A key mission statement of The Blue Collar Investor is to “become CEO of your own money” A new rule issued by the US Department of Labor highlights why this is so important. In the past, stock brokers were not required to put the best interest of their clients ahead of their own. This is in contrast to registered investment advisors (RIAs) who always had this fiduciary (bound ethically and legally to act in the client’s best interest) responsibility. This will all change in April, 2017 as it relates to our retirement accounts. A second leg of this rule will be activated in January, 2018 pertaining to extra requirements for financial professionals who accept commissions. This new rule does not apply to taxable accounts.
Overview of new rule
All finance professionals that give advice on retirement accounts must put their clients best interests ahead of their own financial gain. This includes disclosing their forms of compensation and any potential conflicts of interest. All brokers, advisers and insurance agents are now required to act as fiduciaries (a financial adviser must act solely in the client’s best interest when offering personalized financial advice) or be subject to litigation. In the past, these professionals were simply required to suggest products “suitable” for their clients.
Which products are impacted?
The main targets appear to be high-commission products sold for rollover IRAs such as variable annuities and non-traded real estate investment trusts. A variable annuity is a tax-deferred retirement vehicle that allows you to choose from a selection of investments, and then pays you a level of income in retirement that is determined by the performance of the investments you choose. Compare that to a fixed annuity, which provides a guaranteed payout. These products may disappear from IRAs in the future. The goal is to eliminate the $17 billion per year retail investors are wasting in exorbitant fees according to the government.
I use an online discount broker
It is unlikely anything will change for those of us who manage our own IRA accounts and don’t take financial advice. Full service brokers, however, will be greatly impacted and will gravitate from a commission-based fee base to a percentage-of-assets system. Clients of full-service brokers will be met with new paperwork to fill out prior to the implementation of this rule.
What about my 401(k)?
Finance professionals will now be required to act in the best interest of your employers plan. Recommendations of rollovers from 401 (k)s will most likely disappear from what I am told.
What is BICE?
This is an acronym for best interest contract exemption. This document must be signed by a client when using a broker that accepts commissions for retirement account investing. It pledges that the adviser will act as a fiduciary.
Changes we are likely to see
- Commission-based accounts replaced by fee-based accounts
- Smaller full-service retirement accounts may be dropped and forced to move to online discount brokers, robo advisories or other firms
- Independent broker-dealers will have to build comprehensive compliance programs if they can afford it
- Smaller broker-dealers may have to pursue mergers to afford these requirements
- Sales of high-commission annuity products will slow
- Robo advisory (digital advice providers) services like Betterment, Wealthfront and Personal Capital will benefit
- Nontraded REITs (high-commission product) will be allowed but subject to the BICE requirements which will likely scare consumers away
- Finance professionals will move away from mutual funds with sales loads and high expense ratios and especially away from funds that carry 12 b-1 fees (up to 1% and used to compensate broker firms and advisers)
- Exchange-traded funds which are generally cheaper from a cost basis perspective should be beneficiaries
- ETFs also benefit because these are the main go-to products used by robo advisers (provide financial advice or portfolio management online with minimal human intervention. They provide digital financial advice based on mathematical rules or algorithms)
- Brokerages may lower ETF fees to take advantage of the new investment landscape
- The birth of a cottage industry of lawyers who are experts in this area
Discussion
This new rule appears to be a big win for retail investors. We will be able to better evaluate after implementation of the rule in April, 2017 and then again in January, 2018. Keep in mind also that Republican legislators are working hard to reverse this regulation while the SEC (Securities Exchange Commission) is looking to approve a uniform fiduciary standard.
Next live events
Blue Hour 5: Evaluating Mutual Fund Portfolios and Financial Advisors
Plus: The Top 5 Option Questions from 2016
Thursday April 27th
9 PM ET
This is a 2-part webinar presentation:
1: Many of us hold portfolios of actively-managed mutual funds that we’ve either selected ourselves or, more likely, been based on financial advisor advice. This webinar will provide a user-friendly technique to evaluate the performance of these portfolios and hence the performance of our financial advisors. We should commend those advisers who are out-performing the overall market and certainly question those who are under-performing the market and charging us fees to fall short. “Indexing will be defined and explained and a system to set up comparison charts (FOR FREE) will be highlighted.
2: The BCI team has gone through thousands of questions sent to us in 2016 and selected the top-5 most frequently asked questions to ask and answer in the second part of this webinar.
As always, written questions will be answered live by Barry Bergman, the BCI Director of Research, while Alan hosts the presentation.
