InvestEd 2014: Irvine CA

October 2013 Webinar: Clubs and Covered Options

TINSTAAFL: Using Covered Calls Part 2

Your Call is Important to Us …

InvestEd 2014

Irvine CA, June 6-8, 2014

Irvine Marriott

Plan to join us for InvestEd 2014. Online registration is available now, and you also can make your hotel reservations. Mark your calendar for the November newsletter: the session schedule will be available and linked from the newsletter!



InvestEd Inc. Free Webinar

Clubs and Covered Options

Sunday, October 27, 2013

8:00 PM-9:00 PM ET / 5:00 PM-6:00 PM PT

Instructor: Paul Madison

Webinar Registration


This webinar will highlight the value of using covered options for investment clubs. Paul will cover basics about how covered options work, as well as why they work well for conservative investors. Even more important, just as many of us use investment clubs to learn about investing in individual stocks, we will learn that investment clubs also can be a good place to share learning about covered options.


Register now to attend the InvestEd Inc. free online investor education webinar. Space is limited.

Paul Madison has a bachelor's degree in chemical engineering and is retired after working for nearly 25 years in several different areas at Conoco, including a few years as a crude oil commodity trader. A former instructor at regional investor events, Paul more recently is known as The COOL_Club Dude at bivio, where he conducted weekly webinars related to options. Paul has been an investor in individual stocks for over 35 years.





TINSTAAFL: Using Covered Calls Part 2

Saul Seinberg


In this article, I continue exploring the nuances of covered calls. In Part 1, I focused on the idea that you need to appreciate what you give up and what you gain when writing a covered call and why you need to have and use an estimate of the future performance of a stock or ETF on which your call is written. In Part 2, I am turning my attention to the need to keep records of how your covered calls turn out, especially to determine if you are leaving too much money on the table by underestimating future performance. In Part 3, I will be discussing how the tactics of Parts 1 and 2 fit into a plan for selling calls on existing portfolio holdings, along with the notion of replacement planning, should a holding be assigned, in order to maintain portfolio targets.


If you sell covered calls, I recommend that you perform a simple experiment to determine your propensity for leaving excess profits for the investors who buy your calls. I am assuming you are keeping records of how the underlying stocks for the calls you sell actually perform after assignment. If you currently don't keep such records, you should begin doing so, if for no other reason than to monitor how well your covered call selection process is faring.


My rule of thumb for keeping track of my covered call trades uses two measurements. I count all my covered call trades in which a stock was assigned and determine (a) the total number of times assignment occurred out of all covered calls sold, and (b) the amount of profit left on the table by assignments in a given time period after assignment, usually six months. I compare that amount to the premium obtained for the assigned covered call. I adopted these rules of thumb after some less than desirable results; that is, leaving what I thought was too much money on the table. These rules are still fairly new to my record keeping; they are definitely works in progress, but so far, they have been very helpful.


If I am getting assigned on more than a predetermined number of my covered call trades, I carefully review my selection process to determine why this is happening. In an almost perfect covered call world, I can accept an assignment ratio of 33 percent, which means I will get assigned on one-third of my covered call trades, since predetermining how much a stock's share price will rise in a specific time period is rather difficult. This means I will get assigned periodically when I sell calls. That is the nature of such trades, and we have no way to avoid it if we constantly strive for reasonable or better premiums.


You may decide that you can work with a lower or higher assignment rate. This is a personal choice, although that choice may be influenced by premium size, as biased by volatility or the type of underlying stocks favored, such as higher dividend stocks in a covered call position that fall victim to a call buyer’s dividend capture strategy. Basically, I'm trying to fine tune my covered call approach to ensure that the stocks on which I write covered calls are indeed staying about even or moving slightly in share price  _  that is, neutral to slightly bullish.


The usual culprit when the assignment rate gets too high is an accepted strike price that is too close to the stock price, increasing the likelihood of assignment. Very often this is the result of chasing higher premiums (return) or accepting a longer than necessary option period to grab more premium.


