Writing covered calls

[ERD50]

And if there's more people and funds selling calls, someone has to buy them.

Well, I don't have any facts on this either - too hard to come by, and I'm not sure how to use them if I had them, but....

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

-ERD50

 

[FinanceDude]

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

So after transaction costs, how much can you make??

 

[ERD50]

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

Ok, for the positives on the 'Kim method':

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

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

http://www.kimsnider.com/reports/Closed_Positions_200609.pdf

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

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

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

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

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

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

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

-ERD50

 

[whitestick]

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

.....

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

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

...

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

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

 

[ERD50]

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

Wow, that is some prescription you have for 'rose-colored-glasses' ??!!!

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

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

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

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

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

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

You can read her patent application here:

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

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

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

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

-ERD50

 

[ERD50]

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

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

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

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

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

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

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

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

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

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

-ERD50

 

[whitestick]

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

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

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

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

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

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

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

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

-ERD50

 

[ERD50]

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

As it should be, your yield is based on the amount invested.

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

When the price returns to a point that you can sell for more then your average price, you close/get called away, and calculate the yield as above.

I consider this too rosy. So, take a look at the stocks that were being traded on this system back in Jan-March 2000 (you would not need complete records for this) - see how many of them dropped and never returned. Again, I am more than a little suspicious that Kim is 'unable' to provide data for the down years.

To add to your calculations, you would add in somewhere around 15 -20 positions carried at one time, to exacerbate the problem, or dilute the odds, depending on which side you are standing.

Diversification is good - it does not strictly change the odds, but would smooth out the data. Individual investors absolutely need diversification.

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

Let's not forget some others that met that criteria as well - Kenneth Lay, Ken Skilling, Charles Keating, the accounting firm of Arthur Anderson, and other mainstream (at the time) leaders.
and some interesting reading http://en.wikipedia.org/wiki/Mutual-fund_scandal_(2003)

I don't see Vanguard or Fidelity in that list.

It's so boring talking with the alum from her plan, as they only have positive things to say.

Have you run into any alumni that were using the system in 2000, 2001 and 2002? And if you do, to eliminate survivorship bias, find out how many fellow alumni they have kept in contact with over the years - just the 'lucky ones'? That would be enlightening.

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

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

-ERD50

 

[FIRE'd@51]

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

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

Loss on stock = 100 - 90 = 10

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

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

 

[ERD50]

This is why, as ERD50 says, you have to mark the whole portfolio (including the stock) to market each month, so you know what's really going on. You took in a lot of premium, but you are sitting there with a substantial unrealized loss in the stock.

As a point of reference, I selected this from Vanguard's 'Junk Bond' fund prospectus. Yield is always positive, Total Return is variable, sometimes negative. Their charts focus on total return.

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

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

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

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

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

* Ratio of Net Investment Income to Average Net Assets

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

The[/url] Snider Investment Method is a synthetic bond strategy. The Snider Investment Method combines stock and options together in a very specific sequence that causes them to mimic the most desirable characteristics of an investment grade corporate bond while improving on the undesirable characteristics.

I'd bet, if you tracked the actual NAV of a snider portfolio month-to-month, it would be much more volatile than an 'investment grade corporate bond' fund. That Vanguard fund above is below investment grade, but yet, the NAV has only dropped 15% from it's peak to it's low over that time.

-ERD50

 

[whitestick]

Let's say you buy a stock at 100 and write a one-month at-the-money call at 3. Stock drops to 90 and call expires worthless. Now, what do you do?

And that's for sure where I would cross the line in explaining her Method. As a strong suggestion, to keep me from sounding like a shill salesman troll, she offers and recommends going to her free sessions to hear her explain and answer questions that you would have. You will also meet some of the graduates, as generally there are some different ones that show up each time for the free food to explain their results. She has one of those sessions monthly in Dallas, Frisco TX, and Arizona (forget the city but it's on her website. She also has an evening question and answer on line meeting, but I'm not sure if that is for grads or non-grads, I just haven't gone to that one. As ERD50 has done, she also has info on her website.
There, that should get me out of the line of fire, I hope.

