What to do when assigned and are fully in cash.

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 (symbol KO), expiry date, Friday, July 24, (KO C 24JUL20 46.50) and received 1.5% return for the five days!

At expiry time, KO closed above our strike price and we were assigned. Our KO shares were taken away from us at the strike price ($46.50 US) and we were in cash. What to do with the money?

To continue our involvement with derivatives, we could write cash-secured puts on any security. Just in-the-money strike price written on Monday, July 27, expiry date Friday, July 31, gives the best premium returns on cash-secured puts. For KO, P 31JUL20 48.50 closed on Friday, July 24 at a premium of $0.36.

That works out to .36/48.50 x 100 = .74% for the week. That is not nearly as interesting as it was last week, so let us look at other possibilities.

Novavax (symbol NVAX) is an example. It closed at $133.00 US on Friday, July 24. Selling cash-covered puts, strike price $130.00 US, expiry date Friday, July 31, (NVAX P 31JUL20 130.00) gave option sellers $7.00 US per share last Friday.

That works out to 7.00/130 x 100 = 5.3% for the week!!  It gave some protection from having the security put to the investor.

To lower the possibilities of having Novavax put to them even more, investors could sell cash-covered puts deeper in-the-money, say at a strike price of $125.00 US, expiry date Friday, July 31, (NVAX P 31JUL20 125.00). That gave option sellers $5.00 US per share last Friday.

That works out to 5.00/125 x 100 = .8% for the week. Not nearly as interesting.

Investors could explore different strike price levels with expiry date on Friday, July 31 and decide what they like best concerning premiums and the possibility of having the security put to them.

Canadian investors need to do this outside their tax-advantaged portfolios. (RRSP’s, RIF’s, TFSA’s and RESF’s)  Selling cash-covered puts is not permitted within tax-advantaged portfolios in Canada.

Canadian investors who are in cash within their tax-advantaged portfolios because they were assigned on their covered calls, need to buy the underlying security on which they wish to write covers calls, as a first step. Following that first step, they can write covered calls again, using that underlying security.

As an example, selling Novavax covered calls on Monday, July 27, at a strike price of $140 per share, expiry date on Friday, July 31, (NVAX C 31JUL20 140.00 US) is far enough out-of-the-money to reduce the chances of being called away and yet it gives a premium of  $6.55 US per share. 

That works out to 6.55/140 x 100 = 4.68% for the week!!  It gives some protection from having the security called away.

Members wanting to make money from derivatives (puts and calls) need to observe the following criteria:

  1. Only sell and never buy derivatives.
  2. Use an underlying security that you would be happy to own forever. Novavax might not qualify.
  3. For best returns, sell just out-of-the-money covered calls and just in-of-the-money cash-secured puts. The further out-of-the-money covered calls and in-of-the-money cash-secured puts are sold, the smaller the premiums received but the chances of having the security called away or put to the investor respectively, is lowered.
  4. Target a return of 1% per week or more.
  5. Be prepared to get assigned.

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? With covered calls, 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.

With cash-secured puts, the underlying security could be put to you above the market price. You could then write covered calls on it again.

Caveat

The reliable, evidence-based way to invest follows:

  1. Save 10% of income beginning early in life.
  2. Dollar-cost average it by buying one of the few ETFs which mirror the S&P 500.
  3. Do so in tax-advantaged portfolios.
  4. 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 they are unlikely to do so consistently 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.

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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 900 words, members can read this post in less than a few 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.

 

 

 

 

Question about CDs in the US ands GIC’s in Canada

 

On July 6, 2020, from L. B. …..Newfoundland

Question:

Sixty percent of my portfolio is in  GIC’s which are now giving me just over 2% return. Where else can you hold cash and do as well in the short run?

Monday Morning Millionaire Program Answer:

A 40/60, market/cash or near cash asset allocation puts a slightly greater importance on safety than on growth potential.  It  is good for retired people and conservative investors.

Certificates of Deposit (CD’s) in the US and Guaranteed Investment Certificates (GIC’s) in Canada are similar to each other. Preservation of capital is their primary objective.

A 2% return on a security designed to preserve capital is good. It might be worth your while to shop around for better terms and returns, however.

As an interesting aside, writing in his book The Battle for Investment Survival, Gerald Loeb says that knowledgeable savers would gladly pay a fee to any bank which would guarantee the preservation of the purchasing power of our savings if they felt that there was any hope of the bank staying solvent.

From one of our experts:

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Question about the 200-day moving average

On July 2,  2020, from John, G. … ON, Canada

Question:

I’ve been reading an article on the 200-day moving average of the the stock market. The DOW is now below the 200-day moving average indicating a bear market. Do you put much weight in this? Is there a good website to watch this?

