My Path to Trading Business

[Martzee]

I believe in trading in the stock market. So, I started my own trading business. I will be posting my progress and insights here.

I started in my "intro" but I will continue posting here.

Here is my Intro thread: INTRO - On the path

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► TRADING PLAN

We are investors, not traders. We buy assets - dividend-paying companies. We buy dividend growth companies. Our plan is to hold those companies forever. We treat those businesses we are buying as our businesses. It is like real estate. People do not buy homes just to sell them the next day, or next month. People buy to hold their home for the next 30 years or more. We buy dividend growth companies for the same reason.

We buy dividend growth companies to generate income receiving dividends. We want our businesses to reward us for holding their shares and paying us for it. We reinvest the dividends to accumulate more shares. Our goal in accumulating shares of a selected company is to reach 100 shares of that business. All dividends and account deposits are used to accumulate shares.

Once we accumulate 100 shares of a company, we start selling covered calls. When selling covered calls, we sell to avoid our shares being called away. We deploy all hedging strategies to avoid the exercise of the calls. If, however, our shares are called away, we immediately start selling naked or cash-secured puts. We sell puts as a means of investment to buy shares, not to speculate or sell put just to bring premiums. We sell puts against companies we want to buy. Once the shares are assigned to us, we implement the Wheel of Fortune strategy by immediately start selling covered calls again.

All premiums generated from selling covered calls or puts are used to buy more shares of the companies we want to hold.

We only sell our companies when they no longer meet our requirements - reduce or suspend the dividend.

From time to time, we use other options strategies to generate income: poor man's covered calls, butterflies, covered strangles, or collars.

Poor man's covered call
We use this strategy against expensive stocks where we do not have enough capital to trade a standard covered call right away or in the near future and when saving money would take many months or years; usually indexes such as SPY, RUT, IWM, etc. We also use it against ETFs or individual stocks while accumulating shares of that stock.

Butterfly
We use this strategy as a directional trade. When we identify a strong trend in any direction, we may apply this strategy to limit our risk but reap a decent profit. For example, buying a call against SPY to participate in a strong trend would cost us $800 while the same butterfly would cost us $200. This limits our risk in case we are wrong.

Covered strangle
This strategy is selling an OTM put and a call against a stock which we want to add shares to our holdings and we already own shares. For example, we own 100 shares of a stock XYZ, and we are OK to buy another 100 shares. We sell covered strangle and our calls are covered by the existing position we already own and our put is covered by cash we have in our account in case we get assigned.

Collars
We may use this strategy (selling covered calls and use the premium to buy protective puts) if we see a need to protect our holdings and buy insurance. The covered calls will generate income for us to buy the puts.

Cost basis offset
Selling covered calls and puts, as well as other strategies, will be used to offset our cost basis. This is more of a psychological or mental offset. However, it helps to see it as having less risk in our stock and that we have purchased our shares for "free" (we used premiums collected when selling the calls and puts, although on many occasions we started collecting these premiums after we purchased the stock).

What about other options strategies?
From time to time we may use a different options strategy, for example, naked call, if we see it fit and we are prepared for any consequences from such trades. But, these trades will be very rare.

► REDUCING TRADING COST
Our other trading goal is to reduce trading costs. Therefore we picked a broker that charges low or no fees to trade. We think Tasty Works is the right broker for us. Tasty Works charges no fees to purchase or sell stocks and approx. 1.15 per contract of options trading. This allows us to accumulate our stock holdings buying a single share of the desired stock for no fee.

► DISCLAIMER
Note that all trades presented here are our trades and we post them for educational purposes. We are not licensed as investment advisors and we do not know your objectives and goals, so we cannot provide you with any specific investment advice. If you seek advice, contact a licensed advisor. Note, that trading or investing in stocks, options, or futures involves risk and that you may lose all your money. If you decide to mirror our trades, do it at your own risk and do your own homework.▼

 

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[Martzee]

A little history:

I was always fascinated by the stock market and I knew that one day, this would be my "thing". But I lived in a country where trading was not possible. I could start in 1996. That was my big day. Unfortunately, I was also extremely ignorant and not very successful. Soon, I stopped trading.

I studied as much as I could and resumed in 2006. In 2010 I discovered options and learned a lot about options, how can they make you money, and how they can lose you money.

In 2014 I started a personal hedge fund. Trading and growing money in it since then.

 

[socaldude]

Interesting post. Welcome to the forum.

