Income Strategy: Covered Call or Buy-Write

Name: Covered Call aka Buy-Write

Strategy type: Income
Outcome:  Exposure to losses and limits extreme gains

How it works:
1.  You need to own the stock (pre-requisite)
2.  You need to SELL out-of-money CALL options (locks in some profit and makes some income)

Profit-Loss hack:  The stock is a dividend-paying stock.  You never sell when it goes down.  The stock is a buy-and-hold until you get exercised.  However, if the stock has dropped a lot and you are worried about being exercised, this strategy needs to be modified to minimise losses. 

Calculations:

• Income (if CALL not exercised) = CALL income + dividends
• Profit (if CALL exercised) = CALL strike price -  stock purchase price + CALL income
• Loss (if CALL not exercised) = stock new price - stock purchase price + CALL income - all commission

Other professional views about this strategy that should be considered, read (always important to keep an open mind so as to make a better informed decision about the right/best strategy for me)

• http://www.forbes.com/sites/baldwin/2012/07/17/covered-calls-what-works-what-doesnt/#f3c3a1b59b83
• http://www.forbes.com/sites/baldwin/2011/11/02/getting-rich-off-options/#4e0032491197 

Video information available:

• IndexInvestingShow (short) @ https://www.youtube.com/watch?v=8YjfWTm6j7
• Lilia L @ https://www.youtube.com/watch?v=5nmZPKbXFTo
• TraderInterviews @ https://www.youtube.com/watch?v=LBPu694h-q4
• TheoTrade, LLC @  https://www.youtube.com/watch?v=IchwhxDuIQg

Course on udemy:  https://www.udemy.com/dont-leave-money-on-the-table-sell-covered-calls/
* Note that I am not making commission at time of writing because this blog is not monetized.  This link is here as information only.  I do not endorse this course.  My job is to find information available online to make an informed decision about my trading.  This does not mean that I will not attend trading course afterall, I trained many years to become a professional to make an income.  Thus, I understand the importance of being properly trained to make an income.  Having said that, work and trade are different.  Work, you never quite lose because you get paid each hour you work unless your company is going belly up.  Trade, you win some, you lose some.  Hopefully, win more than lose!

For a more profitable variation, read

• https://www.learningmarkets.com/increasing-profits-with-covered-calls-on-leaps/

Daniel Kertcher's Tradeability Income Course - thoughts from someone who attended his course copied verbatim

This was on a trading forum (http://www.aussiestockforums.com/threads/daniel-kertcher-trading-pursuits-serious-or-scam.21516/).  Written by someone called Matteo in 2011.  I want to thank the trading forum website and Matteo for this information which will form the basis on my research (posted separately) into this strategy. 

-----  Pasted verbatim  --------------

I recently completed the Platinum Pursuits Tradeability Income course presented by Daniel Kertcher. I was quite apprehensive about it, and that wasn’t helped by the negative comments about Daniel and his company on this and other trading forums. However, it is inevitable that anyone who charges thousands for their courses is going to be treated with suspicion, and the content of the course really had me interested, so I decided to part with my $3,200 and do the course. Now I hope here to provide an insightful and unbiased account of the course and its potential to fulfill its promises for anyone who may be considering undertaking it.

Firstly I must say it is disconcerting to me when you get the usual crap on their website saying that you have to get in quick because they limit the courses and if you don’t book early you will miss out, then the presenter proceeds to tell you that they have to charge these ridiculous amounts to cover the costs of holding the seminar (yeah right”¦.). Daniel is a very good salesman, there is no doubt about that, but does his course deliver what it promises? Well, yes”¦.and no.

The Tradeability Income course is basically all about covered calls, however instead of using shares that you already own you buy the equivalent cfd’s to cover your calls. The idea is that you sell well in the money calls (usually the strike is about 10% or so below the share price at the time of entry) so that the share price can drop considerably without it affecting your income from the trade. You then place a guaranteed stop to limit any potential loss and you have a virtually foolproof strategy. You simply deduct the trading costs from the premium you receive from selling the call and that’s your income for the month. And you can do all this in 30 minutes a month, just set and forget. Of course it’s not that simple, regardless of how much Daniel will try to tell you so.

The strategy uses US shares as they have greater liquidity and the options require only 100 shares per contract rather than the 1000 shares required for Aus contracts. As such it enables you to trade this strategy with less capital. It is done on a monthly basis where the positions are closed on option expiry date (Friday), then the next round are opened on the following Monday. So essentially we want every stock to either go up, stay the same, or go down a little. So long as at the end of the month the share price has stayed above the strike (or above the stop loss which is set slightly below the strike) we pocket the income. The risk is if we get a substantial decline like we did in May 10, and find that most or all of our trades get stopped out, we could incur a substantial loss. However this is a long term strategy and the idea is that over time it should generate a good income.

