 |
Between my recent trip to the Orlando MoneyShow and all the regular e-mails I get from readers, I’ve had a lot of questions coming my way lately. And that’s why I wanted to take some time today to address a few of the most common topics that have been coming up.
For starters, the initial feedback on the new covered call strategy that I’ve started using in my dad’s income portfolio has been wildly positive. But a lot of people want to know:
“How Are You Deciding What Specific Options to Write? And How Hard Is It to Do This Myself?”
First, let’s start with how I’m selecting my trades. As I’ve mentioned before, I am ONLY going to recommend writing contracts on stocks that we already own … so that right there limits our choices to a very short list of companies to choose from.
I should note that plenty of other people DO write calls without owning the underlying stocks. But I consider that an extremely dangerous approach.
Still other people specifically buy stocks that they know have the potential to create very big premiums from call writing. I think that’s a fine strategy if you’re a very advanced trader … but personally, it entails a bit too much risk for what we’re trying to accomplish in dad’s income portfolio.
I’m also only going to recommend writing out-of-the-money options contracts that would result in a reasonable profit should the calls get exercised.
Those are just the simple ground rules though.
From there, I’m looking at digging deeper to see which specific options contracts might get us reasonable premiums. And then I’m ultimately basing our expiration dates and specific strike prices on my analysis of the underlying stocks’ charts.
In the case of our first trade that got filled, dad got an immediate return of about 2.2 percent based on his purchase price of the underlying position.
That might not sound like much at first. But if we’re able to do that three or four times a year, dad could be getting a very nice annual result of 6 percent or 8 percent … before we even factor in his dividends or any capital appreciation on the underlying stock!
Obviously, it’s pretty tricky to consistently pick the right contracts to write. But the good news is that getting started is very easy to do.
You just need to own at least 100 shares of an optionable stock. Then, within a few days of contacting your brokerage to get Level 1 options clearance, you could be using this approach for your own portfolio, too!
Of course, on a related note, one question that a lot of MoneyShow attendees asked me was …
“Where do you see the stock market going from here, and why?”
I think people have been surprised to hear me say that I’m not wildly bullish on stocks right now. After all, I was one of the few people saying “buy” over the last couple years when most others were saying “sell.”
Don’t get me wrong — I STILL advocate holding high-quality, dividend-paying U.S. stocks right now! But I also try to be objective, and I get especially nervous when a lot of people start hopping on the stock bandwagon … which seems to be what has been happening lately.
I would note that we have ALREADY had one of the best yearly starts in the stock market in decades. So is it realistic to expect similar gains for the rest of 2012 or have we already gotten a lot of our near-term upside?
I’m leaning toward the latter scenario for two important reasons:
First, I do not believe many of the fundamental issues plaguing the U.S. and Europe have been resolved yet. Rather, they have merely been temporarily “papered over” by easy money.
Second, we have a tumultuous political election still ahead of us … and that could cause some stock bulls to take pause (or at least take gains).
Mind you, my model portfolios are still chock full of stocks … so I hope I’m wrong. But the introduction of covered call writing is one of the ways I’m looking to hedge a bit should the market be topping out.
Now, switching gears, I have also had a lot of questions revolving my thoughts on bonds lately.
So let me cover the two most common ones today. The first is on I-Bonds, something I have recommended here in the past.
Someone at my workshop basically asked …
“Are you concerned about the safety of holding I-Bonds now that paper certificates are no longer available?”
Just to explain the question: As of January 1, you can no longer buy paper I-Bonds from your local financial institution. Instead, I-Bonds are only available in electronic format now.
In short … no, I’m not concerned about having only an electronic record of my bond holdings. Heck, it seems a lot more likely that your physical bonds might get destroyed leaving you without a record of ownership!
Realistically, the only reason this change is troublesome to me is because you can no longer double up on your annual quota of I-Bond purchases per Social Security number by buying $5,000 in paper bonds and another $5,000 electronically.
Last but not least, the idea that I’ve been recommending any type of government bond at all had people wondering …
“Where do you stand on other types of Treasury bonds right now?”
My answer is that I would only consider those at the shortest end of the maturity scale.
While it’s true that a spike in interest rates has yet to materialize — and everything Ben Bernanke says indicates a few more years of rock-bottom rates — I still do not like the risk-reward of longer-term Treasuries.
No, I can’t say when they might implode … or even if they will at all. I just know that I can find better yields in other places without the worries about Washington’s finances!
Best wishes,
Nilus
