Techa,
have been writing covered puts on particular stocks one strike below the current price 4 weeks out. Have been doing this since mid April. Strategy has been good up till now though it’s been stressful at times. Am looking for other strategies.
I’m not experienced in spread trades and other more sophisticated option strategies.
Ajax
techa,
Can you write covered calls on and underlying share if the share is leveraged ( via a margin lending product)
What is the strategy on the covered call ??I have traded shares and options in the past but this is all new to me ( maybe I nedd to attend a course or get in touch with P Spann or something..)
KP
Kp
Ive never asked that question of my lender but would say that as your security to the lender is either cash of stock and provided you are within their margin parameters I cant see why not its your stock.
That also raises a question re stock held by a self contributing super fund (Your own) wether you could write covered calls on that as well.Ill find out.
If your interested in options
“The New Options Advantage” by David Caplan
ISBN 1-55738-863-6 is outstanding.John
Thought it maybe worth explaining the stratagy of using equity in a Margin Loan a little more in depth as reading back it seems that the concept is or will be very new and daunting to some.
Firstly we are all happy to run off to a financial institution for a few $100K for our own home or the next IP.Armed with our deposit of cash or equity from our property.Everyone does it from one time to another and as we know “Everyone makes money in property”
(Well they should).
Generally society is comfortable with the concept.But money in the bank and equity (Particularly) in a property is dead money.Its not working for you.Equity is to a bank like cash in your hand.
Some discover how to unlock it when buying IP’s.But the time comes when property stalls or even goes backward and those who are geared positively enough sit back and smile with satisfaction and others struggle when their gearing puts them at risk when rates inevitably rise.
The gurus rightly point out that there is a pool of wealth available to all who have some equity in their home.They are encouraging you to look outside the square of convention.One idea is to ues the equity as a deposit against a loan from a Margin Lender (Bank,eg Commonwealth,BT,Maquarie).To invest in (In the case discussed)Property trusts.
We call any group of stocks that are in our pool for trading a “Universe” The All Ordinaries is a universe of over 1600 stocks.You could trade just Banks or Mining Companies or Property trusts all universes within the Universe of the “All Ordinaries”
Margin lenders have their own group of stocks they allow to be traded using your funds and theirs.Their “Universe” of allowable stocks to trade have been selected on fundamental criteria which their analysts believe warrent the stocks inclusion.
Like a Bank researching high growth areas for property and only lending on them,how good would that be!! (Sure they are only human and get it wrong ).
They rate the amount that they will allow to be fully vested in one stock from 45% to 85%,so if you trade only one Stock,property trust or whatever you will have a limit to the amount of funds the bank will lend on the ONE stock.
However “Normally” people trade a Portfolio or group of stocks,so if trading 5 equal $ value parcels only 20% of any one investment will make up you portfolio so you will have no restrictions on what the lender will allow you to trade as your below his minimums.
OK that explained you have say $100k equity in your home and you want to unleash it without selling.Off to the bank and we setup a line of credit! Now released we chose a “universe” of Stock to trade and give our Margin lenders their deposit.
$17000 was the minimum margin requirement from BT
.
You can use any amount from 17K to the 100K.As a rule of thumb you will recieve around 2.5* your Margin from the lender so $100K will give you a total of around 350K to trade.
To the Math
Line of credit on your equity–say 7%
Interest on Margin say 7.6%
Costs of buying and selling portfolio etc 1.5%
So you need to make say 10% P/A to be viable.Dividends cover most of your interest.
For those who want more info on Margin lending I have a discussion Paper from 2000 when I first became involved just email me and Ill send it on.
[email protected] please address as “Margin info” or go to https://online.btfunds.com.au.For those wondering.
Im an investor like you I have a Civil Construction Company, 8 IP’s and 2 Trading Portfolios.If you can find it seek your own independant
financial advice from a licienced advisor.John tech/a
Just quickly something that should stir some interest.
To the Math
Line of credit on your equity–say 7%
Interest on Margin say 7.6%
Costs of buying and selling portfolio etc 1.5%
So you need to make say 10% P/A to be viable.Remember a 10% return on your Margin account.
is approx $35000 on our case above.This is 35% on our initial investment of $100K
Now imagine 20% or 30%
But as with all leveraged instruments the downside is leveraged as well.