The blurb that I got before I did the course was that for the first 3 months of using this strategy (note: this is a very new strategy that only people who have done Daniels course can do as for the moment there is only 1 broker, IG Markets, who allow the strategy and they will only allow access to Daniels students) the return averaged about 12% per month, annualized to around 150% yearly return. And you can trade using as little as $5,000. Sounds impressive huh? Well, it may not be quite as impressive as it sounds. Firstly, that return was from the 3 months after the big drop in May when volatility was high and the market rallied back strongly. The past few months volatility has dropped off and I would estimate the monthly returns would be closer to 5%. Still not too bad though ”“ 60% beats the banks doesn’t it? Well, yes, but there is a catch (and guess what, they don’t tell you this before you do the course!). That return is based on selling 8 contracts of each option (and buying 800 shares). Now, this strategy trades US shares, and some of them are valued at over $100, with many valued at $60+. Some quick maths ”“ 800 shares in a company trading at $120 is $96,000. If the margin is 10% then you will need to put up $9,600 just for one trade. The idea is to take about 10 trades in order to spread the risk, so if the average price is ,say, $60 and the average margin is 7.5% (some stocks will require 5%, some 10%), then the amount you will need to buy 800 shares of each is $36,000. So unless you have a bank of about $36,000, don’t expect to get the returns they are spruiking. But wait! Guess what? There’s something else they forgot to tell us before doing the course. Those returns are assuming that you invest your entire bank into the trades. But you can’t do that, because you need a buffer in case the shares drop and your margin requirements increase. Daniel recommends investing no more than 40% of your bank. So now, in order to make the sort of money you thought you were going to make you need a bank of $90,000. You can trade with less and still make money, but can you trade with $5,000? No way! I would say the minimum bank you need is $20,000 in order to make it worthwhile. The problem is that once you go below the 800 shares the costs of the trade such as commissions etc eat a bigger hole into the income from the call. And here’s the other thing, those returns don’t include guaranteed stop losses. Daniel doesn’t use them (even though they are one of the big selling points of the course), and if he did the returns would be considerably less. In fact, trading on a bank of $20,000 with the current returns, using a stop loss will turn most trades into a loss, making them pointless to enter.

So, things aren’t looking quite as rosy now. I have been trading this strategy now for 2 months on a $20k bank and have so far only entered 5 trades with an avg return of about $50 per trade. I have made about $250. I have a long way to go to recoup my money invested with Daniel, however I have made money so far. If I had a $100k bank though I could have entered more trades and got better returns, and would probably have already recouped my money. In order to make this strategy more viable for those with a small bank there needs to be more volatility in the market to improve the returns. However that of course comes with extra risk, and without guaranteed stops then one bad trade that gaps well below your stop could significantly impact on your profits and turn your month into a losing one. With increased returns it may then become viable to place guar stops, but of course your returns will be heavily reduced. I was quite nervous when one of my stocks reported a couple of days ago. It was well above my strike, but a gap down of, say, 25% (which it had done not long before) would have well and truly wiped out any profits I had already made. It did gap down about 8%, but thankfully stayed above my stop and then proceeded to go up 15% the next day!

Also, the strategy sounds simple, but beginners will find it very tricky to get to grips with. I have been trading for 8 years and still found it quite nerve-wracking the first time trying to get the returns right. A small move in the share price can turn a reasonable return into a poor one if the option price doesn’t move as well, so you need to be on the ball. You also need to be checking the trades every day because if something goes wrong you have to attend to it. If you get stopped out you need to decide whether to buy back the option or let it go, or possibly purchase another cfd. Also, you need to subscribe to their income report which is about $450 per year (first 4 months free) and you have to purchase MarketAnalyst software for $888 per year because it has the calculator for the covered calls so you can see the return you are getting. They also forgot to tell us about that”¦”¦

So, there’s quite a few gripes. On the positive side, the support from PP is excellent. I have had queries which have been answered in depth, and the videos and info on the website are very good. Daniel also appears to be very knowledgeable on the subject and teaches it well. Actually I have simply bought a couple of the cfd’s (of trades they have recommended) rather than doing the covered calls and have made money this way instead when the income returns have not been worthwhile and I have thought the chart looks strong. In fact, if you look at the trades they have recommended over the past few months, if you had just bought all the cfd’s and placed guaranteed stops at 10% away (or even if you just put in normal stops) you would have made a killing with a good exit strategy. Of course that’s not what this strategy is about, but it’s something that I will be doing if the chart looks good as the potential returns are much greater than those from the income strategy. So I must say that so far their research and recommendations have been very good, though the market has been very accommodating.