 

[socaldude]

In 2014 I started a personal hedge fund. Trading and growing money in it since then

What are your favorite indicators. What do you like looking at? I like looking at $DXY and /VX.

 

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[Martzee]

What are your favorite indicators. What do you like looking at? I like looking at $DXY and /VX.

I do not look at indicators much as I do not trade. My strategy, as described in my "Trading Plan" above is to accumulate assets and trade options around these assets. Thus, I use the Wheel Strategy and with this strategy, I do not care much what the market or stocks are doing.

For example, I want to accumulate AAPL. I start selling puts against this stock or strangles. By selling strangles, I sell a put and call at the same time. For that, I collect between $80 -$100 a week. If the stock drops below my put strike price, I either attempt to roll the put away in time and lower or let it assign and buy 100 shares. If the stock goes up (while I still do not have 100 shares) I hedge the position by buying 100 shares or roll the call away in time and higher.

Once I have the position, I collect dividends, keep selling strangles, and collect dividends. This way I really do not need to know what the indicators are saying. I used to look at RSI, MACD, and Stochastic and still have them in my charting software, but do not use them much. I, however, watch regularly SPX, /ES, QQQ, and IWM. I want to be in tune with the overall market.

 

[Martzee]

Pretty nice, good job. I want to get started with forex trading, do you have any insight for that? I find it to be quite similar, so any input would be appreciated.

Unfortunately, I will not be able to help you with or provide input on Forex. Although some aspects may be similar, such as using technical analysis (which I do not use much) you also need to be aware of the currencies market, economic forces impacting currencies, and the relationship between each currency. Unfortunately, that is totally foreign to me. I understand stocks and options and I know how to invest and trade them.

 

[Akshay Kumar]

How do you generate cash when the market is moving down?
Do you also try this on etfs?
How much annual returns do you get out of it on average?
And what are the hedging strategies which you use to avoid exercise?

 

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[Martzee]

How do you generate cash when the market is moving down?
Do you also try this on etfs?
How much annual returns do you get out of it on average?
And what are the hedging strategies which you use to avoid exercise?

See below in red:

How do you generate cash when the market is moving down?
I sell options, primarily, to generate cash (plus dividends), so it doesn't matter much where the market moves (but...). I sell strangles, that is, I sell a put and a call at the same time, same expiration. If the market moves sideways, I make money, if the market moves slightly up, I make money, if the market moves slightly down, I make money. The only time when I get a hard time is when the market moves violently down or up, then I have to take action. To protect me from losses, I hold enough cash for assignments or hedge a position with stock holding. On top of that, strangles (or single puts or calls) are extremely easy to roll, so if the market moves violently down as it did in March, I roll the position down and away in time to prevent early assignment. Normally, I open 0 DTE (days to expiration) to 45 DTE trades. When a violent move happens, I immediately move the trade to 90 DTE and keep it there as long as the stock or market calms down, meaning that when a trade moves to 60 DTE, or 50 DTE, I move it back to 90 DTE. So when a market moves down, I still make money and skew my trades towards downside move (meaning giving more room for the put side and go more aggressive on the call side).

Do you also try this on etfs?
I do this with ETFs but not all of them. For example, I trade this strategy against KBE but do not trade it against SPY or IWM. The reason is the capital requirement. With KBE the capital requirement is around $300 to trade a strangle, with SPY it would be $15,000. So I use mostly stocks. However, I use a strategy called a Poor man's covered call (PMCC) against these funds. I buy an at-the-money long term call (LEAPS) and start selling covered calls against the LEAPS call (below is a picture of two trades I opened earlier this year).

How much annual returns do you get out of it on average?
The minimum return on the options part is 125% (but it varies, this year was extremely successful and I have a 360% return, last year was bad as I made a few very bad trades trading SPX 0DTE options and those bit me), add dividends approx. 5% a year + stocks capital appreciation 8%

And what are the hedging strategies which you use to avoid exercise?
There are not many strategies to avoid exercise. As a seller, you never know when and why the buyer decides to exercise his option. You can prevent the automatic exercise (when the option moves in-the-money at expiration) by either closing the position or rolling it. I mostly roll, unless I want the stock exercise (I use a wheel strategy so I am OK to get assign to or away from the stock). On my blog, I wrote about ways how to protect your call side, here is a link to the article: Selling Covered Calls below your stock cost basis. What to do? To protect yourself on the put side is similar - have enough cash to buy the stock, buy back the put option (close the position), or roll it, or sell the stock short to neutralize the put, convert it to a call, or convert it to a debit spread, or a butterfly. If you get assigned, just make sure you have enough money to hold the position (many new investors get burned because they open naked puts, usually too many, and when the trouble hits the fan and they got assigned, they are forced to close the stock position at a loss) and then sell covered calls (I usually start selling deep in the money covered calls to gain downside protection and still make money). If you want to discuss this strategy more, let me know and I can break it down.