Premium members login to the member site a register for FREE here:
Premium Member Blue Hour Registration Link
Long Island Stock Trader’s Meetup
Tuesday May 9th, 2017
7 PM – 9:30 PM
“Using Stock Options to Buy Stocks at a Discount and to Bring Portfolio Returns to Higher Levels”
Admission is FREE
Market tone
Global stocks declined this week with the increasing geopolitical concerns over rising tensions on the Korean peninsula and the possibility of a stronger US commitment to remove Syria’s Russian-backed leader Bashar al-Assad. Oil prices continued to rebound, with West Texas Intermediate crude rising to $53.25 from $52 a week ago. Volatility, as measured by the Chicago Board Options Exchange Volatility index, jumped to 15.96 from 12.8 last week. This week’s reports and international news of importance:
- Donald Trump sounded much more moderate than he did during last fall’s campaign in an interview with the Wall Street Journal on Wednesday. He reversed course on several issues. First, Trump said he may nominate US Federal Reserve Board chair Janet Yellen to a second term after saying last fall that she was “toast”. He also reversed his opposition to the US Export-Import Bank, which finances US exports. Critics cite the bank as an example of “corporate welfare.” Additionally, the president shifted gears on NATO, saying the alliance is no longer obsolete because it has begun to fight terrorism. Finally, Trump said the United States will not label China a currency manipulator, thus breaking another campaign vow. The reversal may represent an attempt to entice China to increase pressure on North Korea to abandon its nuclear program.
- Tensions continued to mount on the Korean peninsula as the North Korean regime threatened a nuclear strike in response to any US aggression. North Korea is believed to be trying to develop intercontinental ballistic missiles capable of reaching the US mainland. This week, the US navy dispatched a carrier task force to the western Pacific in a show of force, while Chinese president Xi Jinping said that China is committed to the denuclearization of the Korean peninsula. President Trump called on China to do more to rein in its nuclear-armed neighbor, saying if China won’t help, the US could act alone
- The US and other G7 nations continue to pressure Russia to abandon its support of Syria’s Bashar al-Assad in the wake of last week’s chemical attack on Syrian rebels which led to a cruise missile strike on a Syrian airbase by US forces
- For months, there have been three candidates in contention for the two spots in the second round of the French presidential election. Marine Le Pen, the populist firebrand, has consistently led recent polls, trailed closely by centrist Emmanuel Macron. François Fillon, hampered by an ethics scandal, has held the third position most of the time. Now a fourth candidate, leftist Jean-Luc Mélenchon, has entered the fray and is in a virtual tie for third place with Fillon. The conventional wisdom is that Le Pen will be beaten handily in the second round by either Macron or Fillon, who are more centrist. But the emergence of Mélenchon could put an unexpected wrinkle into the process. First-round voting takes place on 23 April
- Fed chair Yellen said that the US economy is healthy and that the Fed is now shifting its focus, taking its foot off the accelerator and allowing the economy to “coast” for a while, saying a gradual path of interest rate increases can get us where we need to go
- Yellen also commented on several bills that are working their way through Congress, expressing concern that the Fed could become subject to political pressure if the bills are signed into law
- Bank of Canada governor Stephen Poloz warned of the growing role of speculation in the recent acceleration in Toronto-area house prices. The central banker said that prices had accelerated from percentages in the high teens to the 30% zone, adding there is no fundamental story that can explain the rise. “I think it is timely to remind folks that prices of houses can go down as well as up,” he said. Poloz also said that further rate cuts in Canada are no longer on the table
THE WEEK AHEAD
MONDAY, APRIL 17th
- Home builders index April
TUESDAY, APRIL 18th
- Housing starts March
- Building permits March
- Industrial production March
WEDNESDAY, APRIL 19th
- Beige Book
THURSDAY, APRIL 20th
- Weekly jobless claims 4/15
- Philly Fed April
- Leading indicators March
FRIDAY, APRIL 21st
- Markit manufacturing (flash) April
- Markit services (flash) April
- Existing home sales March
For the week, the S&P 500 moved down by 1.13% for a year-to-date return of 4.03%.
Summary
IBD: Uptrend under pressure
GMI: 3/6- Buy signal since market close of November 10, 2016
BCI: I am currently favoring in-the-money strikes 2-to-1, a defensive posture
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US
The 6-month charts point to a neutral outlook. In the past six months, the S&P 500 was up 9% while the VIX (15.96) declined by 5%.
_____________________________________________________
Wishing you the best in investing,
Alan ([email protected]) and the BCI team
Thanks, Alan, for reporting this issue as it has progressed. I am glad it has left us who manage our IRA’s on-line unfettered.
