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concepts, ideas and strategies on my site of value. If you would like to assist me with
the maintenance costs, and time spent keeping my site updated, I
have set up a Paypal account for those who would like to donate.
Thank you in advance. Remember, nothing on my site is financial
advice or recommendations. Investing is risky and losses can be
large. Trade at your own risk.
Read The Disclaimer
By using this site,
The full terms of
use can be read here.
Nothing presented is financial advice, trading advice or
recommendations. Everything presented is the author's ideas
only. The author accepts no liability for its use including
errors and omissions. You alone are solely responsible for your
own investing and trading. There are considerable risks involved
in implementing any investment strategies and losses can be
large. Trade at your own risk.
Become Fully Informed
I believe that people spend more time
investigating what car to buy than taking care
of their personal finances. Many people work
hard, save and then turn to a financial planner,
broker or other "experts" and hand over their
life savings and hope they can turn their life
savings into a retirement nest egg. Years ago I
took the same approach and found how dismal
returns can be. I decided it was better to learn
how to manage, invest and grow my savings. I
decided to become fully informed.
That was back in 1975 and today more than 35 years later
I have continued to invest in some of the best companies
in the world. Some stocks I have picked, such as Coca
Cola, or Royal Bank Of Canada I have traded for more
than 10 years. Over that time period I have sold covered
calls and naked puts to slowly reduce my cost basis in
the stock to the point of zero. I thought it would be
interesting to start this website and pick some stocks
to see how they turn out during what many are calling
the worst financial crisis since The Great Depression.
My style may be different from others. I believe
in following strong, large cap companies and
working with options and stocks on those
companies. I also take my capital and divide it
into 3 segments. 30% in cash or like
instruments, 30% in laddered bonds and 40% in
stocks. I've laid out this website to document
my strategy. Remember Trade At Your Own Risk.
These are examples and are not financial advice
or investing recommendations. I strongly urge
every investor to paper trade to learn how to
handle your portfolio, before committing actual
Foundation Of My Strategy
I believe that no one can forecast with accuracy the direction of stocks and markets. We
can surmise when a bear market is upon us and when a bull market
has returned. Gurus will tell us that the market over time
always goes higher and that stocks always move higher,
eventually. I once owned stock from past years that not only did
not ever recover but collapsed and some disappeared all
together. While it is true that I can write off my capital
losses, I find it small consolation that I can write off my
losses against my gains. What also bothers me is that when a
stock is rising, not one adviser can tell you when to sell.
Instead they say "overweight" or "underweight" or use "tight
stops" and such jargon. In the end I found many years ago that a
better mix was not to commit all my cash EVER to stocks. This
way when a stock I liked fell, I had cash available to purchase
more and average down.
I decided after paper trading
for about 3 years, that options were the best way to handle my
investments. I learned that through selling naked puts I could
get into stocks at a discount and use other people's capital to
eventually be assigned shares. I then learned that through
selling covered calls I was being "forced" to sell my stocks and
take my profits throughout the trading cycle. Stocks move up and
down a lot. There are literally dozens of events that affect
Over time, I found that by rolling and using other
strategies (which I have documented in my trades) I could decide "when" I was
ready to accept assignment from naked puts and if exercised I
had "sold" my position and secured my profit. I began to build an
income from naked puts, which I then used to eventually accept
assignment on the stock. (Read here
about why I love naked puts) Basically I was not using my
own capital to invest, but the income generated through the
option selling. Even in some of the most severe downturns I
found that I could still delay being assigned by continuing to
roll my naked puts and through the use of other strategies. Then when assigned, I sold covered
calls which eventually would force me to sell my stock and take
my profit. Then I repeat the cycle.
The most important thing
was consistency in return. I
aim for a 1 percent return on my entire stock portfolio
every month. So for example if I had a 20,000.00
portfolio, I would need to generate 200.00 in income.
Often I found that the 200.00 is generated through using
just a portion of my entire portfolio.
