Writing covered calls

[brewer12345]

I write the occasional covered call, mostly on stocks I already own and am edging towards selling. I wouldn't be eager to buy something just to write calls on it, though.

Perhaps an example would prove worthwhile. Two weeks ago, I wrote December 40 calls on PLMD for $1.20 a pop. The stock was at 39.50 when I wrote the calls. I bought the stock a few years ago at roughly $8 a share when they got in trouble with Medicare and the stock crashed. I think they have a solid business long term and good growth potential, but I don't think much will happen between now and the end of the year, and the call premium was pretty fat. If it gets called away, I will look to buy back some stock on the next dip (volatile company), maybe around 36. If it doesn't get called away, I will pocket the $1.20 a share and hang around, since I believe in the business long term.

I also trade long calls for speculative purposes because I can make a bet in size while risking a small amount of principal. And I buy index puts from time to time as a hedge. But every dollar you spend on options should be money you fully expect to lose.

 

[ERD50]

... the ones that go down, you keep selling against the lower prices, and eventually when they go back up (and with a modicum of filtering), they usually all go back up, then you sell them, or not, at the strike price above your average overall cost, and add up all the option premiums and the gain on the stock and calculate your results. ...

It's good this has been working for you, but I don't think it is reasonable to expect them all to 'eventually go up'. Keep buying stocks long enough and you will have some stinkers in the group. It is unavoidable. Esp with volatile stocks that pay the 5% one month premiums they talk about on that infomercial.

What is this 'filtering' you mention?

Your losers have gone up, and at a profit when you include the premiums - all well and good. My problem is with the people who are unwilling to count the down stocks until they close them out. At any point in time, they should be counted to see what your overall return is. If they continue to close at a profit, that will keep building your returns, but it is not right to just not count them until then. Example:

One month you buy 10, $100 stocks and write one month calls against them at $5 each.

At the close of the contract, say 9 stocks are still at $100. You pocket 9 x $5 = $45.

But, one stock drops to $50. You pocket $5, but on that date, you are down $50 on the stock. So, -$50 + $5 premium = -$45.

Your net return on the position on that date is ZERO. But, if you don't count the loser, your gain is $45 (or $50?). If next month, the stock comes back, and you close it at a profit, fine, do the same cumulative calculation and you will show a profit. That way, each month your calculations are based on the entire position, and can be compared. I think the proper accounting term would be to look at your 'liquidation value'. Anything else is really an attempt to predict a future profit, and that can't be done, and certainly does not compare to how mutual funds report. Their returns include the NAV of all holdings, not just the gains on the ones they sold.

-ERD50

 

[whitestick]

Sorry, I just realized that I didn't answer your question about the filtering. It is, unfortunately, the copywrited portion of the system that I paid the money for, and of course, they would not, as you expect, want me to put that out in the public domain. Before you jump me, the system is not the 5% one that a lot of the infomercials represent, and I have no affiliation with it other then have taken the class, do the homework (about 2 hours per month), and follow the system. It has no recurring revenue stream to the author, and she insists that you are the one most concerned about your money, so you should be knowledgeable in the decision making and manageing of your money (a philosophy that is prevelant on this board) If you are interested, her link is http://www.kimsnider.com no strings attached. Again just my experience, yours may vary - might be better.

 

[ERD50]

Sorry, I just realized that I didn't answer your question about the filtering. It is, unfortunately, the copywrited portion of the system ...

OK, I'm not asking for specific details of the filtering algorithm, just what do you mean by the term - filtering? Filtering what?

Filtering your results - like not counting losers until they are sold?

Or filtering your stock picks - so you can pick stocks that 'usually all go back up'.

I'm really skeptical that any stock picking system could result in a selection of stocks that 'usually all go back up'. And, if it could be done, you would probably be better off just buying the stocks and taking ALL the upside, rather than capping your gains with a covered call. Have you compared your results with outright buys?

From http://www.kimsnider.com :

The average annualized yield of the Snider Investment Method over our published track record (September 2002 - September 2005) has been 13%.

