Hi Tom,
It's good that you pointed out your observations. It provides dialog to point out the finer points of any trading system or approach. The great feature about trading options is that they do exactly what they are designed to do provided the investor uses them at the right time for derive a specific intended outcome.
The sideshow PUTs purchased is suggested according to the WINs approach when we expect the stock to cycle downward after a run up and the RSI is very high for that stock and at the same time the upper BBs has been tagged several times with an extended OBV is doomed for a pull-back of some kind. Past history of the chart pattern will give clues of how much of a pull back. This point also happens to be a good time to sell (write) those CCs to raise the cash for the PUTs.
In a somewhat related topic. I was reading a column in the Louis Rukeyser Newsletter yesterday about a study they did. To make it short, they compared two persons investing in stocks ($2,000/year) that comprised of the S&P500.
A. One individual started in 1963 investing for the next 10 years, and unfortunately, at exactly all the peaks each and ever year(Mr. Peak) until October 1, 1999. At the end, person "A" total of $20,000 invested grew to $846,384.
B. The second individual started investing $2,000/year in 1973 for the next 20 years. The investor was the luckiest person alive and picked the lows over and over again. At the end, guess what??? Person "B" $40,000 invested over 20 years was worth -$26,000 less. $820,213 vs. $846,384.
Imagine! Person "B" put in twice the money over the years and his annual return was far higher. But, person "A" still relatively made more money in that 10 years vs. 20 years. The S&P500 growth was the unknown factor.
The moral:Forget market timing of trading in and out of the market. Timing and luck are nice, but you can only make money if you are invested. A great deal has to do with the overall trend of the market. CCing introduces the parachute or the primer for the fire while remaining invested to capture the opportunities.
To me, the above example only illustrates that straight stock ownership will yield certain outcomes. When you introduce covered call writing with long term hold (and careful use of options) the above equation will take change. When done correctly, the investor is able to take advantage of the normal ups and down in stocks. The folks that trade in and out of stocks often are working much harder and many times they miss the major moves away. There has to be a middle ground where you don't worry or work as hard to generate a profit at the end. |