For example with Intel at 19.20 if I
sold four naked puts at a $19.00 strike which brought in
$.50 each, then I was committing $7600.00 to the Intel naked
puts in the event I was assigned. However this left
12,400 in capital that was not invested. I would
therefore sell further out of the money naked puts on
other stocks for perhaps one half a percent return.
As an example if Microsoft was at 25.00, perhaps I would
sell 5 naked puts of the $23.00 strike for .15 cents.
This meant I would earn (in the example)
- $200 (Intel) + $75 (Microsoft) for $275.00 or 1.3% and
have a total of $19100 invested. I found that this
happened quote often, providing many months were I was
earning more than 1%.
With my capital spread out between two
companies with one at higher risk of assignment - Intel,
and one at lower risk of assignment - Microsoft.
Basically the stock that was higher risk was bringing in
the majority of the income and the other trade was
bringing in less but kept a lot more capital in
positions with lower risk of assignment.
Then with each month I would take the
capital earned and compound it by adding it to the
original amount. For example as per above, after the
first month I had now earned 200.00 which meant I now
had available 20,200.00 for investing. The next month I
would have 20,400.00 and so on. Therefore there are many years
see gains over 12% just through this compounding effect.
On top of this is the time when I may
hold stocks for a month or two during which I may collect a
dividend. That also adds up.
Finally there are those times when the
market crashes and stocks have a fire sale. I have cash
always available for such opportunities and I step in
and pick up those deeply oversold stocks and wait for a
bounce. Since starting investing in the mid 1970's I
have had at least 6 sell offs that saw returns greater
than 60% as stocks recovered. So those returns are also added in. Suddenly I
found I was on average earning a lot more than 12% every
year, but my trades remained conservative.
found that this style of trading has worked
consistently for me, by staying
with large cap, dividend paying stocks and of course they must
have options available. The more volume in both the stock and
options, the easier it is to implement my strategy. I began to
look forward to an increase in option volatility and would
listen to the business news during the day to see if there had
been any big swings in the market as this always meant higher
option premiums. As time progressed I learned to use moving
averages and candlesticks to better time selling points.
Now 35 years later my overall strategy
has become second nature to me. I no longer chase rising
stocks or buy into over valued stocks. Instead I just
plod along aiming for that 1% a month.
Rules Of My Strategy:
These are the rules I have developed over
the past 35 years:
I only purchase large cap stocks and NEVER
look at penny stocks or any high flier.
I do not need to follow
hundreds of stocks, just a handful of the best stocks or
By buying into large blue chips I am
more confident the company will be
viable in the future. Therefore I can, with confidence,
commit more capital to any position that is down.
I NEVER commit all my cash to stocks. I keep
30% in cash, 30% in laddered bonds and 40% in stocks.
I ONLY work with stocks that have
options available. In other words there must be some volume
available. The more volume the better.
I aim for no more than 1% a month. Once I
have made my 1% the rest of my capital earmarked for
stocks can be invested at lower out of the money options
that have less chance of assignment.
In my Non-Retirement account I ALWAYS start with selling Naked Puts.
I read just about everything I can about the
company I have invested in.
I paper trade A LOT.
I enjoy learning new strategies all the time
and I am open to new ideas and numerous opinions. The only way I
can learn is through remaining open to other ideas.
I accept that the market
goes up and down and I hope to be able to make money
despite market direction.
I look forward to increases in
market volatility and especially enjoy when stocks go on
I sell my stock when I am exercised out -
this forces me to take the profit I have made.
I average down on a stock ONLY when I can no
longer sell calls with a decent premium.
If a stock I have naked puts against, falls
rapidly, I often will consider buying the put back AND rolling
down to a lower strike or rolling sideways to the same strike,
further out in time. I almost always want a net credit.
If a stock I have researched and believe is
worth holding, should change fundamentals (i.e. go from a strong
balance sheet to a weak one, or enter a prolonged period of
declining sales) I will sell the stock and select a new one in
My main objective is income
through options, that will reduce the amount of my own
capital required to own the stock.