I am not impressed (should I be?). The S&P total return was 46.22% over those same 3 years. 13% over 3 years is less, 44.28% (1.13*1.13*1.13 or 1.13^3). And that term ' yield' concerns me - is that 'yield' or total return? A junk bond can 'yield' 13% while it's net value drops in half. Total Return is all that really matters.

and:

Snider Method positions are very liquid. They can be sold at any time. If they are sold prior to the end of the process, which is the Snider Method equivalent to the maturity of a bond, the liquidation price will often be lower than the cost basis. The effect could be a realized loss on the stock, which could be greater than the accumulated yield from that position. Such a position would then be a net loss. We recommend that you allow at least two years for your positions to close. Some positions might take more than two years to close, but we expect the majority will close within two years.

So, if you have been doing this less than two years, you don't (by Kim's definition) have any losers yet. Again, I think there are a bunch of mutual funds that would like to present their results that way. The liquidation value of your account each month will tell you how that is going (properly adjusted for deposits and withdrawals, not the Beardstown Ladies method).

I certainly hope it goes well for you, but I'm smelling 'snake oil' here.

-ERD50

EDIT: I thought this had a 'deja-vu' ring to it. Take the wayback machine to Sept 2005:

http://early-retirement.org/forums/index.php?topic=4088.60

Quote from: whitestick on September 14, 2005, 12:53:02 AM

Her message as you point out is all about cash flow and yield.

 

[ERD50]

And here is the 'devil in the details', right from the horse's mouth:

bold is mine

[/url]

The yield calculation is different than the return calculation shown by most investment advisors. The yield includes option premiums, interest, dividends, and realized gains or losses from closed positions, but excludes unrealized gains or losses from open positions.

Of course, you don't have much 'unrealized gains from open positions' on a covered call - if you had a large gain, it got called away and is now 'closed'. So, they are essentially counting their winners, and not counting their losers. This is exactly what I got from the infomercials.

Hey, maybe this system is working for you, but I'd be nervous if I paid someone for advice that includes ignoring total returns in such a way as to make the system look good on paper. Just ignore that unrealized loss behind the curtain! Scary stuff.

- ERD50

 

[CyclingInvestor]

OK, so Thanksgiving with my sister-in-law's famly - someone can't stop talking about the "can't lose" moneymaking strategy of writing covered calls.

Anybody play with this strategy ? (I'd guess folks on this board avoid these mechanics).

My little experience with options and arbitrage stuff is that the market prices these things pretty well - and that this is more "gambling" than "investing".

But I guess if there's a stock you're holding for dividend reasons or close to your sell target, this might be a way to add a little gain from it.

I suspect the food I got yesterday was better than the financial advice....

I have had several friends/relatives of friends bring up options when they heard I was
a stock investor. Both eventually got around to telling me about Wade Cook's foolproof
system of making 20% per month (neither had any real experience with stocks), which
they were just about to embark on. I tried to explain things to them. I think I might
have gotten to one of them.

 

[whitestick]

Ok, I'll try and answer as best I can. Please bear in mind, that I am not, nor do I claim to be, a FA, CPA, or other financial expert, therefore, to reply to your discussion about total returns vis-a-vis yield, I may get this wrong. Yes, if you look at overall liquidation value, you will likely see negative, with respect to following the system out and closing when the individual stock price is back above your total average cost. As she explains and you quoted, she recommends planning for a two year period for each individual stock position, to give it time, for worst case scenario, to return to a price that will allow closing without losing money. She gives an example of really worst case scenario, where it took (as I recall - it's a bit late now) about 3 1/2 years for 1 stock to recover, yet still met her goals for total time invested of the money involved. Also, her method is all about income and cash flow, so you realize the income independent of the actual stock price. Now I'll try and answer the other good points you brought up.

OK, I'm not asking for specific details of the filtering algorithm, just what do you mean by the term - filtering? Filtering what?

Or filtering your stock picks - so you can pick stocks that 'usually all go back up'.
This is the filtering, method she provides the parameters for - again bearing in mind that they are chosen for income, not capital appreciation.



Have you compared your results with outright buys?
Yes, and on any individual stock, you could do better, however, she is looking for minimal risk, and she constantly preaches that you can't time the market (a theme I've heard here on more then one occasion)
From http://www.kimsnider.com :

I am not impressed (should I be?). The S&P total return was 46.22% over those same 3 years. 13% over 3 years is less, 44.28% (1.13*1.13*1.13 or 1.13^3). And that term ' yield' concerns me - is that 'yield' or total return? A junk bond can 'yield' 13% while it's net value drops in half. Total Return is all that really matters.