 

[Martzee]

The Wheel Strategy I trade

If you are familiar with this strategy, you can pretty much skip this post as you already know all the ropes. If you are a novice investor, this strategy may help you maximize your returns.

This strategy utilizes trading stocks and options. I use this strategy myself and it generates consistent returns.

Stock pick criteria

To trade this strategy I pick a stock that is relatively lazy (so doesn’t have too much volatility in it), trades mostly sideways or slightly up, pays dividends consistently (dividend aristocrat), and I must be willing to buy 100 shares of this stock (that means, I have to have enough money in my account to do so). The best candidates are usually utility stocks but any stock with lazy charts will do it. I also check options on that stock to make sure it has enough premiums trade.

Trading the strategy

Once you have a stock that meets your criteria, start doing the following:

1) Sell a put contract with delta 20 – 30 (that will determine your strike price), a premium of 0.30 ($30) or more, and 45 days to expiration or shorter if you can get the same premium.

2) Reinvest the premium and buy one share of the stock you traded (if the premium is less than the stock price, leave it in cash).

3) If the stock stays above the strike price at expiration, it will expire worthless, you keep the premium, and go back to step #1 above.

4) You may apply a 90% rule which means that you buy back the option once you achieved a 90% premium, e.g. you sold the option for 1.00 ($100) and buy it back for 0.10 ($10). This means you skip step #3 above.

5) If the stock stays below the strike price at expiration, you may attempt to roll it into the next expiration day and the same strike, or into the next expiration day and higher, as long as the roll is a credit roll. If this is not possible, let the option assign and buy 100 shares of the stock.

6) Once you have the stock, sell a covered call option. Make sure your strike is above your cost basis. For example, if you were assigned at $30 a share, make sure you sell the call with a strike price of 30 or more. Note, there will be situations when the stock drops so low that this will not be possible, but there are strategies to go around this. If interested, I can write about it in another post.

7) Reinvest the premium from covered call trade and buy another share of the stock. Also, in this period, you will start collecting dividends. Reinvest the dividends to buy more shares.

8) If the stock stays below your call strike price at expiration, the call will expire worthless and you can go back to step 6 above.

9) You can also buy the call back once you reach 90% profit on the call and sell a new call with the next expiration day, (i.e. skip step 8 above).

10) If the stock ends above your short call at expiration, you can roll the option into the next expiration and same strike, or the next expiration and higher strike as long as it will result in a credit trade.

11) If the roll as described in the step above is not possible, let the call assign, and sell your shares. If done as described above, you will make a profit on the calls and on the stock. Once you have no shares, you can go back to step #1 above.

That’s it. If done correctly, this strategy is almost invincible and you will be making nice profits. If you need more help, let me know.

 

[Akshay Kumar]

The Wheel Strategy I trade

If you are familiar with this strategy, you can pretty much skip this post as you already know all the ropes. If you are a novice investor, this strategy may help you maximize your returns.

This strategy utilizes trading stocks and options. I use this strategy myself and it generates consistent returns.

Stock pick criteria

To trade this strategy I pick a stock that is relatively lazy (so doesn’t have too much volatility in it), trades mostly sideways or slightly up, pays dividends consistently (dividend aristocrat), and I must be willing to buy 100 shares of this stock (that means, I have to have enough money in my account to do so). The best candidates are usually utility stocks but any stock with lazy charts will do it. I also check options on that stock to make sure it has enough premiums trade.

Trading the strategy

Once you have a stock that meets your criteria, start doing the following:

1) Sell a put contract with delta 20 – 30 (that will determine your strike price), a premium of 0.30 ($30) or more, and 45 days to expiration or shorter if you can get the same premium.

2) Reinvest the premium and buy one share of the stock you traded (if the premium is less than the stock price, leave it in cash).

3) If the stock stays above the strike price at expiration, it will expire worthless, you keep the premium, and go back to step #1 above.