Bottom line: I don’t think what Daniel is promoting is a scam. However I do think there are some serious misrepresentations and I would not be surprised if there were a number of disgruntled people out there. And the truth is that no matter how good a strategy is, probably only 10% of people will make good money from it regardless. Do I regret doing the course? No. As a result of doing the course I have opened myself up to the US market which I have never traded before, and so far the trades I have made have paid off a fair bit of the course costs. With a larger bank the strategy would be much more attractive, so it is something that I believe will reward me down the track. Would I recommend it to a friend? Probably not, unless they had a large bank to invest and had the right mindset to approach it with. It certainly has the potential to be quite lucrative for the right person.

Sorry to be so longwinded, but hopefully this may help someone make an informed decision before deciding to attend the course. Cheers.

Matteo, Jan 13, 2011

----------------  End of Matteo's write-up  -----------------

Please note that the above information was found in the course of my research into trading strategies.  It is not my responsibility to ascertain the accuracy of the comments above.  My interest is merely in finding out what trading strategies are being taught by different companies so that I can work out which strategy may best fit me.  I am mindful that these companies (e.g., Platinum Pursuits and ShareLord) are highly resourced in that there is a team researching on all the listed companies, reading up relevant information, skilled fundamental and technical traders. 

I note that these resources are not readily accessible to all traders due to limitations.  Nevertheless, I wonder if there is a way that average people like myself can break into the market and be successful.  Afterall, back in the day when internet was not available, traders traded based on a handful of pieces of information from newspapers.  Back then, Japanese candlesticks trading methodology was not available.  Technical data was not readily available.  Fundamentals also not readily accessible. 

If you are Matteo or someone else who had attended Daniel's course, please feel free to contact me.  Daniel, if you are willing to give me a free course, please let me know as well.  Or any other financial educators for this matter?  I shall gladly share some information to other readers. 

ShareLord's strategy - Collared Call aka Hedge Wrapper

Note:  The reason why I read up about this strategy is because I watched a Youtube video about what Sharelord does.  I thought that there is no need to reinvent the wheel if someone is teaching it.  Thus, the first strategy I tried to read up about is this.  

----------------------------

Name: Collared Call aka Hedge wrapper

Strategy type:  Protective
Outcome:  Prevents extreme losses but also limits extreme gains

Timing:  After the stocks you own has made substantial gains

How it works:
1.  You need to own the stock (pre-requisite)
2.  You need to BUY out-of-money PUT options (insures against falling px)
3.  You need to SELL out-of-money CALL options (locks in some profit and makes some income)

Profit-Loss hack:  The stock is dividend paying and you do 2 and 3 after dividend is paid. 

-------- Note --------

• 1 + 2 = Protective PUT (aka Married Put)
• 1 + 3 = Covered CALL (aka Covered Call)

-----------------------

Calculations:

• Profit = CALL strike price -  stock purchase price + CALL income - PUT insurance - all commission
• Loss =  PUT strike price - stock purchase price + CALL income - PUT insurance - all commission

Video information available:

• TradersExclusive (best) @ https://www.youtube.com/watch?v=NI2pTBdMJLY
• Schaeffers (simple) @ https://www.youtube.com/watch?v=jj2KIIbT93
• TradeKing (good details) @ https://www.youtube.com/watch?v=7jhBGQb8A5M
• Sharelord @  www.youtube.com/watch?v=vwA489rpigo

For a more profitable variation, read

• http://www.nasdaq.com/article/a-dynamic-twist-on-the-collar-trade-cm119124

1 hr of work time = 1 hr of pay... time to build passive income

Currently, don't really mind my job -- it is not strenous, not really stressful, I rather enjoy my work...  BUT I would like to be able to work less and do more fun things.  I plan to use some spare hours to do some research and see if I can replace my regular income with passive income.

Properties did not work out.  High property management fees (7% of rental income) and property managers don't even tell me that my tenants had defaulted previously until things got serious.  I fired the property managers.   Property was poorly looked after and property managers also said nothing.  The highlight was when the tenants trashed everything and I had to front up the tribunal in my own time.  Too much emotional stress in that -- not accounting for financial losses.

While in search for another viable second income which I hope can be passive income, I thought I should start entertaining the idea of trading.  Afterall, I don't want to slog all my life, pay taxes and have little left for retirement only to worry about everyday expenses and also health etc.  I would like to at least maintain my current standard of living which may be hard when I have all the time in the world but cannot do much.  I have seen many people who had to stop work altogether because of health issues (e.g., stroke) and not having enough to tide them through unexpected retirement can be stressful.  

Trading can take place any time of the day.  There are markets that go 24-7.  Maybe I can start there but I need to do some research.  If you have any thoughts that you can share to help me along the way, please drop me a line.  If you have thoughts that I think other readers might like to know, I shall publish it too!  So, when you drop me a line, please note that I may share it to help others like me.

My plan for this blog is to use non-technical terms so that I can understand what is out there.  Thus, if I am not explaining correctly, please let me know so that I can correct myself to become a better trader.

The goal is to find a trading strategy that is not time intensive and that is a reasonable winner.