This is part of the differentiation. Her yield is by stock, by year, and is for the total money you have selected to be available for that position (unlike the ones you mentioned above, where you actually have to commit money and purchase the funds/bonds/etc.), so it is a more conservative approach.
Also as you point out (I didn't bother to check your numbers), the S&P total return ... however, the return goes up and down, and much of the reason for stratification is to reduce the impact of the downturns. With the income method, it doesn't mattr, as the income still returns the percentage quoted on your money invested, not the value of the stock - more then that I'm afraid I'll get in trouble.

and:
So, if you have been doing this less than two years, you don't (by Kim's definition) have any losers yet. Again, I think there are a bunch of mutual funds that would like to present their results that way. The liquidation value of your account each month will tell you how that is going (properly adjusted for deposits and withdrawals, not the Beardstown Ladies method).

Not sure where you got that two years from, it's actually been over three, and if by losers you mean I have unclosed positions, the longest one I have right now is about 8 months, with vast majority less then 4 months before closing.

I certainly hope it goes well for you, but I'm smelling 'snake oil' here.

I was every bit as distrustful and disbelieving as you are, and kept looking for that oil as well, but to date, haven't found any. Also, there was a bunch of alums (think there were 30 couples) that got together back in April, and every single one of them reported similar results. Not saying there aren't a couple of all the grads that aren't complaining, but their complaints boil down to similar ones you have expressed. And they are fairly new, so are still fighting the concept.


EDIT: I thought this had a 'deja-vu' ring to it. Take the wayback machine to Sept 2005:
Guilty

Of course, you don't have much 'unrealized gains from open positions' on a covered call - if you had a large gain, it got called away and is now 'closed'. So, they are essentially counting their winners, and not counting their losers. This is exactly what I got from the infomercials.
No that is not the way it works. You don't get a "large gain" to get called away - it's slow and steady, and leave the gambling for big gains to the others

Hey, maybe this system is working for you, but I'd be nervous if I paid someone for advice that includes ignoring total returns in such a way as to make the system look good on paper. Just ignore that unrealized loss behind the curtain! Scary stuff.
Actually you only pay her the onetime fee for the training, after that she doesn't get any more - other then the occasional drink we buy her when we run into her somewhere
Re the unrealized loss, see the begining, it's only scary till you come to understand and practice it. Best recommendation I can make is that most of the alums all say that one of the reasons we got into it, was that if something happened to us, our spouses could step in and continue on with the same results and be taken care of financially. As it happened, one of the alums that was on our cruise died half way through, and his wife was able to make the trades the next trade day with no help from us, and realized the same results. That makes me sleep better.

 

[ERD50]

whitestick, thanks for your replies. I think a few points need clarification:

Please bear in mind, that I am not, nor do I claim to be, a FA, CPA, or other financial expert, therefore, to reply to your discussion about total returns vis-a-vis yield, I may get this wrong.

It does not take a pro to understand the difference between 'total return' and 'yield'. It is simple, it is basic, and it is important and something that EVERY investor should know. I'm a bit surprised (not really), that over two days, a 298 page workbook, and $3,175 they do not cover this basic premise.

RE: S&P returns vs Kim's 'yield':

This is part of the differentiation. Her yield is by stock, by year, and is for the total money you have selected to be available for that position (unlike the ones you mentioned above, where you actually have to commit money and purchase the funds/bonds/etc.), so it is a more conservative approach.

How's that? When you do a covered call - you have put money up at risk. You own the stock, it can drop, all the way to zero. Depending on the stocks and amount of diversification, it may or may not be more conservative than a fund or bond, but it probably isn't. You can't get decent option premiums on stocks that are not volatile - no one will pay them, that is a fact.

Also as you point out (I didn't bother to check your numbers), the S&P total return ... however, the return goes up and down, and much of the reason for stratification is to reduce the impact of the downturns. With the income method, it doesn't mattr, as the income still returns the percentage quoted on your money invested, not the value of the stock - more then that I'm afraid I'll get in trouble.

And, the total return on stocks with covered calls goes up and down too - but Kim tells you to ignore that. But, we don't ignore it when we compare to the S&P? That is fishy.

- more then that I'm afraid I'll get in trouble.

Interesting - I can understand Kim not wanting anyone to publish proprietary algorithms, but not wanting to discuss 'total return' is, ummm, suspicious?