4) You may apply a 90% rule which means that you buy back the option once you achieved a 90% premium, e.g. you sold the option for 1.00 ($100) and buy it back for 0.10 ($10). This means you skip step #3 above.

5) If the stock stays below the strike price at expiration, you may attempt to roll it into the next expiration day and the same strike, or into the next expiration day and higher, as long as the roll is a credit roll. If this is not possible, let the option assign and buy 100 shares of the stock.

6) Once you have the stock, sell a covered call option. Make sure your strike is above your cost basis. For example, if you were assigned at $30 a share, make sure you sell the call with a strike price of 30 or more. Note, there will be situations when the stock drops so low that this will not be possible, but there are strategies to go around this. If interested, I can write about it in another post.

7) Reinvest the premium from covered call trade and buy another share of the stock. Also, in this period, you will start collecting dividends. Reinvest the dividends to buy more shares.

8) If the stock stays below your call strike price at expiration, the call will expire worthless and you can go back to step 6 above.

9) You can also buy the call back once you reach 90% profit on the call and sell a new call with the next expiration day, (i.e. skip step 8 above).

10) If the stock ends above your short call at expiration, you can roll the option into the next expiration and same strike, or the next expiration and higher strike as long as it will result in a credit trade.

11) If the roll as described in the step above is not possible, let the call assign, and sell your shares. If done as described above, you will make a profit on the calls and on the stock. Once you have no shares, you can go back to step #1 above.

That’s it. If done correctly, this strategy is almost invincible and you will be making nice profits. If you need more help, let me know.

Thanks for your detailed response. Gonna try this when I have some capital.

 

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[Martzee]

Thanks for your detailed response. Gonna try this when I have some capital.

Definitely save enough capital to trade. Many investors and traders fail because they are undercapitalized and when something goes wrong, they do not have enough money to adjust the trade and must close it for a loss.

 

[Akshay Kumar]

Note, there will be situations when the stock drops so low that this will not be possible, but there are strategies to go around this. If interested, I can write about it in another post.

Can you please write about what to do in these situations?

 

[Martzee]

Can you please write about what to do in these situations?

I already wrote about it on my blog. I do not want to re-post or rewrite it, so please, go there and read it there:

Selling Covered Calls below your stock cost basis. What to do?

 

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[Akshay Kumar]

I already wrote about it on my blog. I do not want to re-post or rewrite it, so please, go there and read it there:

Selling Covered Calls below your stock cost basis. What to do?

Sure

 

[Martzee]

December 2020 and the entire year 2020 is over. I trade 4 accounts and have slightly different strategies for each. That depends on the type of account. If it is a cash account, the strategy is different than in the margin account.

Considering how difficult the 2020 year was, it was a very profitable year for my trading business. And I love this business.

Account #1 ($20,624.47) YTD: +419.15%
Account #2 ($22,216.46) YTD: -2.54%
Account #3 ($37,116.28) YTD: -0.39%
Account #4 ($11,312.36) YTD: +37.96%

My Account #1 was an account I placed a lot of effort and focus on in 2020. I made many mistakes trading options without properly protecting my money. Fortunately, in 2019, I realized I was wrong and changed my strategy to what I knew was working for me. The results exceeded my expectations.

Account #2 is a cash account and the loss was due to the same mistakes I made in account #1 (trading 0 DTE SPX Iron Condors). This account was definitely suitable for this strategy, well this strategy is not suitable for me at all. Although the account shows a loss for the year, I was actually down almost 30% due to losses I accumulated. I dedicated this year to fix this account and I am satisfied with the results.

The same could be said with account #3 which I was also in a "repair mode".

Account #4 is a very conservative account. I trade the same strategy as in account #1 but not as aggressive. So, I could call it a passive income account.

I have seen people despising 30% a year gains in the stock market (or even 12% a year) saying that starting a business brings better results some in a realm of 1000%. Yes, it may. But be realistic. How many people achieved such success? Definitely not all of those who despise 12% a year. Even mature and well-established companies such as Amazon are growing by 30% a year, AAPL's CAGR is 30.5% a year. Yes, they grew by thousands of percent over the decades, but annually, they only grow 30%. If you manage to grow your trading business by 30% a year (my personal expectations were 45% a year), you do the exact same as Amazon or Apple.

Happy New Year 2021 and let's see what my trading will look like in 2021.

