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Averaging 2% income monthly - too good to be true

Discussion in 'Investing Strategies' started by Alwayslooking, 6th Dec, 2007.

  1. Alwayslooking

    Alwayslooking Well-Known Member

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    Hi All
    I am currently looking at various funds/options to generate income.

    This group below have a product (income fund) using options where they are supposedly averaging 2%+ generated monthly.

    They trade in blue chip, mainly resource, Cost - 1% per trade. No entry/exit fees, minimum of $50K.

    I am new to shares/funds but this sounds too good to be true. Does anyone know anything about this style of investing or this group.

    Welcome to Tricom


    Cheers and thanks for your help

    PS
    Realise there is another post re: Tricom, but limited information.
     
  2. crc_error

    crc_error The Rule of 72

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  3. Alwayslooking

    Alwayslooking Well-Known Member

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    Hi crc_error
    Thanks for your reply..... but I must be missing something, if Tricom is achieving income of 24% pa and client still maintaining capital I would have thought that was pretty special.

    Cheers
     
  4. crc_error

    crc_error The Rule of 72

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    covered calls can generate anywhere from 1-5% monthly premium.. the risk is the stock falling in value, so ideally it works well in a slightly up trending stock or sideways trending stock. With a covered call you also forfeit capitals gains the stock may have.

    I have a portion of my portfolio dedicated to covered calls, and its been working well for me.
     
  5. Alwayslooking

    Alwayslooking Well-Known Member

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    Hi crc_error
    that's interesting, do you do this yourself or use a broker and if so do you mind sharing. I would like to pursue this strategy but as I am new to this game would need some guidance.

    Thanks for reply,
    Cheers, AL
     
  6. crc_error

    crc_error The Rule of 72

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    I use a discount broker.. comsec and do it myself via their protrader software.

    The asx website has a intro to covered calls which I recommend to read so you get the gist of how it works.

    Basically you are renting out shares you own.

    I buy a stock, ie BHP for $50, and I sell a one month contract to someone else to sell BHP to them for $51 they will pay me a 50 cent premium which I keep. If BHP runs up above $51, I sell them the stock at the end of the contract for $51. The stock might go up to $52 so they make $1 less the 50 cents they paid me on the trade.

    They turned their 50 cents into $1, I made $1 on capital gain plus 50 cents on the call premium. everyone wins..

    If the stock doesn't go up and stays at $50, then the contract expires worthless and I write a new one again collecting another 50 cents. You only are forced to sell the stock if the stock value goes above the agreed contract price.

    ASX Options Covered Write
     
  7. Alwayslooking

    Alwayslooking Well-Known Member

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    Hi crc_error
    thanks for the info and great to hear you are doing well with this, will you continue to use this strategy in current market conditions?

    On the last dip I purchased about $100K in direct blue chip shares and at this point in time am looking at ways of diversifying via MF or whatever looks attractive.

    My plan was initially to try to aim I guess similar approach to what Navra offers this would help with my current negative cash flow from properties, $50K pa. However, I have lots of equity and am starting to think that I may be better off chasing CG as I can always liquidate some of my shares etc. as required.

    The problem is there are so many MF's around that it really confuses the hell out of me, there will always be a reason why you should not purchase a particular product.

    Back to Tricom, I would be very keen to know if anyone has actually used this company for this strategy, 2% mentioned was conservative figure.

    All the best
    AL
     
  8. The Stig

    The Stig Well-Known Member

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    the downside that wasn't mentioned is if you buy BHP at $50, you sell the $51 call and then BHP drops to $40 for a few months. You will get next to nothing for your $50 call while you wait for it to go back up in price.

    You would be silly to sell calls for less than $50. because then you are obligating yourself to a capital loss.

    I do not trade options in Australia but I think we have American Style Exercise options, so they can get exercised before expiry if the sold call goes ITM. Or it could get exercised if it is OTM if the option has a wide spread and is illiquid. If we have European style options then early exercise ain't an issue.

    Alternative: Have a look at "Collars". A collar buys a put and sells a call. So you have downside protection. The best education about collars is found in the collars book by Random Walk Trading at Random Walk Trading Thanks You
    Collars work best on a stock that moves around a lot. It is the best strategy I have seen that uses compounding to generate wealth.

    Cheers
    The Stig
     
  9. crc_error

    crc_error The Rule of 72

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    I am still doing it, however todays drop in LGL isn't helping my position. I'm not sure what I will get next friday since the stock has fallen so much. I'm looking at writing $4 calls against LGL. I might only get 3-4 cents next week if LGL doesn't recover.
     
