Consider a long term portfolio invested in stocks diversified (15 to 20 stocks), selected and managed according to the usual rules. Stocks with a specific condition: an average long term historic volatility i.e. between 30 and 50% roughly.
Each stock is hedged with a long term put (6 months or more), strike OTM just under the ATM strike, additional investment cost: roughly 5 to10%.
You sell immediately an ATM call for the next expiration date (with at least more than 30 days). You manage closely these positions. You donât necessarily wait the expiration dates. Each time one of the stock is up or down 5 points, that is the difference between strikes, you roll up or down (buying your outstanding call and selling the ATM call). In the first case itâs a cost but it is limited by the premium already collected and the premium of the new call, but in the same times you earn the total of the 5 additional points on the stock. In the second case itâs a substantial profit on the calls but you loose on the stocks more than the profit on the calls, and less than the 5 points. You can afford it if you are long term invested and protected by the puts. (The puts are important mainly to keep your spirit up these days and protect against a meltdown like THC, and you can afford it since you collect premium on the calls).
On one hand you have the stocks invested long term and wait for the improvements in the US economy (or should we give up everything and invest in US Treasuries?).
On the other hand you regularly collect premium from the sell of the calls according to the fact that 80% of the time the market doesânot trend. This additional profit should normally reach 20 % yearly vs the initial investment in stocks, much more vs the real risk (investment costs less strike of the puts).
Of course if you are in an bear market the balance between both side of your portfolio wont be so rosy but, waiting for improvements, you can take advantage of the cash collected for your living.
May be something is wrong ?
Where are the errors ?
Each stock is hedged with a long term put (6 months or more), strike OTM just under the ATM strike, additional investment cost: roughly 5 to10%.
You sell immediately an ATM call for the next expiration date (with at least more than 30 days). You manage closely these positions. You donât necessarily wait the expiration dates. Each time one of the stock is up or down 5 points, that is the difference between strikes, you roll up or down (buying your outstanding call and selling the ATM call). In the first case itâs a cost but it is limited by the premium already collected and the premium of the new call, but in the same times you earn the total of the 5 additional points on the stock. In the second case itâs a substantial profit on the calls but you loose on the stocks more than the profit on the calls, and less than the 5 points. You can afford it if you are long term invested and protected by the puts. (The puts are important mainly to keep your spirit up these days and protect against a meltdown like THC, and you can afford it since you collect premium on the calls).
On one hand you have the stocks invested long term and wait for the improvements in the US economy (or should we give up everything and invest in US Treasuries?).
On the other hand you regularly collect premium from the sell of the calls according to the fact that 80% of the time the market doesânot trend. This additional profit should normally reach 20 % yearly vs the initial investment in stocks, much more vs the real risk (investment costs less strike of the puts).
Of course if you are in an bear market the balance between both side of your portfolio wont be so rosy but, waiting for improvements, you can take advantage of the cash collected for your living.
May be something is wrong ?
Where are the errors ?
My main risk (however limited by the puts) is the US economy or that the US stock market won't meltdown, Japan Style, for the next several years.