A reader called me on what I meant by emerging market PE ratios not being cheap at 14. Generally PE ratios are often lower than developed markets and dividend yields are often higher. Emerging markets, as an asset class, carry more risk of coups (Thailand), political shenanigans (Hungary), very volatile currency moves (Iceland) and other things. The three I noted all happened this year. Places like Brazil and Turkey have histories of wild inflation. This all needs to be compensated some how and lower PEs and higher yields is a way to do it.
A benchmark of 18 times earnings with a 2% yield (the US market) to start looking at emerging markets is not a good idea. PE ratios are not great predictors of future direction where markets are concerned (you can find some spirited debate about whether PEs offer any predictive value for individual stocks). High PE ratios can get much higher. I have not made any serious changes to my emerging market exposure of late (I have mentioned the tweak or two I did make) but cheap, at 14 times for iShares Emerging Market (EEM), is not an accurate description these days.
Another reader left a comment about this being a weird year for mutual funds noting that the Hussman Fund has struggled. The reader asks about whether this is a new paradigm. I don't think it is a new paradigm. Concede me this point for a moment, the market has gone up this year despite the fact that it should not have gone up. Still conceding me the point, markets have gone up when they shouldn't have and down when they shouldn't have many times throughout history. Conceding me the point another moment, 2006 is just one more example of something that has happened before and will happen again. Now if you no longer wish to concede me the point then you clearly don't believe 2006 was a new paradigm.
There were a couple of comments about the call selling scheme where the book authors are looking for 3-4% per month. One reader chronicled two successful naked sales of some puts. There are plenty of put sales that go well and plenty of call sales that go well, no doubt.
There is no convincing me that stock selection based on call premium is a good idea (I am not saying the commenting put seller is in this camp). I don't know exactly what the guys who wrote the book referenced in the video are doing but I have seen this movie before. People build a portfolio of nothing but high octane stocks, make 4% a month for some time period and then the market has some sort of normal correction or bear market and the gains are more than given back. The number of people that are better off without a diversified portfolio is quite small.
Another reader talked about Wade Cook seminars on selling options in the late 1990's. Selling calls worked very well in the late 1990's until it didn't, as mentioned above.
If you want to sell options go ahead. My advice would be to build a portfolio with what you think are the best stocks for a diversified portfolio. When the market gives what you think is a good options trade, take the trade. You might need to learn more than you now know about options so you can recognize when a trade is a good one. To be clear I am not saying you should trade options I am saying if you decide you want to, this is what I would do. It is not the right strategy for everyone. Most people are probably better off without them.
Lastly I stumbled across something called the World Combat League on the VS channel (the old OLN). It had a very ESPN 8, the Ocho feel about it except these guys are all bad asses.
Proud Member Of
Random Roger
© 2009 | Gadget Theme Blogger Template
Original WPtheme By Blogger Template | Converted By Gadget Lover
| Distributed by eFree Blogger Help
Original WPtheme By Blogger Template | Converted By Gadget Lover
| Distributed by eFree Blogger Help
8 comments:
Well done Roger!
A few more comments for people who want to start sell options:
1. You have to be an above average stock picker and well versed in Bollinger band, psi and that kind of indicators.
2. You have to have a deep pocket. Don't sell options if you don't have more than enough cash or margin to cover those option calls or puts.
3. You still need to have probably 90% in a well diversified portfolio and use only 10% for options. Otherwise you will not be able to take vacation or work or function normally.
4. Like most fancy stuff, a little bit of options can add some nice flavor to your portfolio but too much of it will stink only too easily.
my experience has been is that if the volatility is such that the premium is worth selling then the stock is either going to run up and you lose on the upside or going to go down a lot more than the value of the premium.
some of the sales will work, but it will take many successful ones to make up for a single stock that runs away from you -- in either direction.
some people think that they can use technical analysis to cover the open positions if the stock moves drastically. but then, what's the point? might as well use TA and just buy the options instead of collecting premium.
others think that they can always find stocks that do not go down much, yet stay under the strike price (or the inverse for puts). Truth is, if such a thing existed, the volatility will be so low that you will never get the target 50% annual return (3-4% monthly compounded).
80-90% options become worthless on expiration day. Statistically you have better chance making money as a seller than a buyer becasue time value is on the side of the seller. You will be surprsied how high the option premium is and most of it is time value not intrinsic value. An example: NFLD was traded at $14.79 on 12/15/06, the January 15 put is worth $3.3, you go figure! You can still make money if NFLD does not drop below $11.7(-22%)on January expiration day. The key is to find out what is the probablity of NFLD drops that much. You have to be the judge of that.
"There is a sucker born every minute"...P.T. Barnum
Let's see how many of them buy another delusional options-to- riches book.
Maybe I could write a book on that premise.
Born To Be A Sucker
$39.95
anon @8:23. Few years back, i bought an alt mortgage REIT that had a fat (15%+) dividend yield. It was increasing its earnings and dividends every quarter. The chart looked great, with a wonderful up trend. I pyramided into my position while collecting the dividend. life was grand.
Then i got "smart", so i started selling covered calls on my position. In every case, the stock ran past my strike and i capped my upside and lost out on much more than the value of the premium.
Then i got much smarter, i figured obviously i need to sell naked puts.
As the equity hit its all time high ($27+), i added to my position and sold a bunch of naked leaps with a $20 strike. Figuring the "probability" of it going back to $20 is so low, and even if it did, i would not mind owning for around $17 (the strike minus the premium), and at $17 the yield on the dividend would be even much higher than $27.
Well, you probably guessed how this story ends. The stock proceeded to go down to $7 quickly. I held on to the equity because i did not want to be a sucker and cover my calls. I held on to the naked put because i figured it has to rebound, especially with its fat dividend. The dividend was slashed by 80%.
Eventually, i covered the calls, sold the stock at a big loss, and i am still rolling out the naked puts every january, trying to delay the inevitable.
The funny thing is that i had made money frequently buying calls/puts and selling covered calls. But all my earnings combined from all those trades did not cover even a portion of my loss from this one "investment".
In hindsight, i should've exited the stock and the option positions once it started trending down. But hindsight is 20/20, and emotions got in the way. It is also a lot more harder emotionally to exit a position when you sell the covered calls. Because then you need to exit both the calls and the stock. You keep telling yourself, if i can just hold on a bit more, the calls will expire worthless and i will close my equity position...
i know so many readers out there are so much smarter than me, they will sell puts and make a ton of money and never lose a penny... but just in case i can spare somebody else the agony, i share my story.
Sami, thank you fro sharing this.
anyone new to options should realize that the story Sami has shared is not the least bit unique. This has happened many times before and will happen over and over in the future.
thank you again
T you need to talk to a publisher!
That's a good story, and remarkably typical of non-professionals who trade options. Controling the psychology is critical.
And you have to have a real good sense of where the stock is going. If you are selling volatility, you need to be real sure that realised volatility will be less than what you are are selling.
If you are buying volatility, you need the realised volatilty to be greater than what you are buying *and* it has to be in the right direction.
Selling anything besides covered calls and cash-covered puts is really not something that anyone outside of a hedgefund should be doing.
If you do it at a hedge fund, you collect 2/20, and if you lose its not your money. Good Trade
Post a Comment