 

[Martzee]

Trading the wheel strategy

I have noticed people seem to understand the wheel strategy incorrectly. People sell cash-secured puts in the wheel strategy waiting to get assigned. That is not right. You should not get assigned. You should pick stocks that will not get assigned to you. An assignment should be a rare occasion.

It can happen of course. The stock may have some violent run and you never know what reasons the put buyer had to assign you his shares. Thus, you must always be prepared for assignments although you do everything you can to avoid them.

So, do not wait for the stock to get assigned to you. Actively roll the position up or down to keep your strikes out of the money. Yes, sometimes your puts (or calls) will get deep in the money and you need to be rolling OTM slowly and in many steps (trades). I usually move the trade one or two strikes up (or down) to get closer to the money (and eventually, one day out of the money).

This happened to my covered call against my IWM LEAPS. My covered call got so deep in the money that rolling it for credit is difficult. Yet, I monitor the position closely and every time the IWM dips, it also offers an opportunity to roll the call higher.

But there is another strategy I use to avoid (or at least mitigate) early assignment. I roll the position far away in time. Normally, I trade 10 DTE to 60 DTE trades. But when the stock gets in the money, I move the expiration to 90 or more days and I keep it there. It is a long enough trade to prevent people from assigning the position to me early. It still may happen but the odds are low.

And another way to be able to roll is, of course, trading strangles. With strangles, the opposite side of the trade can help you to roll the busted side. If your puts get in the money and rolling it down is difficult, your call side will collect a premium to help to offset the cost of the put side roll. This will allow me to roll the entire trade up or down as needed.

 

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[Martzee]

Starting small

It is hard to start investing and trading when you have a small account and only a few dollars in your account. Unfortunately, a small investor is doomed to take a larger risk than if you have thousands of dollars at your disposal.

Taking a $500 risk on one trade feels different in a $1,000 dollar account than in a $1,000,000 account.

And, you will need double or triple of patience than a large investor. I have seen many small investors, myself included, blowing up their accounts because of being impatient. They wanted to grow their accounts fast, took too much risk, doubled up on trades, and blew it all.

But it can be done.

I personally started trading by buying cheaper stocks. It is appealing to want to trade AAPL but if you do not possess at least $20,000 cash in your account, you can forget it.

I was always into dividend stocks. My philosophy always was that if I would be owning a stock I want to be paid holding it. If you own a good company that pays you a dividend, you get paid in good times as well as in bad times. If the market crashes and all your stocks go south, you still want to receive a check in your mail (well, virtual mail). With growth stock, you do not get this benefit. The growth stock is down and all you can do is to wait empty-handed for it to recover.

But which company is so good that it will pay you even when the markets crash? Not guaranteed, but dividend aristocrats are good candidates to start with.

I went to the dividend aristocrats list and picked People's United Financial, Inc. (PBCT). It is a dividend aristocrat that has paid and increased dividends continuously for 28 years and it was priced between $10 and $13 a share. The stock is optionable although not as great as more expensive stocks.

First, I started accumulating shares of this stock to gain confidence. Once I accumulated 100 shares, I started selling 50 DTE - 60 DTE covered calls. This takes a lot of patience because you have to wait 50 to 60 days to repeat the process. Many novice investors are not willing to do it. They engage in risky trades for which they do not have enough capital to handle the trade if it turns against them.

You take a credit you have received and buy 1 or 2 shares of another stock. I used PPL. Brokers made it easy today when you pay no commission to buy a single share of any stock. It was not possible just two years ago. When adding more cash into my account, collecting dividends and premiums, I soon could add put options towards my PBCT trades. At first, I went partially naked (I only had 50% saved to cover the put side) but I was selling a partially covered strangle now.

Soon I accumulated enough shares in PPL to repeat the process and started selling covered calls and naked to partially covered puts. I kept saving cash buying an ICSH fund that pays dividends and holds value in volatile times. If I get assigned to any of the stock I just sell the required portion of my ICSH holding to release enough buying power to cover the assignment. But with a single put or call, I do not have to do it. I roll the options. Rolling the single options, unlike spreads, is easy. Many times in 2020 my holdings were on a roller coaster yet I could lower or raise my strangle as needed to avoid assignment.

And cash kept rolling into my account. At first slowly, but soon faster and faster. You need to give your trades and stocks time to grow. Nothing will ever happen overnight. There is no quick rich strategy, no fast profits. Fast profits will come once you accumulate a large enough portfolio so you can afford to take riskier trades.