Monday Morning Millionaire Program Answer:

In its broad context, the answer to your question is an important one.

Moving averages are one aspect of technical analysis. If you look up “technical analysis” on Amazon.com you will find over 10,000 books on the subject. (There are over 8,000 on Amazon.ca.)

There are more than 10 books specifically dedicated to the subject of the 200-day moving average!

Technical analysts only look at past security prices and trading volume. They try to identify chart patterns which they feel predict security prices.

There is a very small number of investment books that are highly respected by the knowledgable, the financial academics and the ethical financial advisors. Examples:

If any of them mention technical analysis at all, it is in a negative vein. The reason why all major banks have technical analysts on their staff is because the demand for technical analysis is high.

If investors fully memorized the thousands of books on technical analysis, they could not equal the simple act of buying an exchange-traded fund which parallels the S&P 500. Rocking chair investing, watching-grass-grow and watching-paint-dry style of investing is best.

Warren Buffett: “lethargy bordering on sloth remains the best investment style. The correct holding period for the stock market is forever.”

___________________________________

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 our posts 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.

 

Q and A about paying too much for an underlying security

On June 21, 2020, from P. T  …BC, Canada

Question:

I was very impressed with your previous blog mentioning a phenomenal return selling options when VIX is high.

By selling just out of money cash secured puts, how can one avoid being “trapped” when the market is so frothy?  Picking a strike price just out of the money has the advantage of higher premium but if the market is close to the vertex, and if the put got assigned, one will end up with the underlying that is too pricy?   So the question is, how can one predict the top of the bubble?

Monday Morning Millionaire Program Answer:

Predict? It has been said that only death and taxes are predictable. To that, we can add the permanence of a tooth extraction.

First, the Monday Morning Program recommends selling just out-of-the-money covered calls and just in-the-money, cash-secured puts for for the greatest premium income. Since by expiry date, the market will be either higher or lower, such a sale will result in assignment half the time.

On June 18, 2020, we answered a similar question from John G.  …ON, Canada.

If investors’ underlying is an exchange-traded funds (ETFs) which parallels the S&P 500, being assigned at the top of the market is a pain in the short term only.  We should think long-term. We want to own one of these ETFs anyhow, so having it put to us is desirable.

The Monday Morning Millionaire Program contains 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 350 words, members can read this post in less than five minutes. Following and studying the links imbedded in a post would take longer. How members manage a post depends on their level of interest and investing knowledge.P

Q and A about selling covered calls and cash-secured puts

On June 18, 2020, from John G.  …ON, Canada

Question:

Are you still selling covered calls cash-secured puts?

Monday Morning Millionaire Program Answer:

No, not anymore. Here is the reason behind that decision.

Selling derivatives (covered calls and cash-secured puts) works well when the volatility index (VIX) is high.  We have had two such opportunities in the last 12 years, as you can see in the chart above. This March just past, selling derivatives earned more than 2% per week!

Those days are gone! You can see today’s VIX in greater detail in the chart below — VIX is at about 33 compared to nearly 80 in March!

Based on history, simply dollar-cost averaging an exchange-traded fund which parallels the S&P 500 will outperform selling derivatives in a portfolio.

Nevertheless, a good derivatives selling time might come sooner than 12 years from now. Keeping an eye on the Chicago Board of Options Exchange Volatility Index (CBOE VIX) is worthwhile.

The Monday Morning Millionaire Program contains 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 300 words, members can read this post in less than five minutes. Following and studying the links imbedded in a post would take longer. How members manage a post depends on their level of interest and investing knowledge.

Should investors consider buying Bitcoin?

Question:

I am retired and happy with my conservative portfolio performance. I am considering buying some Bitcoin with a small percentage of my portfolio.

I would appreciate your views on this proposal.

Monday Morning Millionaire Program Answer:

Here is a Morningstar headline: “You can now hold Bitcoin in your RRSP, but should you?” (An RRSP, Registered Retirement Savings Plan, is tax-advantaged and is similar to the 401K in the US.)

Adding fuel to the fire, Warren Buffett, calls Bitcoin ‘rat poison squared’.

Bitcoin is the oldest of the hundreds of crypto currencies in existence. Many have a history of fraud.

The best that we can say is that you plan to commit only a small percentage of your portfolio to it. Having said that, please note that the Monday Morning Program position on investment commitment is that that the smaller it is, the more meaningless it is.

Regardless of how a small commitment performs, its overall impact on portfolio performance is negligible.

