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  • Avatar Tim 
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    You dont have to limit your gains either though it can happen. You can either close the position (often if its been some time it will still be less than sold), buy the stock near the strike or get calls at a higher strike.

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    The definition of a covered call is that you limit your gains. Yes, options and stocks and indexes can be actively traded. That is not a pure covered call strategy for generating additional cash returns which was the suggestion. Just as there are many different stock/index investment strategies, putting options into play exponentially creates more possibilities.

    You can buy puts to protect against losses. You can buy calls to leverage gains.  Options are a different world and don’t correlate with a stock price. Stock price goes up, option price goes down. Whats up with that? The gain from selling a covered call collects on sale and limits future gain. That is an investment strategy, you can turn an investment strategy into a trading strategy.  Not many here are going to start becoming options traders intentionally.

    By the way, in an IRA you HAVE TO buy the same option first. If you have partial fills, do you wait or move on? The reason is naked calls can’t be sold in a retirement account, it’s too risky. By the time you clear out the exisiting position, not you have to fill your new strategy. About the only index option with sufficient volume to avoid volume cause bid/asked spreads is SPY.  Managing and executing options trades usually require limit orders. Trading skills is alot different than buying allocations once or twice a month. Transactions costs drag too. Successful options traders are more rare than active mutual fund managers that beat their target.

    Covered calls reduce risk limiting gains. Any other alternative is probably going to eliminate any risk reduction.

    #205176 Reply
    Zaphod Zaphod 
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    Status: Physician, Small Business Owner
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    Joined: 01/12/2016

    You dont have to limit your gains either though it can happen. You can either close the position (often if its been some time it will still be less than sold), buy the stock near the strike or get calls at a higher strike.

    Click to expand…

    The definition of a covered call is that you limit your gains. Yes, options and stocks and indexes can be actively traded. That is not a pure covered call strategy for generating additional cash returns which was the suggestion. Just as there are many different stock/index investment strategies, putting options into play exponentially creates more possibilities.

    You can buy puts to protect against losses. You can buy calls to leverage gains.  Options are a different world and don’t correlate with a stock price. Stock price goes up, option price goes down. Whats up with that? The gain from selling a covered call collects on sale and limits future gain. That is an investment strategy, you can turn an investment strategy into a trading strategy.  Not many here are going to start becoming options traders intentionally.

    By the way, in an IRA you HAVE TO buy the same option first. If you have partial fills, do you wait or move on? The reason is naked calls can’t be sold in a retirement account, it’s too risky. By the time you clear out the exisiting position, not you have to fill your new strategy. About the only index option with sufficient volume to avoid volume cause bid/asked spreads is SPY.  Managing and executing options trades usually require limit orders. Trading skills is alot different than buying allocations once or twice a month. Transactions costs drag too. Successful options traders are more rare than active mutual fund managers that beat their target.

    Covered calls reduce risk limiting gains. Any other alternative is probably going to eliminate any risk reduction.

    Click to expand…

    I have long wished that it was easier to use option strategies in retirement accounts. Some brokers are better than others. Would love to use spreads more than just covered call or cash secured put, etc…

    SPY, QQQ, EEM, and HYG are very liquid. Agree spreads can suck but nothing wrong with spy, qqq, and i’ll happily pay spreads at times depending. VTI is pretty terrible, quarterly only really and open interest is anemic.

    Those are pretty good fund exposure wise, and SPY trades all the time so its easy to see how its doing. I dont think option strategies are worthwhile for most. They can be fine, but just cost a lot of time. Yes you theoretically limit gains, but just meant you dont have to sit and take that, you can get right back in minus the loss. Again, not useful for most.

    #205185 Reply
    Avatar HumbleInvestor 
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    Status: Physician, Small Business Owner
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    Joined: 12/28/2016

    On option spreads, you can get fills in between spreads. For playing with covered calls you have to keep rolling your calls. You lose time, taxes and transaction costs in addition to opportunity loss by having to sell your underlying and repurchase again at potentially much higher price. Would it make sense for big players? Yes as they have the time, staff, and often play for pennies. Would it make sense for an individual with a day job? That’s debatable.

    Old adage: Option trader’s can win 80% of the time and get wiped out 20% of the time. Too much effort for trivial gains.

    #205195 Reply
    Avatar Tim 
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    The leverage capabilities of options is the part that can get out of hand quickly. Very little capital is required to increase or decrease a portfolio risk. From an income strategy standpoint, a whole group of academics have candidates that are specifically suited for generating call income. Just like dividend investors. I just haven’t found a process that works better than allocation with rebalancing. My point was, you aren’t getting run over. A little cash in exchange for limiting gains. No tragedy there.

