SOX, bonds, etfs and covered calls

[brewer12345]

Re: So much for ER in 2010... (longish)

Brewer,

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

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

Lena

Here is a start: http://www.smartmoney.com/onebond/index.cfm?story=primer

As long as you stick to treasuries, munis and high grade (A rated or above) corporates, all you really need to master are the concepts of discounted cash flow, duration, and maybe convexity to understand what you are getting into. If you start looking at lower rated corprates (BBB and junk), you had better be prepared to do some serious credit analysis.

 

[Lena]

Re: So much for ER in 2010... (longish)

Thanks.


Do you have an opinion on ETFs?

Lena

 

[brewer12345]

Re: So much for ER in 2010... (longish)

Do you have an opinion on ETFs?

Lena

Yes.

 

[Lena]

Re: So much for ER in 2010... (longish)

Let me rephrase my question:

What is your opinion on ETF?

Lena

 

[brewer12345]

Re: So much for ER in 2010... (longish)

Let me rephrase my question:

What is your opinion on ETF?

Lena

I think they can be useful, but most of them just duplicate existing index funds. If you are a Vanguard customer, they are kind of redundant. Since I am at Schwab with all my accounts, ETFs are a godsend because Schwab doesn't have rock-bottom pricing on its index funds. I also think they are useful because from time to time I hedge part of my portfolio by buying puts on QQQQ and IWM.

 

[Lena]

Re: So much for ER in 2010... (longish)

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

Lena

 

[Nords]

Re: So much for ER in 2010... (longish)

Thanks.  Most of this was in English, whatever wasn't I'll have to translate later as I become less ignorant on the subject

One translation:
"Bond ETFs can have lower expense ratios than bond index mutual funds, but Vanguard's bond index mutual funds have lower expense ratios than just about everything (including ETFs).  So I invest in bond ETFs since my account is with Schwab (not Vanguard) and Schwab's bond index mutual funds are expensive to buy, but if you're a Vanguard customer then you're better off with Vanguard's cheap bond funds."

"Purchasing options on stock ETFs like the NASDAQ index (QQQQ) and a Russell 2000 index (IWM) are also useful ways to limit the downside on my portfolio volatility.  The ETFs have greater liquidity and so the options are priced better.  But few investors need to worry about purchasing options on bond indexes, so Vanguard's bond index mutual funds are a better way to invest in bond index funds."

 

[peggy]

Re: So much for ER in 2010... (longish)

Hey hey hey what are you doing on this website at WORK! 8)

Doing something constructive with my day since I'm caught up with my duties at the moment.

 

[FinanceDude]

Re: So much for ER in 2010... (longish)

Here is a start: http://www.smartmoney.com/onebond/index.cfm?story=primer

As long as you stick to treasuries, munis and high grade (A rated or above) corporates, all you really need to master are the concepts of discounted cash flow, duration, and maybe convexity to understand what you are getting into.  If you start looking at lower rated corprates (BBB and junk), you had better be prepared to do some serious credit analysis.

I think "convexity" is beyond a lot of folks on here.......... However, DURATION is the real key to bonds.............in relation to interest rate cycles.............

 

[MasterBlaster]

Re: So much for ER in 2010... (longish)

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

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

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

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

here's the link if you are really interested

http://en.wikipedia.org/wiki/Bond_convexity

 

[Lena]

Re: So much for ER in 2010... (longish)

Dude,

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

Lena

 

[LOL!]

Re: So much for ER in 2010... (longish)

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

www.radicalguides.com

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

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

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

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

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

Another example:

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

Full disclosure: I own MO and I am not doing any of the trades suggested in this message.

 

[Lena]

Re: So much for ER in 2010... (longish)

LOL!, thanks for the link.

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

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

If you get a chance to point me in the direction of online book you mentioned, it would be greatly appreciated
Lena

 

[MasterBlaster]

Re: So much for ER in 2010... (longish)

Covered Calls...

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

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

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

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

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

If I am missing something here please educate me.