RE: gains get closed versus losses roll forward:

No that is not the way it works. You don't get a "large gain" to get called away - it's slow and steady, and leave the gambling for big gains to the others

Maybe my term 'large gain' was confusing. I meant if there was a large gain in the stock, it would be called away, and the position gets closed - so you realize the gain (no matter how big/small), but the losses don't get closed. It seems like a one-way street of accounting. Count your (small) gains, ignore your losses, big and small.

if something happened to us, our spouses could step in and continue on with the same results

Except, we don't know what those results are - only what the gains are, not counting many of the loses. That is the problem, not the hours it may or may not take.

IMO, Kim is playing fast and loose with the numbers, not because this technique is 'different', but because it puts it her a good light. It is easy to look good when you devise an accounting method that ignores (or at least discounts) loses.

I sell covered calls as part of my portfolio. Each month, I look at my total return. I am not going to fool myself into believing I'm doing better than I am. If my *future* premiums offset any loses, that will show up as they are received. I am not going to discount those loses today against future (unknown) gains.

Just ask yourself - why does Kim use a different accounting method from 'most others'? And why is it buried in the 'legal' page, rather than up front where she talks about the plusses?

You really don't detect the 'snake oil'?

-ERD50

 

[ERD50]

whitestick, one more comment on that S&P total return, vs Kim's 'yield':

Apparently her 'yield' (which according to her, does not count some loses) did not keep up with the S&P total return. What makes this fascinating to me, is that this time frame is kind to her 'count the gains, not the loses' method. In a rising market, most of the options should get called out, and you claim the gains. So this should make the system look good.

Also interesting that her quote is based on SEPT 2002 to SEPT 2005.... pretty much a steadily rising market during that time frame. And an odd time frame at that, most institutions pick calendar year, or last X year(s) for their performance numbers.

I detect an awful lot of cherry picking. Cherry pick your gain method, then cherry pick the dates?

What if we were in a falling market? She would still claim to look good, not counting those pesky loses. I suspect your account balance would tell a different story.

I'm just suggesting - look at the whole picture. Don't get fooled by selective analysis.

Simple test - look at your start balance, look at your end balance. Do the simple math (assuming you had no more deposits/withdrawals) - (end-start)/(start). What % over what time frame? Compare to the S&P total returns for that period (the 'adjusted' numbers on yahoo historical quotes will include dividends). Then see how you are doing, and see how confident you are you could do it in a down market.

-ERD50

 

[ERD50]

Wow, I really don't mean to pile on, but the more I read on that web site, the more 'interesting' it becomes.

Even those doubly questionable 'yield' numbers are subject to one more serious accounting flaw. They are the product of 'survivorship bias'. The say the yields are calculated from the accounts under management (2.5% fee thank you).

Well, guess what happens when you measure returns on current accounts? Many of the people who were not happy with the returns have dropped out. So their poor returns are not included. I am willing to bet that if you included their returns, it would look worse.

It is good reading, it reminds me of the many variations in accounting methods, and why mutual funds are under such strict reporting rules (which, uncharacteristic for me, is something I think our federal government did a pretty good job on).


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

Scroll down this pdf - you will see 'open positions' listed - my, my, my sure are some big negative numbers there. But, as far as I can tell, these negatives, being 'open positions' are not included in Kim's 'yield' number.

How clever.

-ERD50

 

[Nords]

Who cares how the yields are calculated or what's at risk. Let's revisit the basics of capitalism, not cap gains.

I'm fundamentally skeptical of anyone whose system requires you to pay them hundreds, let alone thousands, of dollars for them to share it.

If the system works so well then she'd be rip-roaring her way to millions on her own trades without ever having to be a vendor. Instead of wasting her time at sales seminars she could be tweaking the software to do its own thing, similar to Poyet's AI screener. And then she could be optimizing its performance from a tropical island somewhere while she gets on with her own life...

 

[ERD50]

Who cares how the yields are calculated or what's at risk. Let's revisit the basics of capitalism, not cap gains.

I'm fundamentally skeptical of anyone whose system requires you to pay them hundreds, let alone thousands, of dollars for them to share it.

Very good point, and I tend to agree. However, there could be a reasonable comeback for this:

She does not seem to be claiming returns that are far and away above the market returns, supposedly similar, but with less risk. So, theoretically, if I developed this system, but only had X dollars to invest, I could maybe make more money teaching the course, then I could from direct profits utilizing it with my own limited funds.

And if I tried to open a mutual fund, I'd need to disclose total returns

I suspect that your reasoning is correct, though.