    #205197 Reply
    Liked by Zaphod
    Zaphod Zaphod 
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    Status: Physician, Small Business Owner
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    On option spreads, you can get fills in between spreads. For playing with covered calls you have to keep rolling your calls. You lose time, taxes and transaction costs in addition to opportunity loss by having to sell your underlying and repurchase again at potentially much higher price. Would it make sense for big players? Yes as they have the time, staff, and often play for pennies. Would it make sense for an individual with a day job? That’s debatable.

    Old adage: Option trader’s can win 80% of the time and get wiped out 20% of the time. Too much effort for trivial gains.

    Click to expand…

    You dont have to keep rolling calls. You can do it when you want or not. Thats what I do. Im not doing covered calls at a recent bottom for example. Now otoh, Im entertaining it but will still watch for a while.

    You can win 99% of the time and still go broke. Thats not really what we’re talking about here since the calls are covered, you only lose your position and any of the gains in between that and repurchasing the position.

    #205200 Reply
    Avatar Tim 
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    “Taking more then I need for what?”

    If your is $5mm, and you have $20mm, why would you buy any stocks? 100% treasuries is usually considered the lowest risk. AA is used to achieve a higher return at a higher risk. A case can be made for taking only the risk you need. Way less than capacity, safe bet. Would your returns be sufficient at 60/40? Just look at the different averages returns, it’s not a whole lot.

    #205206 Reply
    Lordosis Lordosis 
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    Status: Physician
    Posts: 2186
    Joined: 02/11/2019

    “Taking more then I need for what?”

    If your is $5mm, and you have $20mm, why would you buy any stocks? 100% treasuries is usually considered the lowest risk. AA is used to achieve a higher return at a higher risk. A case can be made for taking only the risk you need. Way less than capacity, safe bet. Would your returns be sufficient at 60/40? Just look at the different averages returns, it’s not a whole lot.

    Click to expand…

    When I get to 20MM I will stop 🙂

    I do not see a 60/40 ratio as any safer at this point in my life.  Actually I see it more of a risk that I may not reach my goals as soon as I should.  I have no use for this money for 20-30 years.  I have no desire to smooth the ride.

    “Never let your sense of morals prevent you from doing what is right.”

    #205223 Reply
    CM CM 
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    Status: Physician
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    Joined: 01/14/2017

    Here is a chart of current valuation metrics relative to their own historical means:

    Here is a graphical depiction of the inverse correlation between 10-year returns and starting valuations. The graph is inverted. For example, the 10-year nominal return following 2000 is negative:

    More details available here: https://www.advisorperspectives.com/dshort/updates/2019/04/02/market-remains-overvalued

    Click to expand…

    Have you heard the argument that share buybacks, decreased outstanding shares and inflated eps from such has artificially raised CAPE (some, ofc its still very high). Thats a new one on me, interesting.

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    Haven’t heard that, but to the extent that buybacks decrease share count and increase earnings, that will decrease P/E rather than increase it. (Note that buybacks became popular when stock options became a popular form of compensation. The majority of buybacks only offset dilution from option exercise.)

    The paper by Asness (linked above) discusses most of the criticisms of CAPE (and rejects them :-)).

    Erstwhile Dance Theatre of Dayton performer cum bellhop. Carried bags for Cyd Charisse (gracious). Hosted epic company parties after Friday night rehearsals.

    #205292 Reply
    Avatar Tim 
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    Joined: 09/18/2018
    The paper by Asness (linked above) discusses most of the criticisms of CAPE (and rejects them :-)).

    Click to expand…

    Robert Schiller does not invest on CAPE. He calls it an intellectual exercise.

    but to the extent that buybacks decrease share count and increase earnings, that will decrease P/E rather than increase it.

    Click to expand…

    Share buybacks actual do not impact earnings or price. Credit cash, debit common stock.  Everything else is market driving on share price or calculation. Many assumptions can be made. Assuming no change,if a P/E rate is 10x and EPS goes up 2% (due solely to fewer shares now) the price would pop 20% (10×2%). The reality is a higher PE is normally given, instead of 10x now its 12. None of the calculations are given. It’s the market. Same profit, fewer shares.

