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  • The Dude Who Came Up With 4% Rule Tells Barron's It Might Not Work [View article]
    I think the 4% rule was a theoretical approach that at best is a rough, simple, guideline...not a "rule".

    Further, common sense seems to dictate that market conditions need to have some impact on your draw down strategy. Instead of a flat 4%, I think about as a base and bonus (like 3.5% base another 1-2 % if the market is up a little/lot). I've never done the math on that, but I suspect it works out ok.

    It has the added attraction of creating a family budgeting/spending process that is similar to a base plus bonus approach many are used to from when they were drawing a pay check.
    Nov 10, 2013. 12:24 PM | 2 Likes Like |Link to Comment
  • Investment Strategy: What Portfolio Withdrawal Rate Can You Live With? [View article]
    These withdrawal rate studies always make me crazy. A few thoughts
    - the different results shown in the two graphs starting just 4 years apart is always very telling. Unfortunately market cycles don't align with your life cycles. The timing of when you stop earning income really makes a big difference. Everyone should be thinking about turning hobbies into small income streams.
    - Why does everyone assume the future will be exactly like the past? There are really only a handful of (i.e. non statistically significant) 35 year modern periods since we have had fiat currencies. With interest rates at "zero" and a baby boom driven demographics I think it is especially important to remember "past results are not indicative of future results". Personally I expect a 60/40 mix to return less in the next decades than in the past decades. Personally I'm looking for alternative investments to have as good of a chance of generating returns in the future.

    - I'm a big fan of dividend investing, but not sure I understand all the comments on living off dividends being different than a 4% withdrawal. If your investments make your withdrawal (say 4%) plus inflation (say 3% on average) you will die with the same purchasing power as you have now. Hence something like 7% is the goal. Years you don't make 7% you will be "withdrawing" purchasing power from your account. Years you make over 7% you will be adding to purchasing power. Hopefully, your purchasing power will not go to zero, but big draw downs make that a real risk.
    Jan 19, 2013. 10:50 AM | 3 Likes Like |Link to Comment
  • The 100% Yield Idea Makes No Sense [View article]
    Isn't "yield on cost" just another way of conceptualizing/visual... the magic of compounding?

    Certainly holding a high quality dividend payer for a long time is one way to generate a good compounded return, but I don't see how striving explicitly for yield on cost as some new, magic, path to investing success.
    Dec 23, 2012. 04:21 PM | 2 Likes Like |Link to Comment
  • Covered Calls: Finding The Sweet Spot [View article]
    Consistently writing covered calls will certainly change the performance of your portfolio. As the article suggests, equities with calls written against them will under perform when things go up, but over perform when things go down or just sideways. To me that means lower volatility and that can be a good thing.

    I would suggest that it is inappropriate to compare a portfolio with lots of covered calls against just holding stocks. Instead I think a better comparison is how does a covered call portfolio compare to some mix of holdings such as 60/40 of stocks/bonds. That type of portfolio is considered "good" because holding the the bonds will likely mean the portfolio will under perform the stock market when the market is up and over perform the stock market when the market is down. That reduces volatility and is good.....wait... that kind of sounds like what covered calls will do.
    Further with today's record low interest environment it seems less likely that bonds will actually provide this type of cushion to a portfolio if/when the equity market falls. Covered calls can provide another way to achieve this result.
    Dec 16, 2012. 11:38 AM | 1 Like Like |Link to Comment
  • Backtesting Dividend Growth Vs. Dividend Yield [View article]
    Tom, Nice article as usual. Thanks!
    Nov 28, 2012. 08:55 AM | 2 Likes Like |Link to Comment
  • Trading Plan: Exit Strategies For Bull Put Credit Spreads [View article]
    I do use delta to manage options which I'm short. Specifically I cover them if they fall to 15 or rise to 85, or most of the time premium is gone. Using those type of rules I tend to enter more naked positions that are OTM than ATM spreads. I realize that entails more risk and possibly capital but I think/hope the risk is worth the reward, especially if you have the discipline to cover at some level. I usually only trade spreads around very specific events like earnings for fairly speculative stocks. After the event the spread is often either a max winner or max loser so there is not too much to manage.

    More broadly, I find it "interesting" that many articles such as yours usually use just the price of the stock as a trigger to adjust the position. Perhaps that is just to keep it simple. However, I inclined to believe that if an investor is sophisticated enough to trade options they might want to be sophisticated enough to manage the position using the drivers of option price illustrated by the greeks.
    Nov 24, 2012. 11:27 AM | Likes Like |Link to Comment
  • Trading Plan: Exit Strategies For Bull Put Credit Spreads [View article]
    Have you considered exit targets based on delta and/or other "greeks". They are designed to take in not just the movement in price but the passing of time.
    Nov 23, 2012. 09:23 AM | Likes Like |Link to Comment
  • Fiscal Cliff: How Bad Would It Be? [View article]
    I usually avoid commenting on anything that has political overtones, but ....
    1). The fact that we have a large combination of very unsophisticated tax/spending changes all one-time, one month after election is really just a depressing indictment of our overall political process. (left and right)
    2). I would like to know who came up with the term "fiscal cliff", and how it stuck? Why not either Fiscal Armageddon, or fiscal speed bump, or tax policy decision day, etc. I'm inclined to believe that talking heads (on the left and right) just need to have a monthly "crisis" just to try to keep their ratings higher post election.
    Nov 12, 2012. 08:34 AM | 5 Likes Like |Link to Comment
  • Selling Puts And Calls: A Better Recipe [View article]
    I agree interesting, well presented, and a worthwhile strategy.