I share your preference for ITM covered calls this month. I suspect many doubters of the tactic are reconsidering it in the face of almost daily water torture market declines. – Jay
Jay,
I view ITM strikes as insurance policies and in bearish and volatile markets I believe they should be strongly considered. If it turns out that the market appreciates during that contract, it was still the right approach at the time. After the fact, we are all right 100% of the time.
Like most other forms of insurance, we have it to mitigate challenging circumstances but prefer not having to use it.
Alan
Premium Members,
This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor Premium Member site and is available for download in the “Reports” section. Look for the report dated 04/14/17.
Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:
http://www.youtube.com/user/BlueCollarInvestor
Since we are about to enter Earnings Season, be sure to read Alan’s article, “Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:
https://www.thebluecollarinvestor.com/constructing-your-covered-call-portfolio-during-earnings-season/
Next live event:
Blue Hour 5, “Evaluating Mutual Fund Portfolios and Financial Advisors”, Plus, The Top 5 Option Questions from 2016.
Thursday April 27th, 9 PM ET.
This is a 2-part webinar presentation:
Part 1:
Many of us hold portfolios of actively-managed mutual funds that we’ve either selected ourselves or, more likely, been based on financial advisor advice. This webinar will provide a user-friendly technique to evaluate the performance of these portfolios and hence the performance of our financial advisors. We should commend those advisers who are out-performing the overall market and certainly question those who are under-performing the market and charging us fees to fall short. “Indexing will be defined and explained and a system to set up comparison charts will be highlighted.
Part 2:
The BCI team has gone through thousands of questions sent to us in 2016 and selected the top-5 most frequently asked questions to ask and answer in the second part of this webinar.
As always, I will be answering written questions in real time while Alan hosts the presentation so you don’t lose valuable webinar presentation time.
Non-members register here: https://www.thebluecollarinvestor.com/the-blue-hour-april-27/
Premium members login to the member site to register. Remember, the Blue Hour webinars are a key benefit of your BCI Premium Membership.
Best,
Barry and The BCI Team
Link to my recent interview on Benzinga Pre-Market Radio:
https://soundcloud.com/bztv/premarket-prep-for-april-13-its-earnings-season?in=bztv/sets/2017-shows#t=34:00
Alan,
I am pretty sure there are factions afoot in Washington to minimize or eliminate some of these very important issues.
My daughter is in an VP capacity with a Retirementx 401K firm involved in these very issues.
I was a broker for sixteen years and there were always additions and subtractions from advice brokers could give. Hopefully these will important disclosures will remain in full force.
So many times I have run into friends who have “invested” $100,000, only to have $94,000 or $95,000 immediately left to invest!!
Thanks, and best to you,
John
John,
Thanks for sharing your experiences on this very important topic. Retail investors are generally shocked to find out that many advisors are not required to act in their best interest. The playing field is beginning to level and that’s better late than never for blue collar investors.
Alan
I have learned options strategies but I would like to trade covered calls on the following conditions:
I don’t want a stock portfolio but a buy write in which I sell the premium and the stock altogether making a min. 5% hopefully.
I would like to know if it is possible at all and if you provide this service to premium members.
Thank you for your time
Itzhak,
A covered call trade is virtually the same whether we use a buy/write to enter or simply leg-in. A stock is purchased and an option is sold in 1 or 2 steps.
Even if we use a buy/write combination form to enter the trade, it is critical we master the individual steps for management purposes.
So, yes, using the buy/write approach is feasible.
Now, you ask about achieving a 5% return. There was no mention of a time frame. In my view, we should all look to “beat the market” to a significant degree (I know that’s vague but the amount is defined differently by different investors).
Let’s leave it that if we master all 3 of the required skills we should beat the market every year.
Alan
Possible ER Date issue with BEAT…
Our of our subscribers, Dale, brought an issue to our attention, a possible ER date change for the stock BEAT.
In general, ER date data can be difficult to nail down. Our “source of truth” is EarningsWhispers.com. It has proven to be the most reliable over the nine years we have been publishing our reports. On a few occasions, a company may change its’ ER date, announce an ER date just before announcement…or…on very rare occasions, there will be a two month quarter.
BEAT is a case of mixed ER date data…the info is all over the place…this could be one of those 2 month qtrs. Since there wasn’t any data on BEAT’s website, I placed a call to the company CFO and I’m waiting for call back from company.
What we know at this point:
BEAT – Last ER was on 2/22/17 (so logically, we can expect an
ER report approx. 90 days from 2/22/17)
– No ER date given on company website as of 10:45 AM
today
What is available so far…
Earnings Whispers – 5/24/17, per the Weekly Report
CBOE – 4/25/17
Yahoo – No date given
Schwab – 4/26/17, listed as “Tentative”
IBD – 4/24/17
NASDAQ – 4/25/17, listed as “Estimated”
I hope this helps. I’ll post a response as soon as I hear back from the company.
