Okay, cloaked one, here's what it seems like in the morning:
Every strategy has its place and time. I would not forego buying calls, for instance, even tho they don't generate margin, as I've found that calls several months out or leaps have done very well for me in this particular sector of the market. Near term calls make me nervous.
However, calls don't generate margin so it needs to be a somewhat limited portion of my portfolio. With margin and/or underlying I can write options more easily, I have greater leverage.
I have until now only bought common of stocks I wanted to own because of long-term fundamentals. In an attempt to build a portfolio. However last night on the porch when I told Tom I still don't understand his strategy, he called me and explained it. It really took repeated explaining. Here's how I see it:
1) As always you need to look at fundamentals. Pick a stock with upward momentum (and momentum for good reasons). But also whatever monthly income you are wanting to generate (which, he kept saying, you regard as your "job" with no fica fuda or whatever that stuff is--I haven't had a "real" job for a long time), when you buy that stock you are completely unemotional. You want less STRESS. You want income. So let's say you set aside this 125K for ELON (I use that because that's the figure he used on the porch, which you probably lurqed last nite so you know the story). Elon calls have a nice percentage return right now about 14%. He thinks its the best deal he's seen and the stock/company has a good future. So you don't worry about getting called away, all you say is, I want my monthly income. In this case, if you don't get called away, you get your premium for writing calls on 1400 shares, and that's $18,900. If you DO get called away you earnd an extra $8K (stock at 87 right now). You don't hassle yourself buy buying them back and selling them and bla bla bla. You have just decided this allocation of stock is for writing these calls to generate this income this month.
If stock goes down temporarily, you COULD buy the calls back for slight profit, but that is stress, and that's not the point of doing this. The point is that on 125K you are getting 19K in 6 weeks. I guess if you annualize that it's a pretty hefty income. You are leveraging a portion of your portfolio to provide a relatively huge monthly income. If you want, spend only half of it and plow the rest back into building a portfolio further.
If you really erred (pickd a bad stock at a bad time), or the NAZ crashes...well you were in trouble anyway. That can happen to anyone. But at least you were covered, so you didn't lose as much as you would have if you just owned the underlying.
This reminds me of Ed always saying, "You can't spend opportunity. Be the house. Cash in." The philosophy is not so different it's just that ed uses his equity to write puts, and Tom to write calls. WHen premiums are high, either one is profitable. So for example, what am I getting by holding QCOM and not writing cc (which I still have trouble thinking about! And probalby won't!) I am holding on to opportunity that may or may not come and I don't know when. And again, I can't "spend" opportunity. Also, I think there is a mistaken psychological security in owning stock, its "ownership" of something. But $ is $. I read a post on some board around here, can't recall which, and the point the poster made was that valuations ARE irrelevent, what counts is to make use of the opportunity to ride the stocks up and convert to cash hopefully at the right time. Look at some of the old Dellheads who are still in luv with the stock because it made them rich and they are as loyal to it as a dog to his master, but in truth, maybe in our own lesser way all of us approach the stock market a little similarly. We may not be as die-hard as the Dellheads, but we think we're taking a risk with Tom's approach. And actually the monthly income it generates allows one to do whatever one wants.
Meanwhile if I took 125K of QCOM stock and sold it, I could get $19K in the next six weeks. (OTOH I hvae to face tax consequences for selling it, and my cost basis on some of those shares is pretty low). So what I may do is get out of some of my profitable call positions today, which aren't generating any margin anyway, and try this on a relatively smaller amount of $. I have eto try something and experience it before I can metabolize it.
I'm not sure if the above would matter too much to some of the posters on SI who are already multimillionaires. |
