Reel Ken

Medium-term horizon, long-term horizon, investment advisor
Reel Ken
Medium-term horizon, long-term horizon, investment advisor
Contributor since: 2011
Hi alpha,
Believe me I know the feeling one gets with all the cash doing nothing.
I also know, even better, the feeling of misplacing cash.
The beauty of calendars is one knows the risk...and that is simply a big move that over runs the strikes. As long as the strikes are set properly and one has patience, the result is achievable.
Just buying stocks puts one at the mercy of the market forces and I don't trust the market.
With my calendar strategy I just have to wait till the market goes my way ... Sometimes it's a few days, sometimes weeks, months or years. But because my result is pre-calculated it will always be there ..... Provided I remind myself of expectations and don't try to get too clever.
If I can help further, let me know.
Hi alpha,
My portfolio is substantially cash. I judge the number of options by their exposure. So, say Spy is at 200 and there is a $1,000,000 portfolio.
I would use 50 options as a conservative and 100 as an aggressive.
My rationale us that the far dated is delta 50, so the exposure is 1/2 the face on the options. 50 options represents a 50/50 portfolio and 100 a fully invested portfolio.
This is how I approach portfolio replacement. If I was hedging a stock portfolio, I would go about it differently, using a ratio calendar spread of 3:1 or 4:1. That reduces risk to25% to 33%.
Is this clearer?
Hi alphaman,
I think it's important to define some terms.A hedge consists of two, or more, opposing positions. Each position should, theoretically move in opposite directions.
The strategy is that one of the positions will move in a favorable direction at a greater rate than the other.
So, a calendar is, by definition, a hedged strategy.
Now, because it is hedged, one can lever up, as you suggest with less risk.
I use it as a total portfolio replacement and it works best as Long as there aren't big and fast run ups. On drops I add naked puts (not too helpful this year).
As long as one is patient and disciplined, it can easily replace an entire portfolio.
Let me know if I responded properly to your question.
Hi Owen,
Thank you, I appreciate your efforts at continuing dialogue. Discussion is often more important than articles.
Certainly we can compare current metrics to historical data to determine if things are "askew". When this comparison reveals that the current is not consistent with the past, then it is certainly appropriate to label the divergence as extraordinary times.
In this, I have no disagreement.
However, once one has determined that extraordinary times exist, it is a mistake (logically and otherwise) to use historical data to derive a metric, such as 60/30. If times are extraordinary then the exteaordinariness of them dictates that past metrics are not applicable.
So, if we are given to believe the times are extraordinary we must abandon predilections to use historical data to suggest the course.
On the other hand, if times are not extraordinary, but represent the outer boundaries of normalcy, then one can garner insight from historical data.
So, if we are in extraordinary times...all bets are off...if we are in outer boundaries .... History can help guide us.
But one thing is for sure .... One cannot have it both ways.
Hi Owen,
My comment doesn't deny the possibility we are in extraordinary times.
What I do assert is that your use of charts and the 60/30 exercise are not valid for extraordinary times. For instance, you use historical data to reach the 60/30, and historical data, by its very nature represents ordinary times.
So, if we are in extraordinary times, then one cannot suggest any ratio that is based upon an average of past observations. For instance, if the times are extraordinary, the correct ratio may actually turn out to be 10/50 .... An extraordinary divergence from prior observed data.
Now, there is nothing to support a 10/50 ratio .... And that is exactly why it would be extraordinary.
So, let's not use ordinary data in extraordinary just doesn't apply.
Hi author,
I find this particular article discordant in many areas.
Most obvious is the assertion that we are in extraordinary times the proof of which is provided be relying on charts of historical times. If one cannot see the irony in this they need to look harder.
Extraordinary times are defined by their divergence from the past not by extrapolating the past.
Hi author,
You present charts as if they can, somehow, give us a leg up on what will happen.
The simple truth is that there is absolutely no connection between the two.
The past charts reflect the factors present at those times. The future will likewise reflect the factors present in the future.
By example, the market drop today was a result of today's events, not something that can be found in a past chart. This is a truth that continues each and every day. The market moves according to the events of the day and the guesses of what will happen tomorrow.
Trying to drive forward by looking in the rear view mirror is a recipe for disaster.
Unless you can guide us on future events, it is just theatrics.