Best,
Barry and The Blue Collar Investor Team
Premium Members,
The Weekly Report has been revised and uploaded. Look for the report dated 04/14/17-RevA. We have updated some ER dates.
Best,
Barry and The Blue Collar Investor Team
Alan,
Thank you for great videos and books!
There is one question that keeps coming back to me that I haven’t understand exactly.
If you can look at this video between:
09:38 – 10:08
https://www.youtube.com/watch?v=OJPKeUpbnxM
1. I understand that we have made +$7 on the stock.
Now comes the question I wonder how it works practically on the brokers account.
Let us assume that all REAL money is tied up in the stock which means that there is no cash left on the account in this scenario.
When we now buy back the option for $7.10, doesn’t that mean that we owe the broker ($7.10) because the profit +$7 is in the stock itself, – if we then assume that we keep the stock?
You mention in the video: “It really cost us only 10 cents”.
So this is the confusing part. Would we owe the broker 10 cents or $7.10 in this case if we keep the stock?
My best Regards
Andreas
Andreas,
The short answer is that we actually must have the $7.10 cash to buy back the option. When implementing exit strategies, it is important that we have a cash reserve of 2-4% of our portfolio value to be prepared for potential exit strategy opportunities.
In the video, after a $50 call is sold and share price moves to $57, our shares cannot be worth more than $50 with the option obligation. If we buy back the option, share value can move to market value or $57.
The option premium cost-to-close of $7.10 consists of $7 intrinsic value + $0.10 time value. Net-net, the cost-to-close is $10 per contract. If we count the intrinsic value as a debit, we must also count share appreciation as unrealized credit.
Alan
To just be sure that I have that basic understanding. If we would not have a cash reserve at all, where all money is tied into the stock. Would that mean that we need to actually sell some shares to free up capital/cash first($7.10), – to be able to buy the option back?
Would it also be possible to borrow on margin as a temporary alternative if there is not enough cash avaliable in the reserve to buy back the option?
Why I mention this alternative is that some kind of goal is to keep the stock as much as possible where I like to buy more shares over time. Not to sell shares. The compounding idéa with other words.
Is it true that sometimes, we need to sell of shares to get Cash in the above scenario?
I think if I can really understand those 2 things, everything will be easier when continue to think how to do the strategies.
Many thanks again!
Andreas
Andreas,
1- Shares can be purchased on margin in margin accounts. Be sure to check with your broker regarding the specifics of their requirements and interest rates.
2- If our goal is share retention and covered call writing, see the sections regarding “portfolio overwriting” in my books and DVDs. All covered call writing approaches require some cash on hand (I use 2-4% of portfolio value) for potential exit strategy opportunities.
3- If there is not adequate cash on hand to buy back an option, adding cash, using margin or selling shares are ways to mitigate. If shares are sold, they must be different shares than the ones underlying the options sold or we find ourselves in a much riskier naked options situation (assuming our broker even allows us to sell those shares…depends on level of trading approval).
Alan
Alan,
This question is about a long call option a friend made yesterday.
He traded FB yesterday (04.17.2017): bought 230 call options Apr 21 2017 143 strike for a debit of 0.26/contract. Yesterday FB traded at 141.07. Today FB is trading at 141.79. He reported that the 143 strike option is trading at 0.39 so he decided to close the option. According to him he made a profit of $3200. I got confused. I always thought that we only start making a profit -when buying call options- when we pass our strike price. Even then the break even would be strike price+premium paid. He says that we do not have to wait for the stock price to pass the strike price to close early and take profit.
I did not want to get into a disagreement with him as he has been trading for far longer than I have but I am still confused. If this is such the case, then it would seem to be very easy to make a lot of money with these OTM strikes. Buy the option cheap, wait for it to appreciate a little and sell. I asked him if by closing the option below strike he would not loose the premium he paid for it? He said no.
Can you make sense of this for me? This friend is into day trading, making lots of money fast (which is not my style at all and prefer covered call writing based on the BCI methodology) but even I heard that experienced day traders prefer ITM or ATM strikes at the most. Is this friend really making big money here or there is something wrong with the calculations.
Thank you very much for your help and clarification,
Marta
Hi Marta,
If you are able to screen out stories like your friend’s and stick with covered calls and cash secured puts for your options career we will nominate you for Sainthood for your devotion to the cause :).
I suspect the rest of us have been tempted to “The Dark Side” of buying options for speculation more than once!
And why not? Who among us has never looked at the cost of buying back a covered call on an appreciated stock on expiry thinking “Why the hell didn’t I just buy that option instead ?”
