Your stratergie to join the Millionaires Club.

it is realistic to get 3% - 5% per month, when you write options close to the expiry price. But where people go wrong is that they tend to under capitalise this strategy. As you need to hold a 1,000 of a given share to write covered calls, diversification becomes a real problem (a 1,000 RIO will set you back $115K etc). So people tend to do it over a small amount of holdings (2 or 3) and thats when they head into trouble.

you share the same downside risk as someone who owns a portfolio of shares, but you trade blue sky profit for a fixed income. so when the market falls like it has recently you fall with it, you do however reduce your loses to some extent.

What I do is write naked puts until I'm inevitably forced to purchase the underlying asset, I then write covered calls at the price I paid, plus an additional naked put on the same asset. It can sting you in the A** when it goes pearshaped though! that's why diversification is the Key.

you should also only do it over shares you would be happy to own for the long run, at a price you are willing to pay.(writing naked puts is actually an excellent way to purchase shares at a discount)

you need to use a variety of option strategies and not just stick to the one. Writing covered calls is often claimed as the ultimate pathway to financial freedom, it isn't, it's just another strategy you can use.

BIG tip here: Don't use any of the software offer by optionetics etc big waste of money ... the ASX has educational material on it, as does most brokers who offer it and of course there is always google!

 

young gun, which stocks do you trade?

 

currently,

asx, anz, cba, nab, bhp, wdc, wes, wow, wbc, nab. (all of which I've had to purchase during the last 12 months and some I'm still holding onto as they are yet to recoup their losses)

only the bluest of bluechips, and companies with strong dividends. I need to be positively geared so if I'm left holding the baby so to speak I want to make sure my cashflow is covered.

I've only recently upped the amounts I invest (by $250K) to capitalise on some low asset prices.

I have lost money (well someone might say I haven't lost anything until I sell) over the last 12 months like everyone else, but I've been able to pay my interest using the income I generate and have bought in at reasonable prices. I did some maths the other day and I'm much better off than someone who just bought these shares outright 12 months ago (almost positive, damn you ANZ, CBA & ASX!).

 

You must be struggling at the moment Young Gun. Negative equity growth on your newly taken out 250K, as well as little to no income... Especially since you trade mostly financials.

Has your strategy changed at all?

 

Strategy hasn't changed at all, not struggling as the volatility equals higher option premiums. If you follow the financials you'll notice that they've picked up quite well over the last 2 months (since I bumped up my investment).

Short term volatility doesn't bother me, I generate more than enough investment income to cover my interest expense's and frankly in this market I've invested knowing that my investments would go down in value initially. Seems stupid, but as I won't be able to bottom pick, I had to settle for picking up selected high quality assets at massive discounts...

why be negative geared? when you can be positively geared!

 

By investment income are you referring to the income generated by your strategy of writing warrants? Or are you referring to other sources of investment income?

I notice you write calls and puts? How will this strategy be affected by ASIC's ban on short selling. I thought Put's would have been affected by this.

 

options have not been affected by ASICS ban.. when you sell a option, your not selling physical stock.

 

I don't write warrants I sell put options and write covered calls. Not affected by ASIC but going forward liquidity might be a problem.

the investment income I recieve is solely from writing these options.

 

How did you go over October and November Young Gun?

 

I'd love to hear where everyone's strategy is at these days, and whether they have changed their game plan somewhat in light of recent events?

I sold out of equities in December, and I'm now I'm sitting with Gold (in the GOLD ETF), an IP and the rest in cash sitting in an offset account.

My game plan to join the millionaires club will now center around protecting what capital I have and riding this depression out.

In the interim looking to growing my income that I generate from my small business and consulting work. Then hopefully sometime when things start looking up again (probably late 2009 or early 2010) I'll start looking for some oversold bargains, both here and in emerging markets, though I will probably invest mostly though ETFs rather than individual stocks. Once a more sustained uptrend has been formed and things are looking more positive I will probably look to start increasing my leverage and take advantage of the cheap rates.

 

hi young gun.. how much of your $250k is left today?

 

Interesting strategy Young Gun. I'm about to start trading options but I'm thinking of doing it slightly different to you. I'll buy a 12 month put at the same time I write 1 month naked puts. Once I get exercised on my 1 month naked put I'll then start selling covered calls.

What do you think of this strategy? This way I get income but also am covered if the share price drops through the floor.

Cheers.

 

Backtest it first.

 

waste of time... backtesting this stratergy before this crash would have shown a nice profit in a raising market.. now with the market crashing, you would have lost a fortune...

 

I'm not even going to reply to that

 

I was just wondering if anyone has been trading CFD's based on Wall Streets movements over the last few months?

Seems to me like it would have been a great way to make money over the last few months, and is largely creating a very predictable market, at least when it comes to days were there are big swings.

I'm very tempted to get into them myself.

 

Hi Chris,

I'm more tempted with the local Zurich Equity Income Fund. Certainly not as exciting as CFDs but I don't need the excitement in my life.

Cheers,

Dan

PS This is general information, before making an investment decision speak to your FPA registered Financial Planner.

 

I've been trading the big wall street investment banks all the way down during 2008. Not with CFDs but with options. Many are so close to $0.00 I've had to stop trading them. Not much room left to manoeuvre when they go below $10.00.

 

My two cents...

G'day All,

My first post, so please indulge me. Many people use an option writing strategy on overseas markets to pick up the 2-3% style of profit. The general strategy is to write an option, call or put, well out of the money in the last month or so of the options life. Options loose the majority of their time value (Theta) in the last few weeks prior to expiry, assuming they are a fair distance from strike.

This strategy has worked very well for many years, but things have been a little different over the past 12 months. Market volatility has been through the roof, and positions which would previously have been a safe distance for writing can take some heat. For people trying to double their premium by writing strangles, volatility has been such that on occasion they have had to roll the position on both sides of the strangle!

Still, the profit target is still achievable, but the strategy needs a bit of a tweak. For example, instead of trying to profit from time decay, write positions further out (say, a few months), but a long way from strike. Then, use some of the premium to purchase inside hedges. While adding wings to your trade will decrease profit, hedging is a very good idea in the current market.

Cheers, joel
PS: This is not financial advise of any sort, but my personal opinion. If you want advice, send me an email at [email protected]