Don't rush it. Rushing it will lose you money. If you give it time, you will be surprised how quickly it all turns around and how fast your portfolio will go up despite the initial turtle moves.

 

[ucantseeme3d]

Unfortunately, I will not be able to help you with or provide input on Forex. Although some aspects may be similar, such as using technical analysis (which I do not use much) you also need to be aware of the currencies market, economic forces impacting currencies, and the relationship between each currency. Unfortunately, that is totally foreign to me. I understand stocks and options and I know how to invest and trade them.

Do you have a course you would recommend for someone just starting off (that is specific and detailed), especially one that teaches this "wheel strategy" you speak of?

 

[Martzee]

Do you have a course you would recommend for someone just starting off (that is specific and detailed), especially one that teaches this "wheel strategy" you speak of?

I don't have a specific course to recommend. There is tons of free resources on the internet (youtube in particular). On YouTube you can watch Markus Heitkoetter's videos, he provides good insights for free. You can also join Investingmentorships.com, they are good but they charge money (I am not affiliated with them in any way, I just know Correy who runs the mentorship), or I can help you with your questions for free too.

 

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[ucantseeme3d]

I don't have a specific course to recommend. There is tons of free resources on the internet (youtube in particular). On YouTube you can watch Markus Heitkoetter's videos, he provides good insights for free. You can also join Investingmentorships.com, they are good but they charge money (I am not affiliated with them in any way, I just know Correy who runs the mentorship), or I can help you with your questions for free too.

Thank you, i'll look into this

 

[Agent X]

Starting small

It is hard to start investing and trading when you have a small account and only a few dollars in your account. Unfortunately, a small investor is doomed to take a larger risk than if you have thousands of dollars at your disposal.

Taking a $500 risk on one trade feels different in a $1,000 dollar account than in a $1,000,000 account.

And, you will need double or triple of patience than a large investor. I have seen many small investors, myself included, blowing up their accounts because of being impatient. They wanted to grow their accounts fast, took too much risk, doubled up on trades, and blew it all.

But it can be done.

I personally started trading by buying cheaper stocks. It is appealing to want to trade AAPL but if you do not possess at least $20,000 cash in your account, you can forget it.

I was always into dividend stocks. My philosophy always was that if I would be owning a stock I want to be paid holding it. If you own a good company that pays you a dividend, you get paid in good times as well as in bad times. If the market crashes and all your stocks go south, you still want to receive a check in your mail (well, virtual mail). With growth stock, you do not get this benefit. The growth stock is down and all you can do is to wait empty-handed for it to recover.

But which company is so good that it will pay you even when the markets crash? Not guaranteed, but dividend aristocrats are good candidates to start with.

I went to the dividend aristocrats list and picked People's United Financial, Inc. (PBCT). It is a dividend aristocrat that has paid and increased dividends continuously for 28 years and it was priced between $10 and $13 a share. The stock is optionable although not as great as more expensive stocks.

First, I started accumulating shares of this stock to gain confidence. Once I accumulated 100 shares, I started selling 50 DTE - 60 DTE covered calls. This takes a lot of patience because you have to wait 50 to 60 days to repeat the process. Many novice investors are not willing to do it. They engage in risky trades for which they do not have enough capital to handle the trade if it turns against them.

You take a credit you have received and buy 1 or 2 shares of another stock. I used PPL. Brokers made it easy today when you pay no commission to buy a single share of any stock. It was not possible just two years ago. When adding more cash into my account, collecting dividends and premiums, I soon could add put options towards my PBCT trades. At first, I went partially naked (I only had 50% saved to cover the put side) but I was selling a partially covered strangle now.

Soon I accumulated enough shares in PPL to repeat the process and started selling covered calls and naked to partially covered puts. I kept saving cash buying an ICSH fund that pays dividends and holds value in volatile times. If I get assigned to any of the stock I just sell the required portion of my ICSH holding to release enough buying power to cover the assignment. But with a single put or call, I do not have to do it. I roll the options. Rolling the single options, unlike spreads, is easy. Many times in 2020 my holdings were on a roller coaster yet I could lower or raise my strangle as needed to avoid assignment.

And cash kept rolling into my account. At first slowly, but soon faster and faster. You need to give your trades and stocks time to grow. Nothing will ever happen overnight. There is no quick rich strategy, no fast profits. Fast profits will come once you accumulate a large enough portfolio so you can afford to take riskier trades.

