Sometimes we forget the basics.
Even in a year with low implied volatility of the market you can scratch out just under 30% profits in our long and short-term portfolios. You can also cash out out income portfolio with a 20% profit by following basic strategies, not by gambling!
So let’s review the basics. Here they are:
Not that we’re adverse to gambling, gambling is fun — but fun means fun, which means it’s a small part of our total investing portfolio while the vast bulk of our money is sensibly invested in safer strategies that are designed to grind out consistently good returns over many years.
Let’s discuss some basic strategies that can generate those consistent annual returns.
Here’s a basic covered call strategy example in which we delve into the fundamentals of stock selection. At the time (September 2013), we were using ABX, which was trading at $19.15 and we sold the November $19 calls (45 days out) for $1.30.
The simple instructions were to wash, rinse and repeat to make up to 40% a year by simply selling calls against the stock.
As you can see, ABX dropped to $10.58, down about 40%. But, had you followed through and kept selling calls, we had a lovely 12-month period in which it stayed in our range and that would have given us eight opportunities to collect at least $1 for $8 back before the stock turned down in September of 2014.
That would have dropped the net outlay below $10 and stopping out at $15 would have been a 50% gain for the year — even as the stock dropped 22% (from $19.15 to $15).
You can’t get more basic than that — just mindlessly selling covered calls every month or two and, even when the stock ends up being a dog — 50% returns! There’s nothing fancy here other than our selection of a range-bound stock which, of course, we stop playing when it falls out of our range.
Anyone can learn how to trade this way. Unfortunately, a lot of traders tend to forget how easy it is to make money by just sticking to the basics.
As with the Dark Side, it is easy to be seduced by the allure of quick and “easy” money using options for leverage and trying to beat the market for a big win based on some “tip” you got, be it from a friend or a guy on TV or even someone like me.
Never forget that that’s gambling and you will be OK. Gambling is not investing. Investing is what we should be doing with the vast bulk of our equity assets — gambling is not!
As I said above, sometimes we just forget the basics — the reason we love options in the first place. We can sell a put to give ourselves a discounted entry on a stock and we can sell a call to pay ourselves a dividend. Year after year we demonstrate how these techniques can give you those consistent 20% to 40% annual returns without taking huge risks.
If you believe investing is gambling, then you are doing it wrong and, if you believe investing is gambling you are more likely to take the kind of risks that are gambling, which will then reinforce your misguided view that investing is gambling — get it?
There was no gambling in buying ABX for $10.58 and selling the Feb $10 calls for $1.15. Your net entry would have been $9.43 and, on Feb 20th (55 days), you will either be called away at $10 with a 0.57 profit (6%) if the stock is above $10 or, if ABX was below $10, you would own the stock for net $9.43 (a 10.8% discount) — at which point you will wash, rinse and repeat the trade by selling the April $9s for $1 or so.
This is not an options class so I won’t get into all the what-ifs down the road. Suffice to say you can repeat the performance that gave us 50% on ABX with very little risk.