Changing course or staying the course

Investment Analysis Clubs Where Angels Fear to Tread
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Not long ago, a person on the Saul’s Investing Discussions board confessed his portfolio declined 94% during the recent stock market downturn. Given that most investors are more eager to share their successes than failures, it was a refreshingly candid acknowledgement of poor risk management. The disclosure also raises a question that may generate different answers among different people: Is a drawdown of that magnitude a devastating indictment of a strategy that should be abandoned, or is it reasonable to continue pursuing a similar high-risk approach in the hope of recouping the losses? The aforementioned person has essentially supplied his answer in a post (later deleted) earlier today:

My plan is to sell my SMCI March 2024 $130 calls sometime late this year.

And, of course, my portfolio allocations keep shifting as share prices soar. Currently:

SMCI 71.4%
TSLA 17.8%
ENPH 5.4%
UPST 3.6%

YTD return: ~90%

The harsh reality of bear market math: A 94% decline requires a subsequent increase of 1567% to reach the pre-drawdown level, though attaining the high-water mark may not be the objective in this case, as time is a far more limiting factor for someone already in his seventies versus those who are decades younger.

It’s clear that a growing number of people view the development of artificial intelligence as the next great investment opportunity, and they might be right. The passage of time will reveal the answer.

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If their current portfolio is an indication of their risk management approach AND risk tolerance, then they seem to be comfortable with a high allocation in a very small number of positions.

At least one of these four positions has to be a home run if they hope to recover their previous losses. In this case looks like SMCI was that grand slam winner.

One has to wonder how many such “bets” they had to place over the past 12-18 months before they hit upon SMCI.

As you said, time will tell if this is a successful strategy. It could work out fine…they could be savvy and lock some of their gains and rebuild their portfolio (aka diversify some more).

I am just happy to see some folks with healthy gains this year. We need more retail investor interest in the markets for all boats to rise…

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There are people that do, and there is everybody else.

I am of the former but it is perhaps more of a do do.
Lost 60%
:stuck_out_tongue_closed_eyes:

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Of course change course! :wink:

When the dot-com bubble burst my port lost some 95% from which it never recovered. This time the port was down some 30% (after adding back in the money taken out to cover living expenses. The lessons learned were to buy stocks that bounce back, to take profits at tops, and to hold on only to high conviction stocks.

A more fundamental lesson was not bubble related, selling covered calls is less risky and higher return than investing in stocks but one needs the tools to select the best calls to sell which cannot be done by eyeballing the market. It’s taken me a decade to develop these tools which I reported on at the New Paradigm Investing (NPI) board over the years.

The Captain

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Captain,

I was wondering if you might be able to link to one of those threads on the NPI board regarding your selection process for determining which covered calls to sell? I went through a roller coaster ride in my Roth IRA over the past couple of years holding higher growth stocks and recently have decided I’d like to switch to a lower-variance strategy of buying higher quality stocks (often paying dividends) and then selling OTM covered calls to juice my returns a bit in the event that the market trades sideways for the next couple of years. I’m in my mid-30s, so I’m very much still in the accumulation phase and would be rather happy to make 10-12% per year over time. As far as my selection criteria for choosing my covered calls, I tend to look in the intermediate range (6-12 months) and aim for a strike price that yields a modest gain on the stock if it gets called away, to the point where I would be happy whether the option is exercised or not. I’m still learning about different investing strategies and that’s where my interest in your process for choosing calls comes in. Further, I would invite any criticism/ideas I may not have considered regarding my current strategy. Thank you in advance for any time/thoughts you choose to share.

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I don’t know how to link to the old boards. The search string should include “covered calls” The new NPI board is at

Maybe TMF help desk can assist you. There is a lot of really good suff on the old board.

Sorry I can’t be more helpful but this new bosrd is confusing as hell!

The Captain

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Thank you, Denny. I will also be searching :slight_smile:

I’m relatively new here at MF, not new to investing, and from what I’ve read, it seems MF changed the board software somewhat recently? Are most of your posts on the old board? Or is it worth searching the new one first? (Or will that just be confusing, like picking up a book in the middle?).

Thanks,
Audrey

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Haha! I found this reply by Denny on NPI (I believe) when I asked him the very same question. Saved it in my notes with the plan to study it. Thank you world, for Denny!

