Max Income, Second Installment. I have been using General American (GAM-) and Tricontinental (TY-) preferreds for longer than most fund managers have been alive. <g> BTW, there may be some exaggeration in some of my remarks. Both are absolutely top tier as far as safety goes. However, of late, I have found the Royce and Gabelli CEF preferreds to be offering much higher yields and also with a lot of safety and protection. At this time, the only ones under $25 are Royce Focus and Global yielding 7.5 and 7.9%, respectively, tax advantaged. Gabelli Trust preferred is right at $25 and my favorite of his family. These are now about 10% of the total.
One note about the collateral base. It is just a base. Many other strategies I use generate collateral, also, and the more of them I have, the smaller the base can be. For example, stock spread conversions, long ASA, short the $15 leap call and long the $10 leap put would generate the collateral of the long ASA position. Also, please note that my total % will add up to more than 100%. In the strategies below, Treasury Futures and Options, I have no collateral. But they each use collateral. So, I may say that I have 3% in 10 year Treasury Note credit bear spreads, which I do, but that is 3% at risk. The actual 3% is in one of the collateral issues, though not always in the base collateral issues. For example, I could be covering that 3% with T-Bills or margin from that ASA position or something similar. I will discuss why this isn't leverage when I talk about hedged stock strategies later on.
2. Treasury Futures and Options. This is the area where I had my greatest impact and success and, not surprisingly, still one of my best income playing fields. There are lots of tricks with these, so many that I fear overlooking some of them. But here is one most people ignore: In a normal yield curve environment, Treasury futures sell at discounts. In an inverted yield curve environment, they sell at premiums. So, these things have a tendency to favor bulls when they are overpriced and favor bears when they are underpriced. To my warped mind, this is the equivalent of dating a woman who is not only beautiful, but brilliant and devious. It drives many to distraction, but I find the market exhilirating.
Also, most of the stuff I've been telling you is gospel about options on stocks and stock indices is crap when it comes to Treasuries. That is because we have a different animule here. Yes, you can lose your shirt on both types of options and futures. But the Treasury game is much different and a lot of the crapola that is applied to trading stock options occasionally actually works on Treasury options. Why? Because the Treasuries have no credit risk, will mature some day at full face value and always have a yield. Now, tell that story to the portfolio managers in 1982 and 1983 who bought the 12 of 2013 at par and ended up with them in the low 80s. You can't really explain that they have been hung with a shorter rope because their eyes are still bugging out of their poor lifeless heads. <g> And don't tell it to bond trading desks who went short the 14s of 11 only to find out that one fund manager had a corner on the effective float and was not going to sell it until he saw the yield fall into line with other, more expensive Treasury issues. You can tell them that they are not as reviled as those who bought Allaire at the top, but they still think getting fired was bad enough. <g>
But the fact is, Treasuries are MUCH safer than stocks and have guaranteed yields. Which means that their options and futures are much safer than stock options and futures.
Again, Treasury futures are tax advantaged. All gains and losses on futures and options on futures are 60% long term, 40% short term. For some reason, very few investors take advantage of this fact, which I consider nutso. But the tax advantages are only the frosting. The relatively low risk and the relatively high returns are the key.
There are three products here. Treasury bonds, 10 year and 5 year Treasury notes. Practically, I do very little in the 5 years. I am sure there is fun to be had there, but the opportunities for being right are much better in the 10 years and the long bond. Remember, a contract equals $100,000 face value of a Treasury security, so some big money can be involved on fairly small moves.
Buy/write-Secured Put selling. Simple enough. You buy a future, sell a call against it or you short a put on a future. This is a bullish strategy that was my meal ticket in the 1980s and has done wonders for me in many other years. Alas, I am no longer bullish. This one will return as a key strategy in the future, but I am not using it right now. I made 17 1/2% on this on a mutual fund that was hugely disadvantaged (by receivables and the gruesome short short rule) in 1985. In 1986, I made over 15% using these strategies in the same gimpy fund. The fund co. stopped using these techniques in 1987 when I dumped them, and in the next 14 years, has not had one year of performance that equalled those years, even though they no longer have receivables, not by a long shot, and the Short Short Rule has disappeared. It is a powerful strategy.
Spread conversion. Buy future, sell at the money call, buy out of the money put. Very modestly bullish, this one can generate high single digit, low double digit returns when combined with a low risk base collateral holding. However, it is still more bullish than I am right now.
Covered short sale. Sell future, short a put against it. A bearish position. I only have a small amount of these right now. I am not as bearish as I am not bullish.
Reverse Conversion. Sell future, short an at the money put, buy and out of the money call. This one is a workhorse for me at this time. I may convert these to covered short sales in the future, but not quite yet.
Bull spreads. Buy lower strike call, sell higher strike call (debit spread) or sell higher strike put, buy lower strike put (credit spread). Still not bullish. <g>
Bear spreads. Buy higher priced put, sell lower priced put (debit) or sell lower priced call, buy higher priced call (credit). That's the ticket. I do a lot of these, mostly in the 10 year, where I think there is the most risk.
Reverse conversion. Sell future, sell lower priced put, buy higher priced call. My top strategy in Max income right now.
More to follow in the future. |