It’s human nature. And all the subscription services bombard us with long lists of their triple digit options winners. But we know those lists are cherry picked….
I buy a few speculative contracts every week. But I suggest there is a better way to do it than large OTM positions day trading unless you are as experienced as your friend
First, start with paper trading just one contract at a time in a high liquidity stock you like if bullish or doubt if bearish. And go at least a month out to give yourself a little time fully expecting to be out of the trade well before that.
Let’s use FB as an example for a possible long options buy paper trade. Let’s assume we are bullish FB. The opiions chain for May shows the May 135 call selling about $8.85. $7.22 of that is intrinsic value and $1.63 is time value you are buying for the month. The Delta is .77 meaning the option should go up – and down – 77 cents for every dollar FB moves.
Let’s paper buy 1 contract spending $880 plus $8.40 in commission for $888.40. I have saved this trade and we can talk about it later if you or anyone else is interested. Since we could lose that entire amount if FB tanks let’s put a 30% trailing stop under it. Wow, you say, I could lose 30%? My friend made $3200 in a day? Yes you can, and often will, buying options! You have to get direction and timing right as an option buyer.
So why bother, one might ask? Well, I consider $888.40 a limited risk minus 30% for an upside that is theoretically, though not likely, unlimited on a stock I have done my research on and feel strongly about. If the trade works I stand to make a few times what I am risking.
Everyone loves quick wins whether at the Blackjack table, horse track, bingo parlor or options market. If you want to buy calls and puts for speculation that is fine. I do it all the time. it can be lucrative and fun.
But if you lack restraint and risk focus it is easy to blow up your account doing it instead of making a few extra bucks for the fun things in life. Please never count on options buying speculation as a cash flow stream. That is what covered calls and cash secured puts are for!- Jay
Marta,
A few points and then an explanation:
1- Only your friend knows if he is making money and, if so, how much…it doesn’t matter.
2- Your friend is on the “buy” side of options, we are on the “sell” side…completely different strategy. The BCI approach is much more conservative…all depends on trading style and personal risk tolerance along with strategy goals.
3- Option value can go up or down from second-to-second. View it the same way we look at the value of stocks…over the course of a trading day, value fluctuates depending on various factors (see below). Therefore, money can be made at any point in time for all types of strikes…or lost.
FACTORS for option value:
These are collectively known as the “Greeks”
Stock price (Delta), time to expiration (Theta) and volatility (Vega) are the key factors in calculating option value.
When an option is purchased (remember, we sell), Theta starts eating away at the option value…like buying a car and pulling out of the dealer’s parking lot…value goes down immediately. An option buyer is betting that Delta (share price appreciation) will negate the impact of Theta and then some to make a profit.
If there is a change in implied volatility in either direction, option value will also change.
All this means that from the buy side, there is a greater chance of larger returns but more risk and a greater chance of larger losses.
It is incumbent on us to evaluate our personal risk tolerance, strategy goals before deciding on a strategy. What is right for a friend may or may not be right for us.
Stay safe.
Alan
Thank you again for a great explanation. Marta
Hey Marta,
Tomorrow is Friday so happy weekend! As you know our blogs turn over every Saturday morning so I wanted to follow up the thought on the FB trade from yesterday while you still might read this.
FB went up 1.53 today and the bought option described above kept pace with it’s delta going up 1.20. On the 8.89 spent it’s a 13.5% one day return. That is why people buy options!
But it could have just as easily gone the other way. That is why people need to buy ITM with plenty of intrinsic value, not much time value, pick a stock that is trending, have a stop point in mind before entering and trade small when you buy.
Anyway, thanks for a great post that got me thinking. – Jay
Premium members:
This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options as well as the implied volatility of all eligible candidates. For your convenience, here is the link to login to the premium site:
https://www.thebluecollarinvestor.com/member/login.php
NOT A PREMIUM MEMBER? Check out this link:
https://www.thebluecollarinvestor.com/membership.shtml
Alan and the BCI team
FREE Webinar next week for active Premium Members
1. Thursday 4/27 at 9 PM ET
2. Topics covered:
•Evaluating actively-managed mutual funds and financial advisors results
•Why consider indexing?
•The top 5 option questions from 2016
To register for free:
•Login to member site
•Scroll down under 10% discount link to Blue Hour section
•Click on April 27th registration link
*** All those who attend live will have access to the live written Q&A while Alan presents
The webinar will also be recorded and saved on the member site later in the week or early the following week.
General members can register here:
https://www.thebluecollarinvestor.com/the-blue-hour-april-27/
Alan and the BCI team