 

[preben]

Whitestick; I think you are overly protective as to the "secrets" of her methods - after one have sold, I guess one then does another screening where one "filters" out the baddies and find another "goodie"?

I am considering dabbling in this a bit myself - but wants to learn more first - sofar I am not convinced though... - but will do more research.

CHeers!

 

[ERD50]

Let's say you buy a stock at 100 and write a one-month at-the-money call at 3. Stock drops to 90 and call expires worthless. Now, what do you do?

And that's for sure where I would cross the line in explaining her Method. .......

Whitestick; I think you are overly protective as to the "secrets" of her methods - after one have sold,

Well, I didn't take the course, so I can't violate any secrets (since I don't know them), but I think I understand fairly well what would be done in this case, and a glance at the patent application seems to confirm this-

A) It sounds like some averaging down occurs - buy more at the lower price. How much to buy and at what points are probably part of the 'secret'.

B) Sell calls against either that lower average price, or against some specific shares or group of shares and let the others ride for the month.

The really 'interesting' part, is that while the stock is dropping, there does not appear to be any calculation or admission of the loss. Everything is stated in terms of 'income' (yield). And this is where IMO, clients are being badly misled. If you look only at the income stream (the option premiums), well, of course it is always positive - it really can't be anything but positive (just like dividends from a bond). With this same line of thinking, Vanguard could claim that their junk bond fund has never had a down year - they always produced 'income' - but they don't do that, and, legally, they cannot do that. Kim has no such restrictions as I understand it, as a 'publisher' she is not held to SEC accounting rules.

Income is counted, but, stock loses are just carried forward with the hope that they become gains or small loses. Now, often times, that will happen. And the combination of focusing on income, and keeping loses 'unrealized' for as long as possible, can lull these types of players into a false sense of security. But what happens in an extended down market?

Kim does not seem to want to share performance numbers for a down market (or total returns), even though the system was being taught and used in the 2000-2002 down market.

But, that does not seem to worry whitestick - I wonder why? Shouldn't an investor be concerned about the risks of their investment technique?

Again, just my opinion, but the strategy sure looks like a basic covered call plan to me. Sure, she wraps all these specific rules on how to select stocks, and how to 'bundle' the dropping stocks and all. That appears to me as just window dressing to justify $3175 for the info. Does any of that actually reduce the risk or improve the total return (of course, total return is not in her vocabulary)?

I'll follow up with a simple example a bit later.

-ERD50

 

[ERD50]

I am considering dabbling in this a bit myself - but wants to learn more first - sofar I am not convinced though... - but will do more research.

ben - here is a simple example, and will show how you can derive a steady income stream while losing real money(!):

OK, so looking at the patent app, Kim says to sell a covered call at the next strike price above the stock price.

BTW, this has been done before - you don't need to pay to learn it, here is some history:

http://en.wikipedia.org/wiki/CBOE_S&P_500_BuyWrite_Index_(BXM)

So, for example, let's look at the QQQQ index this morning (Dec 15, 2006). QQQQ is at $44.61. The next month out call at the next higher strike is the Jan 07, $45 strike (QQQAS). You could get $0.65 for that call. So, here are the numbers:

Buy QQQQ @ $44.61
Sell QQQAS @ $0.65

Total out-of-pocket = $43.96 (ignoring comm/fees)

'Yield' from sale of call: 1.4786 % (.65/43.96)
'Annualized Yield': ~ 15.4% ( figuring 35 days holding period)

See how easy it is to make 15% annualized yield - even when the stock is flat?

Now, if QQQQ is above 45 on Jan 19, 2007, you keep your $0.65, and your stock is called from you, you realize an added $0.39 gain.

Total profit = $1.04; % gain = 2.366%; Annualized gain = 24.67% !!!!

Pretty sweet - right? See how easy! Of course, if QQQQ drops to 43, you have a loss of $0.96; -2.18%; -22.77% annualized loss. But, this is not the accounting that Kim appears to use - she says you just made a positive 15.4% annualized yield that month - 'unrealized losses' are 'old school' thinking!

