Covered call writing and selling cash-secured puts are cash-generating strategies. These profits can be impressive as isolated events but what if we then take these proceeds and re-invest them to amplify our returns? The BCI philosophical approach to option-selling stresses the importance of re-investing our short-term premium returns whenever possible. Of course, for many of us, these revenues are needed to supplement our active income. When I started selling options, the revenue was used to help fund my sons’ college and professional school educations as well as purchase my first real-estate investment property. I currently sell options in my mother’s account to enhance the quality of her golden years. However, in situations when premium returns can be re-invested, the power of compounding can truly be defined as the 8th wonder of the world.

 

Compounding and long-term investing

To demonstrate how compelling compounding our profits can be, I will reference my book, Stock Investing for Students which is a long-term investment plan predicated on re-investing all passive income. Whether we are short or long-term investors, the power of compounding must be respected and considered. Here is the plan based on historical data (no monkey business…and stats can be adjusted to any time frame):

  • 40-year plan starting after high-school graduation
  • Start with an investment of $1,000.00 to open a brokerage account
  • Invest 10% of your gross annual income (GAI)
  • 1/12th of this 10% figure is invested monthly via dollar-cost averaging
  • All dividends are re-invested
  • Assumes an average GAI of $60,000.00 for the first 20 years
  • Assumes an average GAI of $80,000.00 for the last 20 years
  • Uses low-expense-ratio, broad market index funds generating an 8% annualized return
  • Can move to individual stocks and options to generate even higher returns

 

First 20 years

covered call writing returns

Compounding Profits for the First 20 Years

 

Using a compounding savings calculator found at www.bankrate.com, we generate a portfolio balance of$299,400.00.

 

Last 20 years

compounding option-selling profit

Compounding Profits for the Last 20 Years

 

Based on the low side of historical data, the calculator shows a final portfolio balance of $1,852,013.00. Using individual stocks and stock option-selling should significantly enhance these final returns.

 

Discussion

Option-selling should result in returns that consistently beat the overall market. By re-investing these profits and taking advantage of the power of compounding, these cash flows will be elevated to substantially higher levels.

 

Upcoming event 

AAII National Investor Conference: Las Vegas Nevada

 

October 26 @ 8:00 am – October 28 @ 1:00 pm

 

October 26th – 28th, 2018 (Friday through Sunday)

Alan’s presentation: Saturday October 27th at 9:30 AM

Visit Alan, Barry and the BCI team in the exhibit hall Friday, Saturday and Sunday

 

Market tone

This week’s economic news of importance:

  • Markit manufacturing August 54.7 (54.5 last)
  • ISM manufacturing index August 61.3% (57.9% expected)
  • Construction spending July 0.1% (0.5% expected)
  • Trade deficit August -$50.1 billion (-$50.4 billion expected)
  • ADP employment August 163,000 (217,000 last)
  • Weekly jobless claims 9/1 203,000 (212,000 expected)
  • Productivity Q2 2.9% (3.0% expected)
  • Markit services PMI August 54.8 (55.2 last)
  • ISM non-manufacturing index August 58.5% (56.9% expected)
  • Factory orders July -0.8% (-0.6% expected)
  • Nonfarm payrolls August201,000 (200,000 expected)
  • Unemployment rate August 3.9% (3.8% expected)
  • Average hourly earnings August 0.4% (0.2% expected)

THE WEEK AHEAD

Mon September 10th

  • Survey of consumer expectations August
  • Consumer credit July

Tue September 11th

  • NFIB small-business index August
  • Job openings July
  • Wholesale inventories July

Wed September 12th

  • Producer price index August
  • Beige book

Thu September 13th

  • Weekly jobless claims 9/8
  • Consumer price index August
  • Core CPI August
  • Federal budget August

Fri September 14th

  • Retail sales August
  • Industrial production August
  • Consumer sentiment September
  • Business inventories July

For the week, the S&P 500 moved down by 1.03% for a year-to-date return of 7.41%

Summary

IBD: Market in confirmed uptrend

GMI: 6/6- Bullish signal since market close of July 9, 2018

BCI: Selling an equal number of ITM and OTM strikes for new positions. 

 

WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US

The 6-month charts point to a slightly bullish tone. In the past six months, the S&P 500 was up 7% while the VIX (14.92) down by 15%.

Wishing you much success,

Alan and the BCI team