Hi Galt,
"Financial conditions" are not the same as "interest rates".
Conditions and rates can, and often do, move inversely. The do not move in lock-step.
Thank you.
It iis always refreshing to read your articles as they clearly exhibit that you "get it".
Hi author,
Interesting article...thanks.
I do wonder just when all the pundits will finally understand thAt past price action is NEVER predictive..
The stock market moves are not the result of the past, but rather anticipation of the future.
Those that try to find meaning by looking backward are most likely to crash into what lies ahead.
Hi author,
I think a simple Google will get you there.
The studies conclude that the hot hand cools, not because of probability, but because of external factors.
Certainly the incidents are independent, but it likely represents a increased likelihood of continuing the streak. In essence, there is a causal relation that can be attributed to the previous successes and the next opportunity.
By example, a baseball player with an average of,say, .300, can most accurately represented as a hot hand that bats,say, .320, with some frequency and, more often, bats .295.
So, the likelihood of a hit at the next at bat, when in the streak, is greater than the overall average.
It has significant implications for economics and investing. But you can find them through Google.
Hi alpha,
My basic approach is to hedge whatever outlook I take. If I thought a recession was imminent and a sustained drop I would use either a put or call diagonal calendar spread . If I used a call spread, I'd sell the weekly ITM. If a put spread...OTM.
In using a calendar,the far dated hedges.
Right now my far dated SPX call is at 2050. I'm holding it there And selling the weekly 2%+ OTM. My plan is to walk the weekly OTM till SPX=2000, then hold it there and go ITM if SPX rises. If SPX continues to drop, at some point I'll decide when enough is enough and set the far dated ATM.
It's all about judgement, but I hedge because nothing is certain and I don't trust the market.
Hope this helps.
Hi author,
Nice article, thank you.
That said, you may want to do some more research on the "hot hand fallacy".
There has been some work done that now suggests that it is not a fallacy but actualy exists.
It iis likely considered the "hot hand fallacy,fallacy".
Just passing it on to you.
Hi ycl,
First, there are no guarantees. Calendars are always vulnerable to big swings.
Let's say SPy goes to 220 and after rolling to 213, SPY starts to drop. I simply roll back down. If Spy drops so fast that it over runs the strike, then the strike is held waiting for a bounce.
Now, the bounce could come in a week or in months. But until it looks like a bounce is unlikely, I hold. For instance, if the drop was over the summer, I'd hold out for a year end bounce. So, it depends upon when and the conditions surrounding the drop...I.e....are they reaction or new direction.
All one can do is establish a plan, have flexibilities and try to make sense of it all.
Hi author,
It is unfortunate that you, like so many others, drank the tax advantage Kool-aide.
In numerous articles, dating back to 2012, I illustrated on SA exactly why the tax advantages are transient and suggested people move away. Eventually, as investors gained insight MLPs would lose favor and drop.
I'll agree very few could have anticipated what has happened, but my life-lesson for investing is that people making uninformed decisions are just fodder.
I hope you recover from your losses, but there is a lesson for everyone in this.
All you "KO ... this would have been" make me laugh.
Coke grew 2000% in the 10 years from 1989-1998. It was FLAT before then, has DONE NEXT TO NOTHING for nearly 30 years.
It has had modest returns, in the last 10 years and underperformed the S&P over the last 5.
So, with everything else, it all depends on when you bought in.
So, let's get real.
Hi GmanIV,
One can rationalize away whatever they want.
When I pointed out the tax trap of MLPs in 2012, many investors spouted the same mantra ... I'll keep it forever, high income, etc., etc.. But these aren't intelligent investing decisions, they are rationalizations.
Any investment decision that has at its base the necessity to keep the investment forever is flawed. One may end up keeping an investment a long, long time ... even "forever"...but a decision that REQUIRES that is problematic.
Survivability is dependent upon ones willingness and capability to adapt to changing situations. Any decision that foregoes that option is doomed.
So, you can offer me all the alternatives I could have taken ... but the fact is that NONE OF THEM is better than the one I DID TAKE.
What is interesting, is that I have not only earned multiples of what I would have earned had I not "bailed" but I have earned back all my taxes and still have enough to re-renter at lower prices, if I wish. Not bad.