And, if you did this in March 2000, you would have sold a call on QQQQ at around 120. Averaging down over the next year would have just resulted in additional loses. It would be tough to earn much premium on your original $120 investment, with the stock below $40 most of the past six years! And it looks like a long, long time before we will see QQQQ at 120 again.

http://ichart.finance.yahoo.com/z?s=QQQQ&t=my&q=l&l=off&z=m&a=v&p=s

Now, whitestick may say that there are all sorts of details in Kim's method that would save us from such a downturn. Fine. One simple question then:

If her stock selection and other methods help prevent against loss, why does she not publish total return data (which should look good), or data in a down market?

Oh, and ben, if you are interested, I could describe a system that I have been using. It might actually act more like a 'synthetic bond' than the SIM method, I don't know. But I tend to sell calls below the stock price to gain some additional downside protection, and make me less sensitive to small moves in stock price.

I can't really know how well it will work in all markets - you are still somewhat dependent upon stock price movement and stock selection. And your trade off is that you cap your gains to the call premiums ( 2-3% per month, depending on how much risk you want to take). But, I do measure my total return each month. And I won't charge you for the information.

-ERD50

 

[whitestick]

Well, I didn't take the course, so I can't violate any secrets (since I don't know them), but I think I understand fairly well what would be done in this case, and a glance at the patent application seems to confirm this-
.....
There is a requirement when you take the course that you sign a non-disclosure regarding the "inner" workings of the system to protect her patent, I suppose. That's why I may appear to be overprotective. It seems that you have read the published parts of her patent application, and have a fairly good understanding of what is there, as far as what is published.

But, that does not seem to worry whitestick - I wonder why? Shouldn't an investor be concerned about the risks of their investment technique?

Absolutely concerned, and the proof so far - an I stress so far, YRMV, is that it is as safe as or safer then any other investment in the stock market. Everyone that I talk to that has taking the course and gone on to make their living off of it, has started slow and cautiously, feeling their way, and confirming the results. As the results confirm her story, they add to their total funds invested. I suppose that the worry disappears over time, as demonstrated results are consistently happening. And, I stress, that it is easy enough that the wife or SO can pick it up and continue on achieving the same results. Sort of like the way that a Mac is easier to use then a PC, but there are millions of PC users willing to continue using their PC because that's what they know.

Again, just my opinion, but the strategy sure looks like a basic covered call plan to me. Sure, she wraps all these specific rules on how to select stocks, and how to 'bundle' the dropping stocks and all. That appears to me as just window dressing to justify $3175 for the info. Does any of that actually reduce the risk or improve the total return (of course, total return is not in her vocabulary)?

My results were that within 3 months, on an initial allotment of $27,000, just what I had, I paid for the course for me and my DW to take the course. Now there is a greatly reduced fee for your spouse to take it at the same time, but nevertheless, that was my results. Given that I wasn't getting close to that for the same investment in growth funds, I believe that is justified. IMHO. My friend that told me about the course, had a similar result, from a year before me. It took him that long to talk me into even going to listen to her free sessions, and I had to do that twice, before I was willing to commit to paying that price to take her class. That's why this discussion reminds me of my objections when my friend told me about it.

 

[bosco]

Whitestick, have you read

"Fooled by Randomness" by Nassim Nichales Taleb?

It discusses the concept of risk and how people's perception of it is warped by how we are wired psychologically and by our recent "wins" in the market. In particular, it talks about traders who use strategies that seem low risk to them, but are particularly vulnerable to "black swan" events. Your strategy seems on the surface (although I'm no expert on it) to be a risky one, and the "accounting" procedures seem designed to minimize the perception of risk.

Personally, if I had as much invested in the type of strategy you describe, I would give it a read. It's very entertaining in any event, even if it isn't applicable to your case

 

[ERD50]

Whitestick, have you read

"Fooled by Randomness" by Nassim Nichales Taleb?

bosco, I did read it this year - an excellent read, I also highly recc it. It made me think over my own strategies a bit more critically. I doubt that it is on Kim's 'recc reading list'.