    #205302 Reply
    ReFinDoc ReFinDoc 
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    Status: Physician
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    Joined: 01/09/2016
    #205321 Reply
    Avatar borg 
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    Status: Physician
    Posts: 30
    Joined: 03/21/2019

    While I understand that being young = ability to be aggressive (aka 100% equity), but don’t you want buying power if/when there’s a big market dip? Think of it like there’s a huge sale coming, we just don’t know the exact dates yet—but it would suck if you had zero $ when the sale comes, right???!??

    #205345 Reply
    Liked by Tangler, Perry Ict, Tim
    Avatar Perry Ict 
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    Status: Physician
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    Joined: 01/20/2019

    Borg,

    Exactly, that’s the angle I’m viewing right now.  Of course, there is always the chance that things don’t go on sale for awhile, but I’m okay with the possible downsides of playing conservatively at this stage.

    #205347 Reply
    Liked by Tangler
    Avatar Tim 
    Participant
    Status: Accountant
    Posts: 3341
    Joined: 09/18/2018

    @refindoc,
    I started to read through the Buckingham verbiage and realized that the data used started in 2003.
    First point is the limited periods in the table and narratives aren’t statistically valid (6 or 7 periods is rather skimpy).
    Second point is I pulled up the S&P and low and behold, this was the absolute bottom of the internet bubble that started in 2000.
    Is is possible Buckingham would present data that fits a narrative for their prowess in investing? One down cycle maximizing gains leaves me suspect.
    Interesting read. Buckingham isn’t using CAPE either.

    #205352 Reply
    Avatar Tangler 
    Participant
    Status: Physician
    Posts: 384
    Joined: 08/23/2018

    Future projections: 6% +/- 2% but…….agree with FLP. It is mumbo jumbo and all bets are off! The next 10 years could do anything! I think it will tank 20-50% somewhere in there but as a resident I was told: “you are frequently wrong, but seldom in doubt” and it is true. Overconfidence = another reason I want to increase my bond allocation.

    Borg you said it nicely! I too want some “money” for the upcoming sale. William Bernstein, MD refers to a his as “dry powder” as in dry gun powder for the cannons in preparation for the future battle. I think having the ability to buy low after a big drop will help me tolerate it better (keep me sane). If you call this rebalancing your AA after a drop, people will applaud, but if you call it employing your dry powder to remain sane they will accuse you of market timing and caution you. It seems like semantics to me. I am going to try to gradually increase my bond allocation over the next 5-10 years with a goal of:
    now age 45: 90:10
    age 48: 80:20
    age 50: 75:25
    age 55: 70:30

    If (when) the market drops >20% I might need to hold tight or even “rebalance” by employing my dry powder to buy low but if (by some miracle) it keeps going up for the next 10 years I will be decreasing my Stock allocation. I honestly think a big bear is coming but I have no idea when. I just don’t need to take huge risks. If i was a 30 -35 year old doc would i be 100% stocks? Maybe. You are more “bond-like” when you are young, and a young well trained doc with disability insurance has a lot of human capital and should be an earning machine. 10 years ago I was broke and oblivious to AA. I was so broke then that when the market tanked in 2008 i was way more focused on my job, and i wasn’t even looking at my pitiful portfolio. I was focusing on career and student loans so my risk tolerance was huge. Now (as i get older), the student loans are gone, the market “seems” overpriced and I think a coming 20-50% decline is going to hurt a lot more. I know 45 is not that old, but now my portfolio has stuff in it and  a drop of 50% at 45 will sting way more than a drop 50% did in 2007-2009 when I was a broke new attending.

    But…..it is mumbo jumbo as FLP says. No one knows the future. If you are 30, don’t ever look at your portfolio and don’t have much in there anyway then sure 100%! But realize it might drop 50% and be “ok” with that. (MUCH easier said than done). Great thread. Sorry my post is too long.

    #205389 Reply
    Avatar ajm184 
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    Status: Other Professional
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    Joined: 07/14/2017
    but if you call it employing your dry powder to remain sane they will accuse you of market timing

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    It is market timing with a caveat.  Unless you have written framework and process to identify what is on ‘sale’, you will constantly be wondering ‘more dry powder’ or ‘is the “sale” good enough’.

    One interesting approach I have seen discussed (don’t recall whom or where) was the following:

    a. A peak to trough drop of 20% in the Whilshire 5000 (both the % amount and index could be changed for a given individual).

    b. Upon a. above occuring, a person would convert 10% (again subject to change) of their total NW to purchase the index fund.  If the peak to trough drops another xx%, then again you convert that percentage of your total NW again.

     

    #205427 Reply

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