I try to leave emotion out of my decision
Once the stock has been sold, I
repeat the cycle.
Rates In My Trades
In my positions on my
website I have
used the following commission rates. Per trade
$7.00. Per contract $1.25. Per Assignment or
Exercise - $20.00
Rates vary with differing brokers. I use
Interactive Broker for my Margin and US
Portfolio accounts who I believe offer the
lowest commission rates available. As I am in
Canada, my retirement account cannot be held by
Interactive Broker. My retirement account is
with TD Waterhouse and in my opinion, while
their customer service is very good,
rates and fees are far too high. Commission rates are very
important when trading and you should seek a
quality discount broker with decent commission
Therefore these are the typical rates I have
taken into account in the positions shown:
Any stock purchase - $7.00
5 option contracts - $7.00 + 5 X $1.25 = $13.25
10 option contracts - $7.00 + 10 X $1.25 =
Assignment or Exercise - $20.00
Example Of My Strategy
- Coca Cola - Stock Symbol
My investing style
comes down to my overall strategy. It is important to
remember that for me, I have a large chunk of cash sitting
ready to jump into my stocks.
For example, if COKE fell to 40.00 over the next few months,
I would be writing puts all the way down and collecting
stock when I was finally ready to be assigned. I only trade
large caps and only a handful. On the stocks I follow, I
read every single thing I can. I know how much money I have
available and how much I am ready to put to work and at what
prices. KO is a good example. I am presently holding puts at
these levels: 57.50; 55.00
The stock today (April 29 2010) is at 53.36. Look at the
chart below for the past year. It has run up from 42.80 to
above 59 around Dec 11 09 and since then it appears to me to
be in a trend down. It is now moving in a range and has been
for more than 3 months. I have $113,500 earmarked for all
the naked put positions I am holding and I have another
50,000 earmarked for this stock if it should fall back to
the upper 40�s.
But it will be months before I take assignment on any of my
positions. I will continue to roll my puts, up, down,
sideways, whatever until there is no premium left. Then I
might just close and move lower or finally accept assignment
on some shares. Meanwhile since May 2009 I have earned about
13,000 to date in income. So far this year (2010) I have
only earned about 2.5% on my capital, plus whatever I can
get with the capital being held in a savings account � about
0.70% more. But my strategy is long, long term. I will be in
Coke for years unless something fundamentally changes.
Meanwhile though with 13,000 earned, I could decide to take
assignment on some shares and use up the 13,000 I made (I am
hoping for the stock to fall below 50). Then I move on and
earn more � perhaps another 13,000 in time. Then maybe take
assignment on some more shares. All the while I am holding
my capital in reserve and building up earned income which
will eventually place me in Coke without requiring much of
my own money.
I am a long term thinker. My day to day needs are not very much.
I pick large caps and work them for income and eventually
own a lot of shares which are often taken out with calls. I
live in a moderate house and my expenses are easy to pay and
I carry no credit card debt.
Remember I maintain a large cash reserve and I am in for
the long haul. The stocks I have naked puts (and calls
on) I am not concerned about their downside. If the market
tanks, I am a happy camper. My puts skyrocket. I can usually buy and roll
them for much better premiums; and when the stock collapses
I am there with my broom of cash� to sweep up the pieces so to
speak and take advantage of the fire sale prices.
The Importance Of Paper
When starting into an
investment I urge every investor to paper trade
first. I will often paper trade my strategies
for anywhere from a few
quarters to years to study my strategy, tweak it
so it is consistent for returns and formulate
rescue strategies in the event of a market or
stock decline. I highly recommend paper trading to
anyone, novice as well as seasoned investor.