So a 10% portfolio loss is a 35% Initial capital loss.Now imagine 20% or 30%.
tech
Good one techa,
WIll spend a bit more time reading the whole post.But you raised an interesting point about who owns the stock that you are putting up for rent to an option buyer. Sure you own it, but the margin lender has security of it ( mortgage?) and its not paper anymore, so how do you put up the share ( electronic paperless) for rent??
KP
An interesting discussion.
A margin loan is a relatively inefficient vehicle for leverage these days. Instalment warrants, CFDs and LEPOs offer far greater leverage. The choice of derivatives available nowadays means the traditional concept of buying FPOs (fully paid ordinary) is a little like having the equity in your home sitting idle.
Having a margin loan exposes you to a margin CALL. Owning instalment warrants removes this risk. You can write call options against them for extra cashflow. They pay very good dividends (up to 20%) and franking credits. Your risk is limited to the amount paid up front.
CFDs provide good leverage (95% LVR) but there is a high risk of margin call. You cannot use a CFD as collateral when writing call options. CFDs pay dividends but no franking credits. The major advantage to CFDs is that equity is unlocked in real time. This can be very useful in a rising market.
LEPOs provide the best leverage (95%-98% LVR) but pay no dividends, however they can be used as collateral for option writing. Again, equity is unlocked in real time.
Writing call options is not a strategy for use in a bull market, which we appear to be in. The returns are often exagerated a great deal, I have seen some spruikers quoting 8% a month. The REAL return is likely to be an extra 5% a YEAR. I have run many simulations on this and my results show writing calls against owned stock will improve the relative performance by only 3-7% p.a. This means if the stock was flat for the year, you came out with 5%. If the stock went up 10%, you cleared 15% (excluding dividends).
If it is cashflow you seek, look for a stock paying a high dividend yield. Then look at what instalment warrants it has. You may find a stock like NAB paying 6.5%, which may have instalment warrants yielding 20% (due to the fact leverage is involved and the dividend paid is the same). Or perhaps look at dividend stripping.
hey techa!
http://www.posigear.8k.com
Positive Geared Share InvestingCrashy! nice to see you again…how’s things?
joy to the world
As for your philosophical question as to how to get cashflow from equity, well call me old-fashioned, but what is wrong with RENT????
i.e. equity
go buy loads of high yielding CF+ve properties (or create them by building extra bedrooms, renovating, selling off a slice of the land, whatever it takes) and live off the rentsBlocks of flats can work quite well
Crashy.
You may know I have basically no time for Financial Planners,purely because 90% of them are attempting to be as wealthy as their clients.
You at least appear to be ‘Out of the Square’.Ill have a good read of your site when time allows.
(youd think at 3 in the morning Id have time!!)tech
Humans are the DUMBEST of creatures.
They do the same thing day in day out and expect a DIFFERENT result.>>Writing call options is not a strategy for use in a bull market, which we appear to be in. The returns are often exagerated a great deal, I have seen some spruikers quoting 8% a month. The REAL return is likely to be an extra 5% a YEAR. I have run many simulations on this and my results show writing calls against owned stock will improve the relative performance by only 3-7% p.a. This means if the stock was flat for the year, you came out with 5%. If the stock went up 10%, you cleared 15% (excluding dividends).<<
At last…the truth about covered calls!
Crashy.
After giving you a bit of a rap Im now a little confused.
On your site you state.
{{My name is Paul Crewther, I am a qualified Financial Advisor based in Brisbane.}}
And your Site Disclaimer states.
{{Disclaimer – This site contains educational information only. The author cannot guarantee that all information is complete or accurate. Investment conditions and tax laws are subject to change. At no time should anyone act on any material on this site without consulting their own licensed advisor. The author is not licenced to provide specific advice or recommendations, and does not provide any such advice. No responsibility or liability for any loss suffered by anyone acting on this material is accepted by the author.}}
Nor can I find any reference to you or Posigear at.
Whats the go? Licienced or not?
Humans are the DUMBEST of creatures.
They do the same thing day in day out and expect a DIFFERENT result.“”At last…the truth about covered calls!””
You write calls on your stock if your long term bullish and short term bearish.
Its not a money making ploy its a hedging stratagy—-a risk minimisation tool.
a clearer understanding of option use and deployment maybe best.Read David Caplan
“The New options advantage” if your keen.Humans are the DUMBEST of creatures.
They do the same thing day in day out and expect a DIFFERENT result.techa
there should be no confusion, unless you dont know the difference between a qualification and a licence. As it CLEARLY states, I am qualified but not licenced, which is why I dont offer any advice, simply educational material (which requires no licence). ASIC tried to catch me out last year by asking me for specific advice, which I refused.
cheers
http://www.posigear.8k.com
Positive Geared Share InvestingCrashy.
