deaddog wrote:Hey Adrian; our favorite debate;
Are you investing in common stocks are still using preferred stocks and options? Hell of a ride since 2008.
Zero preferreds now, not enough yield. Last one sold was YPG.PR.B, at a small profit and not because of a stop loss; I had (later proved true) concerns about the business itself and the downward spiral of the common / potential conversion at an inflated common price.
deaddog wrote:What are your thoughts on why trading/market timing is difficult? With or without stop losses.
I'll divide the traders into two roughly equal camps: trend followers (aka momentum players, aka growth) and contrarians (aka value). I can't speak about the first camp as I was never able to accept their arguments. For my camp, the difficult part is sticking to your guns when all hell breaks loose.
Back to leverage: it's a siren call to me because it's a "sure" way of making money out of nothing, as long as some basic premises are kept.
E.g., start with lots of margin (say you have an indexed allocation across the world), then you pick some stodgy dividend payers (say, 3 or 4% current yield) in various sectors. Write at the money puts and collect a year worth of dividends in time value for short term puts (a couple of months or so). If, in a couple of months, the stocks are stagnant or up, you've gained "money from nothing", rinse and repeat. If one or more go down, the moment there is no time value left, you roll forward the puts -- in the worst case, if the puts are deep in the money, you just gain the equivalent of a dividend; if they are not too deep in the money you gain some "pure" time value, too. The "trick" is that option theory for a dividend payer expects the stock to go down the day it becomes ex-dividend by the amount of the dividend, so the neutral position for a stock paying 4% yield is that in 25 years the stock will be down to $0. Anything above it is gravy. My ego says I can identify stocks that won't be zero in the next 25 years and will continue to pay their owners -- all I need is enough margin to keep my position safe from margin calls.
Occasionally, I'll do it with indices which have even less of a chance to go to zero. Lately, I've done it with VWO and VGK (Vanguard Emerging Markets and Vanguard Europe) -- VGK I've bought, then written covered calls when it bounced up (standing to make about 7% in a month a half and very likely be assigned, but I don't care as spreads are too wide to roll forward), and VWO I've written January puts which again, at current prices, may expire worthless. Money from nothing
and chicks for free...
My attraction to leveraging by writing puts is that it gives me the mental accounting of "what you had and what you've lost". Starting with negative cash and lots of margin, if I write a put I save a bit of the margin interest (3% currently), plus I can close the trade with a couple hundreds in profit and not worry too much about commissions (2 x $7 for a round trip), it's a cost of doing business and making $200 or so. Without entering and closing the trade, it's the base scenario, after the trade I'm a few hundred better. Could I have made more? Many times yes, but why should I regret -- there is always another opportunity on the horizon.