There are many free paper trading websites which
allow you to set up your stocks or ETF's, make
purchases in real time or delayed and work to
perfect a strategy. I have done mine for years
on paper before risking my capital. Once I have
established a style of trading that creates
profits with very few if ANY losses, that�s the
time I begin to apply my strategy with actual
Jumping into covered calls and naked puts may seem risk free, but it is
not. Many investors lose capital; end up being
assigned stocks they really do not want to own
and eventually sell them for losses; write
calls at inappropriate times; wrong strikes;
lock themselves into losses; get exercised out
of stock they did not want to give up; buy back
calls or puts for dollars that they received
pennies in premium for when they sold them; and
many more mistakes. They lose their discipline
along with capital and become very disheartened.
It takes years to grow capital. It can quickly
be lost. Stocks are called risky assets for a
My Strategy: Addendum
- Looking Down The Road
With the unprecedented credit crisis still underway, I
feel it is important to understand why I
allocate my capital as- 40% stocks - 30% bonds - 30% cash.
As my strategy employs 40% of my capital
always in stocks I like to have a strategy that I can use no
matter the financial climate. While the Fed is busy propping
up stocks, you can also tell from company earnings where
fair value is. While many companies
are showing excellent earnings, those earnings have to be
taken into context with everything from reducing the number
of workers employed to the amount of long term debt that has
been re-written by almost 75% of US companies. When factored
in, the earnings picture is pretty much the same as it was
By establishing trend lines and valuation points, it really
assists me in knowing what strategy to employ when the
market reaches specific levels. An investor can do the same
thing with individual stocks particularly when selling naked
puts. It becomes easier and easier to know when to sell puts
out of the money, at the money or in the money and whether
to go one month, two months or further out depending on the
This allows an individual investor to understand how to stay
invested throughout the year, while taking into account
risk. While the Fed may be propping up the market through
liquidity, a lot of that liquidity has actually been reduced
from various sectors of the economy and moved to others.
Right now you can tell that the Fed�s main goal is keeping
the long end of mortgages and credit at low rates, so that
is where they are putting most of their cash as they try to
force rates down and push the dollar lower. This is
impacting American businesses and those of other countries.
I think people need to understand profit levels within
companies. Companies like JNJ did not really benefit in
sales from the Fed�s initial action, BUT they benefited by
re-writing long term debt at rates far below the normal. As
well the declining dollar value means many companies will
show better profits on their international sales which over
the last 10 years has grown substantially.
The Fed intervention has had some long term effects that
will play out on the bottom line of many US companies and as
a consequence stock valuations can be established to tell me
as an investor at what stock price to be prepared to sell
puts, accept assignment and buy stock. So despite Fed
intervention, it remains very viable for investors to
determine stock price valuations in many stocks, at which
they would want to sell their puts and or actually step in
and pick up shares.
In my opinion, this is what investing is all about. If
tomorrow we had a major scare (How about a US dollar
currency crisis which I believe is coming) and the market
fell 600 points overnight and a company like JNJ fell from
63 to 59 or 57. I would know exactly what strategy to
employ. I would not need to sit back and think, �well maybe
tomorrow it may be cheaper�. Instead I can react immediately
and begin to scale into positions. Remember how in October
2008 Warren Buffet announced he was �Buying America�. Aside
from all the political hoopla, he really wasn�t wrong.
Basically he saw value in many companies, that had become
undervalued in the selling. He was early as many that he
bought fell another 15% or more, but it turns out he was
right. When interviewed on Charlie Rose, Buffet laughed and
said that he really is never sure of a bottom in selling,
but knew the prices he wanted on his stock picks. Rose said
that Buffet certainly is a stock picking genius, but Buffet
laughed it off telling Rose that anyone could be successful.
He told Rose that it takes a lot of homework and he has his
goals established long before something happens and he is a
very patient man. He likes to think long term. He likes to
buy when there is a sale, and in October 2008 he felt that
there was a big sale happening on wall street.
In my case, if I am wrong and the stock continues to
collapse, I have many strategies available. I can buy back
my naked puts and roll lower, buy back and close for a loss,
hold and roll further out at the same strike for more
premium, sell more puts even lower, accept assignment on
some stock and collect the dividend and if available sell
covered calls, or do a combination of a variety of the
The problem so many investors have is short term thinking.