-ERD50

edit/PS:

How many people have taken your Snider Investment Method Workshop?

We have taught the Snider Investment Method to over 2300 people who have come to Dallas or Phoenix from 36 states, 2 Canadian provinces, Germany and France to learn the Snider Investment Method.

$3175 * 2300 = $7,302,500

That is 13% of 56 Million dollars. It probably cost less than that to run the classes. And no pesky 'unrealized loses' to account for.

 

[ERD50]

OK, I promise I'm going to stop now, but this was just too good to pass up:

How did the Snider Method perform in 2001 and 2002?

When you publish performance data, it must be complete and free from bias. 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.

I cannot account for every single trade that every student made over that time frame. I also cannot guarantee that the results would mean anything because I could not guarantee that they used the method the way I teach it. In other words, it is possible they made errors or changes to the method on their own.

The track record that we are able to publish begins in September, 2002. It is complete and we know that it is made up of trades which were done in the proscribed manner.

How convenient that during a down market, their data is 'incomplete'. So what happened in SEPT 2002 that suddenly, her students don't make methodical errors? Coincidence? Funny that is coincides with a market turnaround. Or maybe not so funny.

'Complete data' would include 'total returns', like any mutual fund is required.

- ERD50

 

[FinanceDude]

Both eventually got around to telling me about Wade Cook's foolproof
system of making 20% per month (neither had any real experience with stocks), which
they were just about to embark on. I tried to explain things to them. I think I might
have gotten to one of them.

WADE COOK Isn't he in federal prison??

 

[ERD50]

WADE COOK Isn't he in federal prison??

according to wiki:
Financial and legal troubles

In 1987, Cook filed personal bankruptcy. Two companies he controlled, American Business Alliance and Monarch Funding Corporation, also went bankrupt that year. [2]

In 1989, Cook was charged with securities violations by the Arizona Corporation Commission. The following year, the Arizona Attorney General charged him with several criminal counts, including selling unregistered shares of a company he controlled [3]

In 1998, Cook won a settlement against self-help guru Anthony Robbins over his claim that Robbins had illegally used concepts (particularly the "meter drop") from Cook's book Wall Street Money Machine to create a financial seminar. Robbins agreed that he had read the book and met with Cook, but disputed the illegality of his use of the concepts. A jury in Tacoma, Washington sided with Cook and awarded damages in the amount of $655,900. [4]

In 2000, WCFC, a company which sold seminars on investing and offered subscriptions to a trading bulletin board service called the Wealth Information Network (W.I.N.), posted $1.7 million in trading losses [5].

On October 5, 2000, Wade Cook Financial Corporation agreed to a settlement with the Federal Trade Commission and 14 state Attorneys General on charges that the corporation misrepresented earnings potential. As a result, WCFC was required to set up redress program for consumers who purchased its products and to alter its advertised earnings claims. [6]

In 2002 the FTC brought new charges based on failure to comply with the previous order. [7]

In 2002, WCFC was forced into [Chapter 11]] bankruptcy by a group of its creditors, including several employees and indepedent contractors, who claimed they had not been paid for several months. [8]

In December, 2005, Cook and his wife Laura were charged with several counts of income tax evasion. [9] Both pled not guilty. According to court documents, the Cooks operated a fraudulent charity, ostensibly to benefit the Mormon church, but instead bought show horses, his and her Cadillacs, and a 40-acre estate. [10] The trial has been set for January, 2007. [11]

 

[whitestick]

Good thing I have had results that exceed my expectations, or I might feel like I should be wearing a crown of thorns from you guys. Rant off

Who cares how the yields are calculated or what's at risk. Let's revisit the basics of capitalism, not cap gains.

I'm fundamentally skeptical of anyone whose system requires you to pay them hundreds, let alone thousands, of dollars for them to share it.
Ok, to your point Nords, I really don't have a problem with paying someone a reasonable price compared to the results for the information given to me. Otherwise we would expect all teachers to teach for free.
If the system works so well then she'd be rip-roaring her way to millions on her own trades without ever having to be a vendor. Instead of wasting her time at sales seminars she could be tweaking the software to do its own thing, similar to Poyet's AI screener. And then she could be optimizing its performance from a tropical island somewhere while she gets on with her own life...

