This past Thursday and Saturday I conducted a webinar series attended by investors throughout the United States and Canada. I am humbled by the response and supportive emails that you sent during and after the presentations. Thank you. Investors had the opportunity to send questions during the course of the webinars and I felt that a few of them would benefit all readers of The Blue Collar Investor Blog:
1- Q- In this current economic environment, how are you handling your covered call strategy?
A- Because of the unpredictable volatility of the market along with the lack of its orderly behavior, I have stopped selling options but continue to be fully invested in the market. My reasoning for maintaining my equity positions is twofold. First, in order to make up for recent losses, I feel that I need to be in an investment asset class that has the potential to do so. That rules out treasuries, CDs, money markets, and the like. Historically, the market returns 11% per year and time and time again has proven to be resilient. Think back to the “crash” of 1987 and how the market recovered from that episode. Second, I refuse to believe that the market capitalization of the S&P 500 is now truly worth 40% less than it was just a few months ago. Since all this selling has left a HUGE amount of cash on the sidelines, I feel that it is just a matter of time before all that liquidity sets a fire on the stock market.That being said, I should point out that things are so unusual and so few experts and investors have experienced this type of economic and psycholgical environment, that nobody really knows for sure how to proceed. That goes for Paulson, Bernanke, Buffet, Cramer, me and anyone else you name. All we can do is take the path of common sense and adjust our decisions from there.
2- Q- Which online-discount broker should I use?
A- There are many good ones out there. I can personally attest to USAA Brokerage Services. As an officer in the military, I had access to all of USAA services, including the brokerage company. The commissions are extremely low ($5.95 per trade up to 1000 shares) and they provide reliable service. I suggest you do your own due diligence regarding the other companies taking into consideration reliable transactions,phone assistance, if needed, and most importantly, low commissions. Here is the contact information for USAA (non-military are now allowed to participate):
3- Q- IBD suggests an 8% stop loss as a guide to selling a stock. What are your criteria?
A- There is nothing wrong with setting a stop loss if you are long a stock. For me, 8% is a reasonable percentage in a normal market. In today’s volatile market, an 8% stop loss would result in a significant turnover in your portfolio several times a week. In a covered call position, you must first buy back the option to “free up” the stock for sale. You can enter a “limit order” to buy back the option at 10-15% of the original option sale. This, however, is not how I handle my stock/option positions. I will consider option buy-back when the option premium drops to 20-25 cents or 10% of the original option premium for the first 2-3 weeks of the contract preiod. I will buy back an option during the last week of the contract period only if I want to sell the underlying equity. I make my buy/sell decisions of the stock itself via technical analysis using moving averages (EMAs), MACD, Stochastics, and volume.Chapter 8 in my book, Cashing in on Covered Calls, goes into great depth explaining this process. Those of you on my mailing list who would like a set of guidelines regarding these technical indicators, email me at [email protected] and I’ll be happy to send it to you for free. Use this as a general guide only, as technical analysis is more an art than a science.
4- Q- Why do you use 20 and 100 day exponential moving averages in your technical analysis rather than the 50 and 200 that most others use?
A- I use the 20-d ema because we are selling 1-month options and there are approximately 20 trading days in month. I utilize the 100-d ema because my portfolio turns over 20-80% per month so these shorter term EMAs will serve as quicker indicators for our purposes. If I were a long term investor in stocks, without the options aspect, or sold longer term options, I too, would use the 50/200 indicators. Once again, I am using the path of common sense.
5- Q- How do we know when the market is settled enough so we can start cashing in on covered calls again?
A- I am looking for an upturn in the housing and financial sectors as well as a loosening of credit requirements. Once this occurs, there is a strong likelihood that the institutional investors will start re-investing all that cash that is currently on the sidelines. One technical indicator I check is the VIX which is the Volatility Index that tracks the S&P 500. It is a measurement of market risk and is often referred to as the “investor fear gauge”. Values greater than 30 is indicative of investor fear and uncertainty while values under 20 infer calmer, less stressful times in the market. Needless to say, the current chart below is above 30 and approaching the planet Pluto! Use the ticker symbol $VIX to pull up the chart:
Last Weeks Economic News:
Volatile stock Indexes reflected the continuing investor fear of a global recession. A few small positives were a slight rise in the Conference Board’s index of economic indicators, which measures the economy’s health. This was due to an increase in the money supply and consumer expectations. Also, existing-home sales rose 5.5% beating analysts’ expectations. For the week, the S&P 500 Index fell 6.8% for a year-to-date return of -39.2%.
Thanks to all who participated in the webinar series. I truly enjoyed spending the time with you.
Best regards to all,