They worry that the market will collapse around them; stock
valuations will plunge; they will end up holding puts on
companies that they really did not want to own; to mention
Instead if investors would establish 3 funds for themselves;
stocks, bonds, cash, they might be surprised at the annual
results and their ability to sleep nights. The percentages I
arrived at suit my investment style and my level of comfort.
Every investor needs to decide on their own comfort zones.
Almost always when stocks collapse, bonds rise dramatically.
The investor can then cash out some of his bonds (at a
profit usually) to raise cash to step back in to the stocks
that are on sale. As well having some cash available all the
time means the investor does not have to sell his stocks in
a collapsing market, but instead can step up to the plate
and buy them on sale, averaging down on his stock holdings
and continuing to sell calls and puts.
Case in point � In March and into early April 2010 I was
buying bonds. Stocks were in an upswing and bonds prices
were moving lower. I moved back into bonds that I had sold
from October 2008 to April 2009. Then recently I posted a
number of articles explaining how I was selling my bonds. I
started selling in July right through until just recently.
My bonds have returned 8 to 14 percent depending on the
maturity. You don�t have to be a genius to protect and grow
your wealth, but you do need a plan. If the market begins to
move higher this fall I will be watching bond prices. If
they move lower, which I expect they will, I will again
begin to buy bonds waiting for another sell off in stocks
somewhere down the road.
I would urge investors to step back from the daily noise
and look a little further out than next week or next month
and realize what is actually happening around them.
Unemployment in the US is at historic highs, individual and
government debt is massive, housing is absolutely terrible,
BUT US businesses have scaled back their employment numbers
leading to bottom line returns; debt levels have been
greatly reduced and long term rates have been tied in at
unprecedented low rates for more than 30 years by many
corporations; many have been expanding by purchasing
competitors as well as expanding into other markets. A lot
of businesses have a lot of cash.
The most important aspect of the recovery remains
expansion and while unemployment is terrible and governments
at all levels are strapped with debt, many businesses are
expanding. This is a good sign. But the talking heads don�t
focus on this. The old adage that bad news sells, is still
true today. I believe that eventually debt levels will
become manageable. Governments just like citizens have been
living way beyond their means and eventually you just had to
know it would end badly. To think that this will be fixed
overnight is foolish. This will take decades to
remedy. It�s like weight loss. If I can put on 100 pounds
over 20 years, I really shouldn�t expect to lose it all
within a month. It is just not realistic. But in investing,
I need to be invested at all times to garner a return, and I
have to be realistic.
To make 20 or 30 percent a year or more on my portfolio is
just not realistic. To have those kinds of returns I would
have to �throw caution to the wind� and commit all my
capital and certainly pick all the right stocks and trends.
Is this realistic? Not for me. So if my 40% of capital in
stocks returns even 15% I am pretty pleased. Then my bonds
perhaps 5 to 6 % and my cash 1 to 2 %. Added together maybe
a total portfolio return of 8, 10 or 12 percent consistently
every year. Some years better than others, but consistently
I want that percent return. That�s a huge return which over
time will build an excellent nest egg while offering better
I strongly urge investors to step back from the noise. This
recovery is about as bad as the recovery that began in Sep
2002 or the August 1998. Both of these were not credit
crises and as such the recessions saw unemployment more in
the 8% range. I believe the recovery we are in will take a
lot longer based on past historic credit crises of other
nations. The deleveraging that needs to go forward will take
years and that is why I believe it is so important to
establish ranges on stocks and the market, so I can remain
invested, know what to do at different valuation levels and
know when to commit fresh capital when stock or bond plunges
I believe that Investing is not rocket science or luck. It
is establishing goals, developing strategies and following
those strategies to a profitable conclusion. I cannot
accomplish that if I only look a few weeks or a month down
the road. America is a great country and I believe the
American story has a lot more pages to write.