BTW, I don't necessarily agree with all Taleb says - but there is so much value in this book. Another good one is 'Against the Gods: The Remarkable Story of Risk' by Peter L. Bernstein

What if I got hit by a 'black swan' event (the rare, unforeseen events that *do* occur from time to time)? Sure, the odds are, by definition, slim - but cannot be ignored. What if I wiped out a big part of my portfolio, what would I do? That is where diversification comes into play, but consider this:

The Nasdaq 100 (QQQQ), a basket of 100 stocks - dropped from 115 to 20 (an 82% drop in value!) from 2000 to 2002 and spent most of the next 4 years under 40 (less than 35% of it's 115 value). That really got me concerned about holding a basket of 10 to 20 stocks - no matter the selection process. Over my lifetime, could I get hit by a 'black swan' and see even more than an 82% drop - I just cannot rule that out after reading Taleb's book. It really does make you think.

whitestick - take a look at the stocks in Kim's performance data (or your own current basket). What percentage are components of the NASDAQ 100 or other highly volatile index? Or, if they were around in 2000 - how did they weather the storm? What could happen in a future down market?

-ERD50

PS to whitestick - I will answer your other comments a bit later - thanks

 

[Alex]

Here's my two cents and for what it is worth, I hold a series 3 license and have extensive experience trading futures and options:

(steps up to the soapbox)

"this is a scam. You'll go broke doing this crap. If you want to gamble go to vegas"

(leaves soapbox)

whatever you gamblers decide to do, I wish you the best of luck. Just remember that is all it is, luck.

 

[ERD50]

ERD50: Shouldn't an investor be concerned about the risks of their investment technique?

whitestick: Absolutely concerned, and the proof so far - an I stress so far, YRMV, is that it is as safe as or safer then any other investment in the stock market.

And the problem with that statement is (of course).... you have been using the method in an UP MARKET. So, you really don't know if it is 'safer then any other investment in the stock market', do you?. And Kim (how many times have I said this, and you will not address it) offers no data on how it performed in the down market of 2000-2002. Worse yet, she speaks out of both sides of her mouth on the subject:

on one page of her web site, she gives the impression that the method works in up and down markets:

The alternative was to use what I knew to engineer an alternative method that would make money in all market conditions.

but then we find:

I began teaching the Snider Investment Method in 1999 and had students who were using it, as was I, during the period 2001 and 2002 when the market was falling. We cannot, however, publish that data because it is incomplete.

How convenient to give the impression that the system works in down markets, but not be willing to present data for that time frame.

Her 'comparisons' to other investments are always Apples-to-Oranges. SIM 'yield' against stock market total returns; SIM 'yield' compared to average bond 'yield' - w/o 'total return ' data - ignoring that stocks you are holding have more downside risk than the bonds she compares them to. This is like saying junk bonds are 'better' and 'safer' than investor grade bonds, because their 'yield' is higher. No snake oil there? Really? Really?

If Kim's stock selection and method work so well, she would be publishing total returns - not just yield. OK, so she says you may need to hold a stock for two years, so, after two years, the total return should be looking just dandy. So why, even in an up market, does she NOT present 'total return' data for 2002-2005?

Please understand, I truly believe her method would provide attractive returns in an up market - what I don't like, is both you and her dismiss the risk during a down market, focusing only on 'yield'. Very, very misleading (I am being kind when I say that).

ERD50 - Does any of that (her methods) actually reduce the risk or improve the total return (of course, total return is not in her vocabulary)?

No answer from whitestick on this. I would really like to hear an opinion on it.

Have you met any of those alumni from 2000?

BTW, I was wrong about an earlier assumption I made - Kim actually does have 'Fooled by Randomness' on her reading list! How ironic.

-ERD50

 

[whitestick]

Whitestick, have you read

"Fooled by Randomness" by Nassim Nichales Taleb?