  10. crc_error

    crc_error The Rule of 72

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    The Stig, Problem with Collars is you end up losing your profits(call premium) on the puts you buy. And the puts don't fully protect your position anyway.
     
  11. The Stig

    The Stig Well-Known Member

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    Collars generate wealth, not income. Let me clarify that.

    Explain to me how you think puts don't save your position. I have never heard this statement before.
     
  12. DaveJ

    DaveJ Well-Known Member

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    The PUTs are alway(well 90%+ of the time) more expensive then the calls you write so each month this position is going to cost you money? Even more if you purchase the stock on margin...
    I am really interested on whether you have actually made this work over an extended period of time? It doesn't make sense to me. A collar is usually used to lock in a stock price in times of uncertainty not as an ongoing 'wealth' strategy???

    The reason the PUT doesn't fully protect you is the PUT will cost you money so you will never get 100% of your position back..

    Can you please clarify it more because i don't get what you are saying:confused:
     
  13. The Stig

    The Stig Well-Known Member

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    This is how it is done in the US market and how it was taught to me.
    You need $200,000 US.
    You dedicate about $160,000 to buying the stock. This will get you 2000 shares or more.
    You look for a stock $50 to $80 that moves up and down and passes 2 strikes or more each month. Strikes will be $5 apart.
    Example: Buy the stock at $57.50, buy the $55 put and sell the $60 call, all in the front month. Whenever the stock moves $5 you roll the options up or down to lock in profits OR move the water line as it is called.

    With 2000 shares and $5 strikes, every time the stock moves down $5, your puts will go up in value enough to let you buy 100 shares more. That is how this strategy builds your wealth.

    The greek working for you is gamma.

    That is it basically. From that point it gets subjective. Do you sell the calls or not, is the biggest arguement the trader will have with him/herself every day LOL.

    I have seen the maths done by Peter Achs at Optionetics Oasis conference this year in the US. I know it works. I have not mastered it yet and I am not trading them yet. But I know it works when done properly.

    Now, as for Puts not protecting you 100%. You comment is very amusing LOL
     
  14. DaveJ

    DaveJ Well-Known Member

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    Interesting... Maybe you don't understand... I'll give you an example to make it clearer.

    Company XYZ is trading at $30.00

    You purchase a $30.00 PUT option for $0.75 (2.5% for arguments sake). Hey i have a locked in sell price of $30.00 so i have 100% protection. WRONG
    Your stock has actually cost you $30.00 + $0.75 so your break even is $30.75. Therefore you actually only have 97.5% protection.. Small sacrifice you might say but do this over a couple of months and it will add up.

    I don't see what's funny about my comment?? :confused::rolleyes:
     
  15. The Stig

    The Stig Well-Known Member

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    Puts do fully protect you. Only problem is you have to pay for them.

    That's the problem with every insurance policy in the world LOL. Darn it, they cost money LOL

    I read your first comment as "puts don't fully protect you" meaning the contract could be broken by the put seller, which never happens.
     
  16. crc_error

    crc_error The Rule of 72

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    puts protect you for the value of the shares, not the value of the shares + puts.

    like car insurance.. they don't pay out the premium you paid for your policy at claim time do they?
     
  17. DaveJ

    DaveJ Well-Known Member

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    I think we are just disagreeing on 'perception' on how PUTs are treated. Yes they are used as an insurance policy and 'LOL wow you have to pay for insurance, fancy that' but in a Collar trade the PUT is an integral part/leg of the strategy and so should be included in the payoff/BE diagrams.

    I am still interested in actual trade examples of how this works in the Australian market place without a huge banks (you mention $200k+) What are the expected p.a returns using such a strategy? The Australian market is a lot more inefficient then the US. The US has much higher liquidity(therefore more fairer priced options), MUCH cheaper brokerage etc...

    If you have seen the optionetics course have you profitably traded their 'Iron Condor' strategy in the OZ market? 4xbrokerage(4x~$40+) to open and close the trade surely erodes most of the profit potential?? Iron Condors work well in the US but not here.

    IMHO anyway....

    Happy trading!
     
    Last edited by a moderator: 18th Dec, 2007
  18. The Stig

    The Stig Well-Known Member

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    Yes I agree, we misunderstood each other about the puts.

    I do Iron Condors for $4.00 each lot in the US. I think the Aussie market sucks for trading options too, especially if your account isn't large. That's just my opinion and I am happy for anyone who trades options successfully here.

    It's best if your strategy lets the Iron Condor expire worthless. It's half the brokerage.

    Collars. Expected returns? How long is a piece of string? I have seen them make over 100% per annum when you can compound your wealth with each roll down. That's all I can say.