Don't rush it. Rushing it will lose you money. If you give it time, you will be surprised how quickly it all turns around and how fast your portfolio will go up despite the initial turtle moves.

View attachment 36183

Thanks for the details on your strategy. What are your thoughts on individual exposure to any one company for risk management? In your blog you mention to only use 35-40% of your buying power at a time to reduce risk, but do you have a target for individual positions? You mention buying power here, which would be different in a margin account vs a cash account, so if we are doing CSPs you would manage the risk to the cash available right? Do you include purchased stock as part of your buying power as well? Do you also try to manage overall portfolio delta to hedge risk or do you not worry about it since you are investing in companies long term with this strategy that you think will keep increasing in value over time? Also, if you have accumulated some stock of a company, i.e. 50 shares, do you also sell calls to bring in premium along with the CSPs to accumulate more shares?

 

[Martzee]

Thanks for the details on your strategy. What are your thoughts on individual exposure to any one company for risk management? In your blog you mention to only use 35-40% of your buying power at a time to reduce risk, but do you have a target for individual positions? You mention buying power here, which would be different in a margin account vs a cash account, so if we are doing CSPs you would manage the risk to the cash available right? Do you include purchased stock as part of your buying power as well? Do you also try to manage overall portfolio delta to hedge risk or do you not worry about it since you are investing in companies long term with this strategy that you think will keep increasing in value over time? Also, if you have accumulated some stock of a company, i.e. 50 shares, do you also sell calls to bring in premium along with the CSPs to accumulate more shares?

I do not mind the risk in any of the individual companies I hold in my portfolios because all these stocks are companies I want to own. I read about these companies (as much as I can) and I pick among dividend aristocrats and as you may know these are companies that have a proven track record of being good companies. So if they get hammered by the stock market conditions, I actually am happy about it and start buying more. And yes, I am aware of potential Enrons or GE stocks, but these usually show warning signs well before they go under. For these reasons I use Fastgraphs to look at the company I hold or intend to buy. Fastgparhs show you in a neat way the company's operation and free cash flow vs. the dividend so in a quick one look I can see whether a company is bleeding cash or making enough money to cover the dividend. And if it can cover the dividend, then I keep holding it and adding more.

Another approach I use is that I buy stocks using free cash and not my own money. I start selling puts and buy shares using credits received so technically, it is the house's money. For those shares I use my own money, I keep selling strangles to lower my cost basis as quickly as possible so I get my entire investment back as fast as possible (Warren Buffett way).

Currently, I do not have a target for any particular position besides owning 100 shares of each stock I plan to accumulate. After that, I will be adding more shares or cherry-picking new stocks. But I am not there yet. That being said, I only have the 35%-40% cash on margin account only (and in fact, recently, I lowered these reserves to 20% only). In a cash account, all trades are fully covered so I do not need to hold any large cash reserves in those accounts. I only keep $10 - $100 free cash for rolling trades if I do not want an assignment, but other than that, no additional cash is needed. In a margin account, I have to hold reserves as buying power fluctuates with the stock prices.

In a margin account, the CSP position is covered by 20% of your BP and I create reserves for 50% of the stock position which is the initial stock purchase BP. So for example, if I want to sell a CSP against ATT (T) I will need approx. $450 buying power to cover the option trade and to cover the assignment, I will need an additional $1,000 BP for a total of $1450 BP to purchase 100 shares of ATT. So when I start selling CSPs I make sure I also set aside $1,000 for potential assignments. I do not do it for every stock, though. I currently believe, 20% of the entire account net-liquidating value is sufficient to cover these assignments. With CSP or strangles, it is easy to roll them unlike spreads, so I consider an assignment a rare occurrence, and for that the overall 20% reserves should suffice. If not and in some catastrophic situation all my positions get assigned, then I will be forced to close these positions for a loss as that would exceed my reserves. But I do not think this would happen. When a market starts crashing and I see my positions going deep in the money, I immediately roll 90 DTE and as low as I can, and unless someone has INSIDERS information on a stock going bankrupt, no one would assign 90 DTE put early.

I do not delta hedge as many of my positions are covered and as you said I keep buying the shares so I really do not care about delta. I do care about it on expensive stocks such as AAPL where my position is not fully covered then I do hedge that position. But I only do it if I see no way out and usually converting into a different structure such as a butterfly, back ratio spread or Iron fly to neutralize the trade as much as possible.