Captains Resources

I recently accepted assignment of FSLY shares. I must have done the math a half dozen times to make sure I was “thinking right” and was still kinda nervous. :slight_smile:

A bit of grammar. The option contract is assigned, not the shares. If the option is a call the option holder “calls” the shares. If the option is a put, the option holder “puts” the shares. I’m not being pedantic, options can be confusing and it’s best to try to be as clear as possible.

Wish I knew what you know about options. Thanks for sharing.

It’s taken me over ten years to get here. First learn the basics which you can find on Google. Then get Option Volatility and Pricing: Advanced Trading Strategies and Techniques by Sheldon Natenberg

https://www.amazon.com/Option-Volatility-Pricing-Strategies-…

There are lots of ways of trading options and some trades have weird names that sound like catch-as-catch-can holds, “Iron Condor” sounds painful! LOL I don’t do any of that. Most books about options teach these things but Natenberg explains how options work which lets you configure trades to meet your investing goals.

One of Warren Buffett’s secrets is float, how to use other people’s money without the risk of letting them ask for it back. Examples of float are insurance premiums, prepaid cards, and discount coupons.* I asked myself how an ordinary Joe can get float to play with. The options market is just like a casino, option buyers place their bets while option sellers play house. They say that options are risky and they are, but when you sell options you control the amount of risk you are taking, you control the risk/reward ratio. Selling covered calls is the lowest risk trade. If the stock goes down you lose less having sold the call. If the stock goes above the strike price you only have opportunity loss, not real money loss. In between it’s all profit.

It was opportunity loss that kept my returns lower than Saul’s and I found a solution for that as well. Now my portfolio is split into two. I have high growth stocks on which I will not sell covered calls, instead I get Saul like growth profits. The other part is dedicated to generating income to meet my ordinary expenses. These are stocks that generate the best premiums and I typically sell the calls at-the-money to generate the highest premiums. I don’t care if these stocks are called or not. Once I made this separation my returns skyrocketed, enough income to cover expenses and hardly any opportunity loss.

But it did take me over ten years. My first “Natenberg” trades were made during December 2008. I made good money selling puts but later the puts showed how risky they can be. Now it’s covered calls only.

You might also like Alan Ellman’s Complete Encyclopedia for Covered Call Writing. It has less theory than Natenberg’s book.

https://www.amazon.com/dp/B0064TJS7M/ref=dp-kindle-redirect?..

How’s the Corvette?

Denny Schlesinger

***One of the wiliest things Buffett has done is to sell shares of a “regular” corporation instead of creating an invyestment fund. Not only did he get rid of the pesky regulations that “protect” fund investors buy ordinary shares cannot be cashed in! Better than even insurance float!

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I’ve been with TMF for over 20 years so most of my posts are on the old board at

Value Hounds,
NPI, and
BMW Method

There are a few post on the new board but much better stuff on the old.

The Captain

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A lovely find! It encapsulates the theory behind my option trading. Back then I was using spreadsheets but they are clunky and error prone. I already had a portfolio tracking web app and I ported the spreadsheets to it. Being able to power through mountains of data is a big help in increasing the yield. That does not mean that one cannot screw up once in a while. :wink:

The Captain

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With that strategy, the first step is to find stocks with dividends in the 4% and higher range. Then you need a premium that gets you to 10 to 12% total. I think the key finding dividend stocks you would like to own and then from that list find the 6-12 month (or less) options. For example, SPG. It currently yields 6.96%, so you look for 3 to 5% premium. The stock is at $105, so call t $3 to $5 premium, or less depending on the settlement date. January 24, $125 strike sells for $2.15. You can sell again, May 24 so you can get 10% or 11% and 20% more if called away.

E*Trade has options screener. You would make a list of dividend payers from any stock screener. Dividend range, p/e, market cap, etc. Put that list into the options screener. Screen for minimum stock price gain and minimum premium and maximum days to expiration. Wala!

Ah, better yet, I see that Denny’s old posts were recovered. But I’ll post anyway since it is typed out.

KC

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Denny,
Can I ask what web app you are using? I am a spreadsheet junkie, but always willing to learn and try something new.

Thanks,

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Entirely of my own design. I started out using the Apple/Claris FileMaker database to track my portfolio. My first experiment with the web was testing FileMaker Pro on a Mac server but soon realized that I needed to move to open source code and switched to LAMP (Linux, Apache, MySQL, php) and that’s what I still use.

The Captain

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You make by far the most money selling weekly call, but it is time consuming. I look for 30% annualized return if called a way, and about 10% annual premium, call premium, plus dividend.

Most important, you need to be happy whichever way the trade goes.