I just finished reading your book "Create Your Own Hedge Fund". It is an excellent read and I loved the book. Thanks
After reading your book I have more questions to ask you. As I am just now learning about options, please forgive me if these questions do not make sense. If you prefer that I send these questions one at a time please let me know.
1) When choosing between writing covered calls or uncovered puts should I be taking dividends into consideration? Are dividends still a factor when I am trading options on ETFs like iShares that continually reinvest? Yes, dividends count when they are paid out in cash. But many ETFs pay no dividends because those divs are not large enough to offset management fees. You must verify the amount of cash dividends that are actually PAID to shareholders. If that info is difficult to find, you should be able to request that information from ishares.com (http://www.ishares.com/get_started/dividends.htm).
"At the discretion of the board of directors, a company can
issue dividends to their shareholders. Dividends are usually paid in
the form of cash but can also be issued as stock or property.
Traditionally, higher growth companies do not issue dividends since the
majority of their profits are funneled back into the company. Most
mature companies distribute dividends to their shareholders, however
there is no guarantee that dividends will be paid.
Mutual funds often pay out interest and dividends, less fees and
expenses, from their portfolio holdings to the fund's shareholders. ETF
shareholders are also entitled to receive any dividend distributions,
less fees and expenses. Each fund pays out dividends to investors at
least annually and may pay them on a more frequent basis. Most
income iShares Funds pay out dividends at least monthly. Those are income ETFs and says nothing about the funds
you may want to trade.
Since ETFs are purchased through a broker/dealer, how investors
receive distributions (cash or reinvested back into the fund) is
determined by their agreement with their broker/dealer. Unless your
investment is made through a tax-exempt entity or tax-deferred
retirement account (such as an individual retirement account), there
will more than likely be a tax consequence on those distributions."
Thus sounds as if they do pay, but you may be forced to
ask to learn the amounts.
2) The BXM vs S&P 500 Index data you shared in the book does not seem to match the charts shown by Mathew Moran in the CBOE presentation on April 2006 (This was the link provided by another reader on your site http://www.capitallinkforum.com/cef/2006/pres/05_moran.pdf).Can you please explain what the differences are based on? Easy answer. My mistake. I did not learn until later that I should have compared BXM with SPTR (S&P total return index), which includes reinvested dividends. Using that comparison, covered call writing barely exceeds buy and hold. But it does make the portfolio less volatile (i.e., the value moves up and down less). But, unless you are bullish here, you can expect BXM to outperform until the market surges again (one day).
3) For a long term investment plan concerned mainly with maximizing long term returns would you recommend a one month 1-2% OTM call writing strategy rather than one month ATM?
The reason I am thinking this is because markets over the long term go up by about roughly 10% so the expected value of the ETF in one month will be roughly 1% higher.
Difficult question and I am
not a good person to ask as my market prognistication skills are not
good. But, I'll say this: If you want to maintain a bullish strategy
all the time - as do the majority of American investors - and as you
apparently do - then selling OTM accomplishes that for you. Minimum
option premiums, but the market will not run higher without your
participation. Note, even with OTM, there is going to be a cap on your
But, if you want better protection aginst a market decline, you are
forced to sell options with a higher premium. It soundsa s if this is
not your top priority and OTM may be right for YOU.
Thus, either stance is reasonable. It just depends on what you feel
comfortable doing. One compromise is to write some of each type. And
it doesn't have to be equal amounts. You may prefer (for example)
20-30% ATM and the rest OTM.
4) In the covered call writing in action chapter it seems that your were recommending a somewhat flexible approach to choosing the strike price (ATM most of the time and OTM
occasionaly especially with EFA)? This is where I started feeling a little uneasy because it seemed to me that the hypothetical call writer was timing the market rather than staying with a consistent strategy. Am I correct in thinking that I should have a consistent strategy without making predictions about the direction of the market? Would love to get your perspective on this.
My perspective is that a constant approach works best. But, human nature being what it is, it's difficult for many people not to be concerned with 'woulda, coulda, shoulda.' If the current market concerns you, a more protective approach would make you feel better. But, if you think we are bottoming and that this is a good time to accumulate longs, then OTM is better. On;y time will tell which would have worked better, but dwelling on the past helps no one.
But it is reasonable to change your mind every time you write new options. Yes, it is timing the market, and I only recommend it for people who have a proven track record of being successful doing that.
I KNOW this is wishy-washy, but the bottom line is that it's each individual investor's own money and he/she must make a decision that's comfortable at the time it's made. It seems to me that you stated your case for MAXIMIZING long-term growth - and that suggests OTM all the time. The only decision for you is whether its 100% OTM or a bit less.
Mark, thanks again for writing a great book. Thank you. I appreciate your kind words.
Rgds And mine to you,
FYI, the book below teaches 6 strategies. So if you ever want to consider something other than covered call writing or cash secured naked put selling, it may be a good read for you. But some people never go beyond those strategies - especially investors whose outlook is constantly bullish.
Mark D. Wolfinger
The Rookie's Guide to Options:
The Beginner's Handbook of Trading Equity Options