So he would have to buy slightly less shares and sell slightly less calls. In the end his return is going to be closer to 5.2%

Also, there's a very high probability that the calls with get exercised early so the divdends are going to be hard to collect. I know he knows that, but it will happen a lot.

That's one of the many reasons I prefer selling puts.
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