Clever illusion.
Your not alone 90% of the Financial Planning fraternity are nothing more than glorified insurance salesmen restricted to the mother company and the products carried holding their authority.(Not a licience an authority,clever again).
You know and I know that this little illusion works well.
Hi Im Joe Bloggs and Im not a financial adviser/planner—just doesnt have the impact!
For interest could you define QUALIFIED.
This qualification is recognised by?This qualification is awarded by?Can you see why I get really peeved off about this!!!! Mr and Mrs Average know no better and although your clear THEY ARENT.
Anyway lookforward to your measured response.
tech
Humans are the DUMBEST of creatures.
They do the same thing day in day out and expect a DIFFERENT result.illusion you say? interesting allegation.
I hold a Diploma of Financial Advising, awarded by the Securities Institute of Australia (2003), recognised by the Australian Qualifications Framework. Registration number 90106NSW/40058 should you wish to check. PS146 compliant. And a partridge in a pear tree.
Many financial planners are not qualified (DFP), and the ones that are only had to sit 4 modules. The DFA is 8 modules, so you could say we do twice the study. Yes they are just salesmen, we all know this.
cheers
http://www.posigear.8k.com
Positive Geared Share Investing“You write calls on your stock if your long term bullish and short term bearish.”
That would then mean that you would only write calls when the stock is “high” by some measure. Why own a stock at all if you are bearish, regardless of the timeframe?
In a falling market, this means you have no hedge. In a flat market you make no income. In a rising market, this means you give away most of the cap gains, and if the stock ever comes back down you stop writing calls because you are no longer bearish? Just who is so good that they know all the tops to sell and all the bottoms to stop selling? Its just not credible. You either write calls every month or not at all. It would be nice to have cake and eat it too, but lets be realistic.“Its not a money making ploy its a hedging stratagy—-a risk minimisation tool.”
Well you just contradicted yourself. How can it be a hedge if you sacrifice upside and dont protect on the downside. The only way to hedge properly is to write calls every month. Imagine if you wrote bhp calls @ $12, because you thought it had run to far and you were “short term bearish”. The next month you do the same @ $13, and so on. Pretty soon its $15 and you have made squat. Perhaps then it falls slowly, but you dont write calls because you are not “short term bearish”.
“a clearer understanding of option use and deployment maybe best.”
None of us can say we know it all in the option department (yourself included), there is simply too much to know. But Im sure that comment of yours was not meant to come across so condescending? Have read a lot of options books but not Caplans (got a distinction in the derivatives exam by the way). Will give it a whirl, even a fragment of new knowledge will be worth the effort.
http://www.posigear.8k.com
Positive Geared Share InvestingPaul.
Thanks I’ll check it out (The illusion).
By the way Ive learnt more over the last 50 yrs from the UNQUALIFIED than I have from the QUALIFIED.
Its the pretentiousness of those who present themselves as something they arnet that gets up my nose.(Its a personal thing).
Anyway now thats cleared up I’ll continue reading your site.tech
Humans are the DUMBEST of creatures.
They do the same thing day in day out and expect a DIFFERENT result.Funnily enough, the three insurance agents that I dealt with in the early-mid 1990s are all financial advisors now
They followed the money – can’t be too dumb
Cheers,
Aceyducey
In theory, there is no difference between theory and practice. But, in practice, there is.– Jan L.A. van de Snepscheut
Acey.
Interesting comment.
I maybe wrong but Ill bet chances are thay are (although by name,advisors) still the same “Salesmen”.
If however you old us that they are now owning X properies and they had “Followed the Money’
Id certaintly agree.All I can see is an alteration in percieved posture within an industry!
Doing the same thing placing a different label on it.
tech
Humans are the DUMBEST of creatures.
They do the same thing day in day out and expect a DIFFERENT result.Techa,
They are definitely salesmen…but so is Aussie John.
Nothing wrong with being a salesman (or salesperson even!)
The issue lies in that they have an employee mentality.
To a large extent I do see the majority of financial planners today as the insurance salespeople of yesterday.
There are some diamonds out there, but like in other things not that many.
I think of the mediocre ones as potential renters.
Cheers,
Aceyducey
In theory, there is no difference between theory and practice. But, in practice, there is.– Jan L.A. van de Snepscheut
You must be logged in to reply to this topic. If you don't have an account, you can register here.