In pretty much all companies I do sell calls and puts (strangles) unless I am extremely bullish and see that the calls would be challenged all the time but I sell both. One significant reason I like strangles is that these strangles help rolling the trade up or down as needed. One finances the other, so yes, I sell CSP and Calls even when I am not fully covered by the stock position. I do not do this in my cash accounts though. That's why the results are different in my account #1 vs. accounts #2 and #3 for example as #2 and #3 are cash accounts and there I wait until my calls are fully covered, so I do not trade that often in these accounts (someone asked me that question why the results differed if I use the same strategy everywhere).

Hope this helps. If you have any further questions, let me know.

 

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[ljean]

Stock dividends do not make you richer. Its the same as going to the ATM and withdrawing money out of your bank account.

 

[Martzee]

Stock dividends do not make you richer. Its the same as going to the ATM and withdrawing money out of your bank account.

LOL...

This is the most ridiculous and ignorant comment I have ever seen so far.

 

[ljean]

Well my stocks are up $100,000 in the last two days but what do I know.

 

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[Martzee]

Well my stocks are up $100,000 in the last two days but what do I know.

Well, your comment about the dividends indicates that you do not know much. In an extremely bullish market, anyone can be a hero and investment champion.

 

[ljean]

Ok good luck to you.

 

[Agent X]

Ok good luck to you.

Well, your comment about the dividends indicates that you do not know much. In an extremely bullish market, anyone can be a hero and investment champion.

No need to argue over different investing styles and risk tolerances. Martzee's investment strategy is to generate income and the dividends are just part of that. In fact, the dividends help make the company's price more stable, which helps this strategy more. Those dividend paying stocks are typically less volatile and have lower beta's compared to the overall market.

Ljean's characterization of dividends isn't wrong either though. It isn't the dividends that make you richer, but the profits from the company as an owner. With all other variables held equal, a dividend does take out of the overall value of the company, and therefore the share price. Essentially by receiving a dividend, you are exchanging one asset (appreciation of stock) for another (cash). So the dividend could be used to reinvest in the company as Martzee suggests, or used to buy other assets or used for expenses (which we all strive to for a paycheck pot, right?). So if it is a company that is making money and increasing it's revenue and cash flow, then the stock price would increase theoretically if it does not pay a dividend. In this case you would either receive a dividend or get some capital appreciation. The taxes for long-term capital gains and qualified dividends are essentially the same (with a bit of difference on the bracket thresholds). Either way you are still receiving the value from the profits of the company in some form and by reinvesting the dividends, you could increase your overall ownership in the company to even a controlling interest if you wanted to or you can buy shares in other companies to diversify. You can't increase your ownership in the same way with just growth stocks that don't pay dividends and you can't diversify without divesting either. Either way, it isn't a very fast way to increase wealth, but it does provide cashflow that can be reinvested.

@ljean It looks like on your other threads that you like to actively trade to make money off of price movement. That's fine too. It's also a riskier strategy with higher payouts. So it just depends on your risk tolerance and how active you want to be managing your portfolio.

 

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[ljean]

Yes. What I am getting at is dividend yield by itself is a poor, possibly meaningless indicator to make investment decisions. Take the extreme example of a company with $100/share cash that pays $25 dividend but does no business, it just exists. After 4 years, this 25% dividend will have returned all your investment and the company would be worth zero. You would actually be in the hole after dividend tax. Dividends are businesses way of saying "here, take this, sorry, we dont have any better ways to reinvest your money."

 

[Agent X]

Yes. What I am getting at is dividend yield by itself is a poor, possibly meaningless indicator to make investment decisions. Take the extreme example of a company with $100/share cash that pays $25 dividend but does no business, it just exists. After 4 years, this 25% dividend will have returned all your investment and the company would be worth zero. You would actually be in the hole after dividend tax. Dividends are businesses way of saying "here, take this, sorry, we dont have any better ways to reinvest your money."

True, if you are going to invest in dividend companies, they should have solid balance sheets with good growth and growing free cash flow. Don't get enticed by large dividend yields, because those businesses could be declining or failing. And yes, you would be worse off tax wise to dividend a company to death, rather than just taking a capital loss and using that to offset other taxes.

Dividends are businesses way of saying "here, take this, sorry, we dont have any better ways to reinvest your money."

That's especially true with large companies that have a hard time increasing market share or are in heavily regulated industries (which typically creates small monopolies geographically). Those companies aren't bad, but they won't have huge returns.