She does claim to have all of her money in this plan, as well as a fair number of her family's. Funny you mention the island, her constant reminder is to go to Bora Bora between the trade day's activities, which is really to say get on with your life and don't focus so much on the mechanics of making money. And before ERD50 jumps in, that's not to hide your head in the sand, just to enjoy life. As to getting on with her own life, this is her passion, so she enjoys doing the training and working with her students - or her extended family as she calls them, and she really does treat us like family - the good kind, not the kind you hope doesn't come for dinner. More to ERD50's posts

 

[whitestick]

whitestick, thanks for your replies. I think a few points need clarification:
...

RE: S&P returns vs Kim's 'yield':
How's that? When you do a covered call - you have put money up at risk. You own the stock, it can drop,

When buying a stock you consume money to make the purchase. In her plan, you allocate money for the total position that you could end up with, but you don't actually spend the money till certain trigger events happen, and then only in a controlled and gradual basis - kind of DCA - sort of. Her calculation of yields is based on the total money that you allocate up front, even though you may never spend it to buy the stocks. That's as much as I can get into, I think, without violating her copywright. I'm not trying to be a snake oil or hide things, it's just that there are pieces of this that you agree not to reveal, till you take the course. After taking the course, you still are free not to pursue the plan, if you choose, although that seems pretty silly to me, not to do it.


Maybe my term 'large gain' was confusing. I meant if there was a large gain in the stock, it would be called away, and the position gets closed - so you realize the gain (no matter how big/small), but the losses don't get closed. It seems like a one-way street of accounting. Count your (small) gains, ignore your losses, big and small.

True, although, as I mentioned before, her filters seem to prevent a total reduction of the stock price to zero - no guarentee of course, but the actual results are that the so called losers, actually go back up eventually within the time horizon she speaks of, and then you close them, and calculate the yield on that closed position.

Just ask yourself - why does Kim use a different accounting method from 'most others'? And why is it buried in the 'legal' page, rather than up front where she talks about the plusses?

Maybe Martha could answer that, I certainly cannot

You really don't detect the 'snake oil'?
Actual results have outweighed the snake oil detection. I suppose if after many years I have a down year, I may change my mind. It's not for everyone, but then again neither are FA, ETFs, annuities, health insurance, long term disability, or a dozen other things. It, so far, works for me, and everyone else that I know or met that took the course and followes the plan.
-ERD50

 

[whitestick]

whitestick, one more comment on that S&P total return, vs Kim's 'yield':

I'm just suggesting - look at the whole picture. Don't get fooled by selective analysis.

Simple test - look at your start balance, look at your end balance. Do the simple math (assuming you had no more deposits/withdrawals) - (end-start)/(start). What % over what time frame? Compare to the S&P total returns for that period (the 'adjusted' numbers on yahoo historical quotes will include dividends). Then see how you are doing, and see how confident you are you could do it in a down market.

Appreciate the comment. She actually does have a form for doing that, I forget what it is called. I used it a couple of times, and it always came out positive, so I didn't see any additional value other then a "feel good" and I looked at the money from options each month, and a general sense that the stocks cycled and closed on a reasonable basis, and quit doing that form. As she says, I spend time in Bora Bora, and try not to dwell on the mechanics - would rather do what I like to do, and even spend time on this board for all the valuable things I have learned beyond that investing. Only real complaint is it's hard to put that kind of investing in FireCalc, unless you "game" the inputs.

-ERD50

 

[whitestick]

This one is easy. The dates of the numbers are due to accounts from a seperate organization called Chromium Investments which is her husbands investing firm. He makes a cameo appearance and talks about that during the class. First thing he says is that they are doing exactly the same thing taught in class, and they really recommend that you do it yourself. IF you feel so lazy uncomfortable doing it yourself, then they will charge you the percentages (it's a sliding scale based on how much money you have them work with) to do it for you following the same techniques. They do offer a service (purely optional) called vacation trades and general advice, where for (I believe) about $120 a year, they will provide interpretation and guidence on the plans mechanics, and if you supply them the months status of your various positions, when trade day comes around the will make the necessary trades for you. Of course Kim herself will provide written responses or phone answers to your questions, so the guidence is a bit of overkill, but some people think the vacation trading is nice - they do have a monthly fee version as well, so if you are only using them during the summer months it is about $30 total.
Now the numbers are drawn from the accounts under management that they have, since that's the only ones they have control over and know if you are following the plan exactly. (full disclosure) I also, am guilty of occasionaly placing an extra put or so, something about testosterone kicking in - but only in my fully taxable accounts, not the IRAs.