 

[brewer12345]

Re: So much for ER in 2010... (longish)

Covered Calls...

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

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

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

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

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

If I am missing something here please educate me.

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

 

[LOL!]

Re: So much for ER in 2010... (longish)

Lena, www.radicalguides.com IS the online books on ETFs and bonds.

Maybe a new thread solely on covered calls is called for.

 

[LOL!]

Re: So much for ER in 2010... (longish)

I believe that most calls do not expire worthless. Many are bought back to close the position.

Suppose I sold a call that was 10% out of the money. If my stock is called, I get the 10% gain in the stock, plus the call premium. Yes, it is rare for a stock to gain 10% in a month and since it is rare, the money gained from selling the call would be minimal.

That's the dilemma with covered calls: If the premium you get by selling is worthwhile, then the likelihood of the stock being called away is high. If the premium you get by selling won't even pay the commission, then the likelihod of the stock being called away is low.

In the latter case, there are no buyers for such unlikely scenarios, so you couldn't sell such a call in the first place (the volume for many calls is zero).

 

[Lena]

Re: So much for ER in 2010... (longish)

LOL!. Sorry, should have looked at the link first.

May be new thread is in order. I do feel bad for hijacking Peggy's thread

Lena

 

[MasterBlaster]

Re: So much for ER in 2010... (longish)

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

I have heard of that strategy for covered calls. My reaction is... If you don't expect the stock to move up don't own it. A 1 percent payout just isn't enough for me.

LOL:

OK OK OK...

I didn't really mean to hijack this thread so I'll stop the covered call posts.

 

[FinanceDude]

Re: So much for ER in 2010... (longish)

Dude,

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

Lena

I DO give them credit........ I am NOT questioning anyone's intelligence or resource on here, jsut pointing out that "convexity" is a ways beyond the basics of bond investing...............DURATION is something we all shoud know about...............

Kind of like "R-squared", or Sharpe Ratios on mutual funds........most people dont'care..............

 

[FinanceDude]

Re: So much for ER in 2010... (longish)

I believe that most calls do not expire worthless.   Many are bought back to close the position.

Suppose I sold a call that was 10% out of the money.  If my stock is called, I get the 10% gain in the stock, plus the call premium.   Yes, it is rare for a stock to gain 10% in a month and since it is rare, the money gained from selling the call would be minimal. 

That's the dilemma with covered calls:  If the premium you get by selling is worthwhile, then the likelihood of the stock being called away is high.  If the premium you get by selling won't even pay the commission, then the likelihod of the stock being called away is low. 

In the latter case, there are no buyers for such unlikely scenarios, so you couldn't sell such a call in the first place (the volume for many calls is zero).

Good thoughts...............in the late 90's, the premiums were much HIGHER, so you could make some nice cash on covered calls. The spreads are much tighter now, so after transaction costs the net profit has fallen..........

Gotta give props to the option folks...........they know where the market's going before the traders on the floor.............

 

[LOL!]

Re: So much for ER in 2010... (longish)

Yep, you can look at the options that have high volume to see where the action is.
With high volume, both sides believe they are gonna make money. And 100% of the time, one side does.

 

[Martha]

I split this discussion off from Peggy's questions about her investment situation.

 

[LOL!]

<thanks for the split >

Here is another way I have used covered calls:

Suppose I am thinking of selling my stock, but I am a little ambivalent about it.  Should I sell?  Should I hold? 

I just don't know what to do.  So a few times I have sold a covered call in that situation with a strike price acceptable to me.  I would not be upset if the stock got called away from me (at the higher strike price of course).

If the stock price goes up, I make a gain up to the strike price plus the call premium for being wishy-washy about it.

If the stock price stays about the same and the call expires, I have the gratification of having made a little money for being uncertain and I can repeat the exercise.

If the stock price drops, I have the consolation that the call premium diminished my losses.

 

[MasterBlaster]

LOL:

If that works for you then go for it.

Personally I won't touch covered calls because of the reasons I posted earlier.