Have not, but will look for it on Amazon (used in paperback of course to save shekals)

 

[whitestick]

And Kim (how many times have I said this, and you will not address it) offers no data on how it performed in the down market of 2000-2002. Worse yet, she speaks out of both sides of her mouth on the subject:
....
No answer from whitestick on this. I would really like to hear an opinion on it.

Have you met any of those alumni from 2000?
-ERD50

Ok, I was waiting to get an answer from Kim, herself, as I obviously was not trading back in that 2000-02 period. Here is her reply
"Bill-

I don’t have an answer for him. We cannot publish any performance data from that time period because it does not meet regulatory requirements. I can tell him our performance was good during that period of time, as good or better than it is now, but I can’t give him any empirical data.

We have graduates from that time frame that would be more than happy to talk with him. One you know is xxxx from the cruise. We have a couple others as well. I would be happy to forward names and phone numbers so you can pass them on.

Warmest Regards,
Kim"
Ok, it may not be the answer you want, but at least it is the answer from Kim. As to the name removed, I will contact him, and see if he wants to offer his experience, or maybe even join the group. I'll probably ask the others as well, just to drive home the response from more then one source.
Which also answers partially your question about having met these alumni from that period. i have met him, and others, although generically speaking, none of the folks that I have met, say that it is a problem, and their comments are that it doesn't make any difference - they see the same results. Which is consistent with Kim's story.

[/quote]
ERD50 - Does any of that (her methods) actually reduce the risk or improve the total return (of course, total return is not in her vocabulary)?[/quote]

(Hope that worked to paste in. Guess not. Not sure how to paste in quotes from other posts.)
Her methods and selection process, appear to me, to be very conservative within the idea of options trading. As I think I mentioned before, her response to most of the alumni's questions about modifying a little bit for more income, is that "to maintain a risk profile that produces consistent results, go back to the book and reread the item being questioned, and follow the book". I believe that it does reduce the risk, and improve the "yield". i don't compare to the total return either, as I haven't tracked that. Her method provides the forms to track each positions yield when closed, and that is what I have been using. She does provide a monthly snapshot form, to look at total performance for all positions (something that seems close to what you are asking for), but honestly, after going through all the calculations to show that it was positive, I saw little value in keeping that up, so quit doing that. I take a mental snapshot (I know - bad form) that shows increasing values of total portfolio as positions close and others are added, and that gives me the same "warm and fuzzy". Probably not empirical enough for what you are asking, but that's what I do.

Re: the Fooled by Randomness book, I have not read it personally yet, but from the statements made here, and the assumption you can make from it's title - Kim quotes quite a lot of what I believe to be the same thing - Make decisions on numbers, not emotion, etc.

[/quote]
whitestick - take a look at the stocks in Kim's performance data (or your own current basket). What percentage are components of the NASDAQ 100 or other highly volatile index? Or, if they were around in 2000 - how did they weather the storm? What could happen in a future down market?
[/quote]

In my current basket, with the exception of 1, which is only there because I transferred it in from another account when I was finally able to close that account, and haven't sold it yet - waiting to be called away, none of the others are in the NASDAQ 100. Hadn't really looked at Kim's data. I did have a couple of the stocks in the 100 in past positions, but they were called away, and didn't meet the criteria to rebuy them since that time, at the times that I did my trading. As to how they weather the storm, that's where her method differs, from conventional capital appreciation valuation. It doesn't matter, as you are still collecting the income on average, and somewhat unconcerned about their actual selling price. It does even out, which is why she recommends the two year period. Actually she shows how to continue to draw off the money even before the two year period, but that is not on her web site, and I don't want to get into that at all, since I'm staying more conservative then that.
Hope all this helps. You've made me go searching for more answers to your questions then even I had originally.

 

[Nords]

I don’t have an answer for him. We cannot publish any performance data from that time period because it does not meet regulatory requirements.

I bet copies of her Schedules D would meet these alleged "regulatory requirements".

I must admit, though, that I'm impressed by her use of weasel words. She makes Kiyosaki look like a stuttering amateur...

