Many of our members manage their portfolios actively. This is the first of a series of active investing posts in order to give them some insights. If you have not read the Caveat entry below, please do so now.
Last Monday, July 20, we wrote just out-of-the-money covered calls on Coca-Cola, expiry date, Friday, July 24, (KO C 24JUL20 46.50) and received 1.5% return for the five days!
Members wanting to make money from derivatives (puts and calls) need to observe the following criteria:
- Only sell and never buy derivatives.
- Use an underlying security that you would be happy to own forever.
- For best returns, sell just out-of-the-money covered calls and just in-of-the-money cash-secured puts.
- Target a return of 1% per week or more.
- Be prepared to get assigned on half of your orders.
What are the risks with the above approach?
If you use an underlying security that you would be happy to own forever, the long-term risks are close to zero.
And the near-term risk? The value of your underlying security could drop to a greater extent than the premium that you received. You would have a losing transaction. If you hold it long enough, it will become a long-term situation.
The reliable, evidence-based way to invest follows:
- Save 10% of income beginning early in life.
- Dollar-cost average it by buying one of the few ETFs which mirror the S&P 500.
- Do so in tax-advantaged portfolios.
- In retirement withdraw 4% of portfolios to live on.
This is Paul Samuelson’s watching-grass-grow or paint-dry approach to investing. Other methods such as derivatives investing or day-trading could outperform the above, but it is unlikely in the long term.
Concerning the second point, at a young age is a good time to explore stock picking as well. The possibility of doing so successfully over the long term is slim, but it can happen.
Day-trading for a living? Who wins? Wall Street brokers! Every time!
Individual investors? Over an extended period, rarely.
The Monday Morning Millionaire Program was designed to offer compressed investment opinions. Over the last two decades, these have outperformed over 90% of portfolios including professionally managed ones.
The program does not provide any investment advice or endorsements.
With fewer than 400 words, members can read this post in less than five minutes. Following and studying the links imbedded in these posts would take longer. How members manage a post depends on their level of interest and investing knowledge.