From page 5 of our award-winning book Monday Morning Millionaire: “Historically, over the long term, properly selected market index exchange-traded funds, held in tax-advantaged accounts, have been the investor’s best way for growing savings and are likely to remain so for many years.”

Over the last two decades,  Monday Morning Program has outperformed over 90% of portfolios including professionally managed ones. I have a$100,000 standing bet that it will continue to do so in the future.

The program includes buying the US economy as a whole (no stock picking) and avoiding complexity. Could anyone explain Bitcoin to a 12-year-old?

Please note that the Monday Morning Millionaire Program contains opinions only. It does not provide any investment advice or endorsements.

Questions about gold, possible market crash

On September 24, 2019, from Cam K…… DDS, BC, Canada

Question:

I did have several questions-

  1. What are your thoughts on gold– especially holding physical gold?
  2. If the stock market bubble was to crash, as many analysts say it will soon, wouldn’t you still be very exposed – with being in an EFT?

Monday Morning Millionaire Program Answer:

Thank you for your questions, Dr. K.

Years ago, the Aden sisters predicted $5,000 per ounce gold. Currently, James Rickards is talking $10,000 per ounce gold. Neither prediction has come close to taking place. What does history tell us?

Over the 93 years since 1926, the S&P500 has returned 11.96% annually. Gold has returned 0%!

On May 7, 2018, we posted a more detailed blog on the subject.

Concerning a market crash, the Monday Morning Millionaire Program (15.5% annual return since 2012) encourages members to hold an ETF which mirrors the S&P 500  and to welcome market drops for the bargain buying opportunities that they are.

To do that, members need to have an appropriate asset allocation in place with enough cash to take advantage of the bargains.

Monday Morning Millionaire Program members take profits when the market rises and buy bargains when it drops. Fluctuations are exciting. Lateral markets are boring.

Please note that the Monday Morning Millionaire Program contains opinions only. It does not provide any investment advice or endorsements.

Question about The VectorVest Smart Investor

On June 14, 2019, from Elliot Goldenberg, CEO  Mindware Seminars, CDE credits on dream vacations!

Question:

I have been receiving literature from a company called The VectorVest Smart Investor- who claim to beat the S&P handily for the last 30 years. Have you heard of them? Are their claims valid? They have developed a software package that apparently offers amazing results for regular investors.
 
May we have your comments, please? 

Monday Morning Millionaire Program Answer:

Selling any system that works, immediately makes it less profitable. However, aggressively selling it rather than using it can make money for the vendors. The VectorVest Smart Investor software package might be of some value to people who pick stocks, an approach which the Monday Morning Millionaire Program recommends against. It can take an enormous amount of time and over the course of a decade, more than 90% of portfolios built on stock picking methods fail to equal an exchange-traded fund which mirrors the S&P 500 index. Indexing has impressive third-party validation in academic investment literature. Stock picking systems don’t.

A question about tax-advantaged accounts

On April 27, 2019, from F. B. L….DDS, FAGD, Idaho

Question:

I just signed up for membership today and as I looked through your postings the “core” accounts were tax advantaged. What does that mean?  Does that mean they are in a retirement account?  I am not yet retired but at age 71 am forced to take minimum distributions and they are accumulating outside the retirement account. Is there a better way? Thanks

Monday Morning Millionaire Program Answer:

Broadly speaking, the expression “tax-advantaged” can refer to investments, accounts or plans which offer tax benefits.  These are either exempt from taxation or tax-deferred allowing investors to pay taxes later, sometimes decades later. There are many examples both in the United States and Canada.

Canadian tax-advantaged accounts and US tax-advantaged accounts go by different names but are similar. There is no better place for any investment assuming that the Government allows the particular security in any particular tax-advantaged account. Over an investing lifetime, this can amount to hundreds of thousands of dollars compared to investing outside such an account. We hope that this describes your investing history.

You would need less than one hour of your accountant’s time to focus on the best way for you to proceed. Unless your accountant has many dentist-clients, you might want to buy an hour’s time from an accountant who does in order to confirm your accountant’s suggestions.

It is almost a certainty that their views will be similar.

 

A question about the progress of US market size

On April 22, 2019, from L….. B….. DDS, Cayman Islands

Question:

Interesting to see the relative size of the US economy in your illustration. I was wondering if it has reached a peak at some point during this time or if it has been a continuous rise ?

Thanks.

Monday Morning Millionaire Program Answer:

(Used with permission from Prof. Dimson)

While it is true that predictably, stocks fluctuate (JP Morgan) and empires have 100%   failure rate (history), we don’t have a definite answer to your question.

Probably, the rise was continuous.  It’s end is not in sight.