Wow, I really don't mean to pile on, but the more I read on that web site, the more 'interesting' it becomes.

Even those doubly questionable 'yield' numbers are subject to one more serious accounting flaw. They are the product of 'survivorship bias'. The say the yields are calculated from the accounts under management (2.5% fee thank you).
....

How clever.

-ERD50

I'm convinced, but always open to other opinions. Which is why I value this discussion so much. Oh and thanks for taking the time to read her stuff, to form your critiques and questions. It helps to know that your comments are really informed and not made without facts.
Thanks

 

[lazyday]

I suspect that covered call strategies really have provided a slightly higher risk adjusted return than just buying stocks and bonds. But only slightly, and only in the past. The secret is out, and my guess is that the excess returns are gone, or maybe are negative. I don't know enough about options to guess if part of the past excess returns were caused by lower than expected volatility, something which one shouldn't expect to be repeated. Perhaps excess return came from amateurs overpaying to buy calls. But it seems to me that with more individuals and funds persuing the strategy and selling more calls, the call premium would be driven down.

I think that ERD50 is doing a good service by intelligently challenging the lofty claims of a business that sells a secret strategy.

 

[FIRE'd@51]

I suspect that covered call strategies really have provided a slightly higher risk adjusted return than just buying stocks and bonds. claims of a business that sells a secret strategy.

Part of the problem with the studies that show that is they looked at them in a mean-variance framework. The risk parameter they should be using is semi-variance, not standard deviation, since all the risk in covered-call stategies is on the downside.

 

[ERD50]

Part of the problem with the studies that show that is they looked at them in a mean-variance framework. The risk parameter they should be using is semi-variance, not standard deviation, since all the risk in covered-call stategies is on the downside.

True. And beyond that, you need to use log-normal distributions, as stocks don't go below zero.

While it is 'fun' to play with these statistics, it can only give you kind of an overall guide, maybe a sort of relative merit number. When it comes down to it, the specific stocks you transact probably won't neatly fit the averages, the market conditions probably won't neatly fit the averages, etc, etc.

The old 'YMMV' was never more appropriate.

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.

-ERD50

 

[FIRE'd@51]

And beyond that, you need to use log-normal distributions, as stocks don't go below zero.

Not to nit-pick, but when someone says mean-variance they mean that the returns (continuously compounded) are distributed normally. It is the stock prices that are distributed lognormally.

 

[ERD50]

The secret is out, and my guess is that the excess returns are gone, or maybe are negative.

.....

Perhaps excess return came from amateurs overpaying to buy calls. But it seems to me that with more individuals and funds persuing the strategy and selling more calls, the call premium would be driven down.

RE: secret - Could be, but my gut feel is that it makes no difference that the 'secret is out'. Consider that it is no secret that lottery tickets and casinos are a bad 'investment'. Also, insurance, on average, will cost more than you get in return. But, people keep paying for them. Options (buying calls and puts) can be viewed like that.

RE overpaying, supply/demand - Also could be. Again, my gut tells me there is a very small minority following a covered call approach like this (just ask around!), I'd guess not enough to really impact prices. I really don't know how much the price of options is driven by the small investor - could be a lot, I really do not know.

-ERD50

PS to FIRE'd@51 - correct, my log-normal ref was to stock prices, not returns.

 

[lazyday]

I agree that sometimes, even when the "secret is out" an anomaly can persist. Your examples, and also January effect and value and small premiums continued to happen even when well known. (Though I'm not counting on those either. At today's prices, perhaps there's no value or small premium built in.) But don't most free lunches go away, once discovered?

Makes sense that some people would continue to be willing to overpay when buying calls. But if these are mostly unsophisticated speculators, then I doubt their demand for calls would rise much if the price drops a little.

My focus is on the increase in people and funds that want to sell calls. Sorry I don't have any facts... funny my post was right after whitestick thanked you for using facts. But I have noticed a relatively new fund by Bridgeway, and some new closed end funds that sell calls. Not sure, but I think at least one is over a billion dollars. If I cared a lot about this issue, might try to figure out what % of volume comes from these funds. Don't know if impact from individuals can be easily measured.

It may be a minority of people selling calls, but based on the articles I've seen on the topic and running into a few people socially who are either doing it or want to, I'll bet there's been significant growth. And if there's more people and funds selling calls, someone has to buy them.