 

[ERD50]

whitestick Today at 02:50:21 AM

RE: performance data in a down market

I don’t have an answer for him. We cannot publish any performance data from that time period because it does not meet regulatory requirements. I can tell him our performance was good during that period of time, as good or better than it is now, but I can’t give him any empirical data.

This looks like more double-speak to me ('weasel words' as Nords says ). Does the data she presents for the up market time frame meet 'regulatory requirements'? We are just supposed to 'trust her' that the down market 'performance' was 'good or better'? Trust but verify, I say.

And further - 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 appears to me that she hides under 'regulatory requirements' when it comes to reporting in a down market, but ignores those same 'regulatory requirements' (which, I believe, include reporting 'total returns') for reporting in an up market. Curious?

I think this quote from her legal page is 'interesting', no mention of meeting 'regulatory requirements' that I could find:

Legal Information

This information is solely for the purposes of soliciting workshop attendees for Kim Snider Financial Communications. Some testimonials from alumni of the workshop give their individual performance results. We have not verified these results.

Now *that*, I believe to be true! So, she can't produce numbers for 2000-2002 because they cannot be verified? But, it is OK to present select individual performance results, even though "we have not verified these results"? Double-speak? Double-standard? Or worse?

We have graduates from that time frame that would be more than happy to talk with him. .... Warmest Regards, Kim

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.

- Does any of that (her methods) actually reduce the risk or improve the total return (of course, total return is not in her vocabulary)?

I believe that it does reduce the risk, and improve the "yield". i don't compare to the total return either, as I haven't tracked that.

Then - how DO you measure 'risk' - how can you say it reduces 'risk' w/o any definition of risk? You def need to read 'Fooled by Randomness'!

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.

As to how they weather the storm, that's where her method differs, from conventional capital appreciation valuation. It doesn't matter, as you are still collecting the income on average, and somewhat unconcerned about their actual selling price. It does even out, which is why she recommends the two year period.

This is also double-speak. 'It doesn't matter', but, 'it does even out'? Why do you care, or even mention that it 'evens out' if it 'does not matter'? And if this is true, a 'total return' number would show it (within two years, to be generous). But, Kim does not publish 'total return' numbers. Even though, that *is* a regulatory requirement for the mutual funds that she mocks on her web site. She can't be held to the same standard?

IMO, the reason that 'her method differs, from conventional capital appreciation valuation', is that is a distraction to present her method in the best light for as long as possible, to build up client's 'confidence' in the system, w/o regard to 'regulatory requirements'.

1) Delay the accounting of losses,
2) focus on yields (by definition - positive),
3) no definition or measurement of risk,
4) no data for down markets,
5) compares the positives of the 'system' to the negatives of other investments (instead of apples-apples)
6) No data on volatility of the NAV of a portfolio

- it all adds up to....

I'll let the reader decide, but there is a clue in my earlier use of the word 'confidence'.

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

 

[haha]

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

 

[ERD50]

whatever you gamblers decide to do, I wish you the best of luck. Just remember that is all it is, luck.

Awwww, come on Alex - what do you mean by 'gamblers' and 'luck' - what does gambling and luck have to do with charging >$3000 for a two day workshop?

Oh, you mean the clients will need luck?

Seriously, I do believe that there is *some* profit to be made selling options. It makes sense to me that there must be some premium there to compensate the seller for taking the risk. And yes, I recognize the risk of holding a stock with a covered call, or having to commit $ for a stock put on you with a naked put. It seems a premium is needed to 'make the market'.

Now, can an individual take advantage of that, or is the premium too small to outweigh the individual stock and general market risk? That I do not know - but I don't suspect that there is very much excess premium there, no 'killing' to be made.

I have also studied all sorts of 'conservative' options approaches. From what I can tell, any way you wrap it up, it all comes down to that premium for taking the risk. All the complications in the world don't alter that equation. But, often, the complications make the approach seem like more than it is.

It's kind of like a perpetual motion machine - no matter how you convert that energy, it all gets used up. There is only so much (if any) excess premium - no one is giving away any more than they need to in order to place their 'bet'.

-ERD50