    As kongen1 indicates, the harder part of this strategy is managing the position. For example, it is very likely that as the price of the underlying moves one side or the other the trade will be "challenged". Which side would you consider "taking off or rolling " first. The side that gets challenged or the side that becomes safer? I'm usually inclined to the take the "safer" side off first and hope for a reversion to the mean to get out of the other side. However, I know others think it is safer to address the side of the trade at risk first or just always take off both sides at once trying to skim a little of the theta decay. Thoughts?
    Oct 30, 2012. 06:04 PM | Likes Like |Link to Comment
  • Selling Puts - Investing Made Easy [View article]
    Interesting article!

    Was looking for a little point of clarification on exiting the position.
    Specifically how the index calculates the exit of the position. Does it assume the put is held to expiration. If assigned, does it assume the assigned position is sold on the open Monday or what? For your strategy it seems like you wait to the day before expiration to make some sort of decision about options that have become ITM. Have you considered rolling the option when the delta gets to something like 10 or 90 or days to expire gets down to a few?

    Lastly if this works great wouldn't doing it with weekly options make even more sense?
    Oct 28, 2012. 09:16 AM | Likes Like |Link to Comment
  • Do Covered Call Strategies Make Sense? [View article]
    Thanks for the article, and I agree with the general point that covered calls add to performance in a down/flat market and take away from performance in a up market. However, I think there are a few points that also need to be considered.
    1) volatility reduction - the results described above seems to certainly led to less volatility to a portfolio. Reduced volatility likely has a positive impact on compounded returns over the longer term, and also has a positive influence on an investor's mindset such that they might be less inclined to panic sell
    2). How the covered calls are managed? I believe the indexes and most back testing assume that the options are held to expiration. However, I think the results would be different if an investor had some basic strategies to roll the options prior to expiration. If an investor is going to sell calls, they need to have a plan to adjust the position if/when the market moves significantly.
    3). Cash flow - Some of the reason to sell calls is to generate cash for consumption on a periodic basis. Something akin to the coupons from a bond. Hence, for a person in retirement who is going to need to get some cash from their portfolio the draw downs may look different for each scenario.
    Oct 17, 2012. 09:36 AM | Likes Like |Link to Comment
  • Using A Put Spread On The QQQ To Provide Some Insurance For A Portfolio [View article]
    Kind of depends on your objective, but 2 would get you close to delta neutral.
    i.e. Long Apple has a delta of 1 and this spread probably has a delta a little less than -.5.

    I only mentioned Apple in the article because it was a big part of this index. If you are really, really concerned about an Apple position it might be easier/better just to use Apple options. Maybe sell a call way above the current price and use the proceeds to by a put below. This exchanges further big moves up for insurance on the downside.
    Sep 19, 2012. 10:17 PM | Likes Like |Link to Comment
  • Using A Put Spread On The QQQ To Provide Some Insurance For A Portfolio [View article]
    You are right there are lots of numbers that help an investor define the probabilities. In this case:
    - I view 50/50 (or actual 92/108) as the odds of success because that is where the market has set the odds. I hate to use gambling terms, but the bookies (ie market makers) have defined this as the odds based on their models.
    - The 67% probability of touching actually came from the options trading platform I use. Most of the options oriented trading sites do the complex math to figure that number out. I've heard people quote a rule of thumb that 2x delta is a good approximation of the probability of touching. At the end of the day that all seems very theoretical and very tied to a belief in a normal distribution of activity. I use those numbers as starting point for probability of something happening, but then try to adjust it based on my human judgment.
    - Volatility. I don't put a whole lot of thought into the current IV vs HV. To me those seem to diverge/converge across the whole market at the same time. However, when I perceive IV to be low (like it is now) I'm more inclined to buy the put spread. Hoping that volatility might rise helping the direction of the trade a little. If IV was higher I might have sold a call spread instead.
    Sep 19, 2012. 10:10 PM | Likes Like |Link to Comment
  • Using A Put Spread On The QQQ To Provide Some Insurance For A Portfolio [View article]
    Yes, an investor can use any of the indexes and accomplish the same general objective. All the indexes have some "over weight issues " to consider. Since DIA is price weighted the large priced stocks make a bigger impact. I think IBM is about 11% of the DIA and the large oil companies also make up a big chunk. SPY has a fairly large weighting in financials.

    As I said, this approach can work with any of them. I chose QQQs right now because it has had such a big run up, and "hoping" for a reversion to the mean for the big tech stocks like Apple that drive this index.
    Sep 19, 2012. 09:54 PM | Likes Like |Link to Comment
  • Investing In Gold: Miners Or Metal? [View article]

    I prefer to get exposure for my portfolio to gold via options. Specifically I like selling puts on the miners (GDX), and using those proceeds to buy calls on the metal (GLD). Per above, these two entities are 85% correlated, but the higher implied volatility in the miners makes this trade attractive. As described in the article below this lowers the capital requirements needed to gain gold exposure, but still provides upside exposure on a spike in gold prices.
    Sep 17, 2012. 12:02 PM | 2 Likes Like |Link to Comment