Premium decay accelerates, and is the greatest, as time runs out on an option. Thus, the seller's best return on an option is in the final month before expiration, which is when the metrics definitely favor the option seller. While the premium for a longer term call is higher than it will be for a one or two month call, the extended time period also gives a stock's share price a longer period in which to increase, sometimes dramatically. So, even though a one or two month outlook for performance is muted, the chances of assignment definitely increase over a longer term, especially if a growth stock is involved.


I also weigh the amount of premiums collected against the profits lost to assignment using another one-third rule. If lost profits are 33 percent or less in total than the total amount of premiums collected within the six month period after assignment, I am willing to accept that level of performance as the acceptable fallout of trading covered calls. I regard this as a sign that my selection criteria for underlying stocks satisfies the mildly bullish to neutral outlook strategy applicable to covered calls. If not, either a change in the stock selection process or a respite from writing covered calls is advised, as too much in the way of profits is being left on the table. In other words, the stock picking may be too good for the covered call strategy being used.


Lastly, expiration means you can write another call on the shares you still hold. On the other hand, assignment requires a sale of the underlying stock and the purchase of replacement shares in the same stock or another stock to keep your money working. That means additional commissions, which, while small compared to other factors involved, still add up over the history of a covered call portfolio. Obviously, you would want to be prudent in keeping these extra commissions as small as possible.


Part 3 of this article will look at challenges for covered call traders and suggestions for success.


Attend the next InvestEd conference, June 6-8, 2014, in Irvine CA, to learn more about options from Saul and from Don Cassidy and Mary Ann Davis. Specific session information will be available soon on the InvestEd website.

Saul is an InvestEd Inc. advisory director and a conference instructor. A former vice president for education of InvestEd, he teaches at local through national investor education events. With degrees in electrical engineering and law, Saul spent most of his career as a corporate attorney. In addition, he served as an adjunct professor at Albany Law School in New York.





Your Call is Important to Us …

Sandy Gallemore


"Your call is important to us, [sure it is!], please continue to hold." I don't like waiting or trying to manage my way through a telephone tree. My time is valuable. Can't I just email you and let you get back to me? How about if I just leave a phone message and let you call me back?


Take heart, some new startup companies are helping us "…take the cuss out of customer support," as PCWorld puts it.


Enter Fast Customer where you can find a listing of over 3000 companies that let you have the company return your call. In the meantime, you can go about your usual activities rather than balancing the phone on your shoulder and listening to ten more of the same messages about how important your call is. All you need to do is enter your phone number and wait for a company representative to call you back. Fast Customer will give you an estimate for wait time so you have some idea about when you might expect a return call.


To help you find the exact number you need to call, Fast Customer includes a number of subcategories. For example, if you have a problem with your Dell computer, you can decide if you need to call Dell's Tech Support or its Customer Service. These subcategories help you direct your call to the appropriate department or person. In addition, Fast Customer has apps for iOS and Android.


Another website of interest is LucyPhone, which translates into Let Us Call You. After selecting a number from Lucy's listing (or entering a toll-free number), clicking Start will let Lucy do your waiting on the phone line. When someone answers your number, Lucy will call you back and put you through to your number. A mobile version of LucyPhone is available for iOS and Android.


Courtesy of LucyPhone, GetHuman connects you to the appropriate customer service department and also lists other methods of contacting a company (email addresses and other phone numbers). In addition, based on user data, the site ranks the effectiveness of each contact method. GetHuman lets users know average wait times and maintains user forums. The company is well known for providing a list of "cheat codes" that help callers break through telephone trees to find a human. After looking up your number, select the green "They call you instead" and then the orange "Start Call-back." Like the other services, it has an app for Android and iOS.


For those of you who don't care to spend your time on the phone waiting, waiting, and more waiting, give these services a try to see how they might make contacting customer service a bit easier.

Sandy is an InvestEd Inc. director and serves as secretary. She is lead editor and prepares the general program brochure for the InvestEd conference. Sandy, an O'Hara Award recipient, is a charter member and the current president of a local investment club. She has helped form investment clubs, presented introductory investing programs, and taught stock study classes at local and regional events. Sandy is professor emerita, Georgia Southern University.



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