I would take a guess that there are only a few people that own MLPs that wouldn't gladly have done what I did.
But, human nature, being what it is, they will rationalize away the failure rather than learn an important lesson. So, I suspect you have plenty of company to console with.
Your choice, your money.
Hi Elliot,
I think midstream and upstream are very different, with upstream being much more sensitive to commodity prices. Personally, I favored midstream and owned EPD.
I have always recommended that investors view MLPs as energy sector and their investment accordingly. We don't talk of XOM as a "C" Corp, why call EPD an MLP, as if it were something special.
I see the midstream as long term conservative plays ... and still do ... just not in MLP form.
My "beef" with MLPs is not the business they're in ... but their tax structure ... I wrote an article that explored the tax traps (
The "beef" is that the tax structure is being mis-represented all too often and dragging in the unwary. If the real tax truth was properly disclosed ... then each to their own.
I did author an article in April 2012 that warned of the factors that could hurt MLPs. Believe me, I had no inkling about the gas price ... just the tax and interest rate environment. (
Personally, I would have no problem going back into midstream at once the MLP framework and the "slight of hand" is finished.
I like EPD, but as long as they remain an MLP ... I'll pass. If they convert to a "C" Corp .... maybe then. I have problems with KMP/KMI simply because they are playing two sides against the middle.
Hi GmanIV,
You mention ... "....whats wrong with "holding forever"? MMLP and Buckeye arent going anywhere. Quit being a typical day trader and start being an INVESTOR...."
Investing is all about knowing when it's time to move on. There has never been and there will never be a stock that is a winner, forever.
MLPs, in particular, are a tax disaster the longer they are held. There are many investors that now own severely depressed MLPS, that if they sold will get back less than they bought it for, yet have to pay ordinary income tax. Can you imagine paying $50,000 for an MLP, selling it for $25,000 and having the $25,000 taxed at ordinary income tax rates? Their only comfort is that they received "tax free" money 10 years ago ... long gone and far away spent monies. People live in the here and now, not in the past.
Next, I'm not a day trader as ALL of my 100+ articles clearly indicate. I'm an investor that keeps my brain functioning, researches as best I can, including the tax impact of any investment, and am willing and capable to move on when it's time to move on.
I cautioned investors to reconsider their MLPs (especially in IRAs) NOT because I had any thought they would be pummeled, as they have, but because all too many were lured into them under false promises of transient tax benefits.
I warned that once investors realized the "tax free distributions" were really a "tax trap" they would start looking elsewhere. So, I take great pride in the fact that I helped countless thousands make better decisions.
Lastly, I agree with you that ...".... MMLP and Buckeye arent going anywhere...."
However, I think we ascribe two different meanings to the statement.
Hi squabkiller,
You say ...".... It took you 3 years to be right. You gave up a lot of income and gains in that time.....A broken clock is right twice a day", and not very useful.."
Actually you couldn't be more wrong. My reasons for dumping NLPs was that the recapture tax would distress any returns. It was the right decision then and it has been the right decision all along.
In fact, over the last three years, the monies taken from liquidating the MLPs have provided a far better after tax return than had they stayed in the MLP.
I suspect that most people still holding MLPs would be very happy to retroactively trade them in for the S&P returns since 2012.
The tax problems I pointed out in numerous SA articles meant that the longer MLPs were held, the more the total returns would suffer from tax incursion. The only way to avoid that incursion was to 1) get out soon, 2) wait for a big drop (which is self defeating) or 3) hold onto "forever".
I added comment to this article to illustrate that putting one's head in the sand is not effective planning. One needs to assess the risk (sometimes the risk is a tax risk) and make the best available choice. Hope and prayer are not planning techniques.
One additional note ... Too often people wait for the clock to strike a set hour to move on ... others ... like me ... move when we think it's the right time.
There are really two questions .. 1) What went wrong with MLPs? ... and you offered a very detailed explanation and view ... thank you.
But there's a second question ... possibly a more important question ... one that will reverberate into the future ... 2) What went wrong with the MLP investor?
Many will offer opinions, but here's mine ... What went wrong with investors is that they thought nothing could go wrong ... that they had found the magic carpet of steady income.
I had pointed out problems with MLPs years ago and dumped mine in 2012. I can't tell you how many investors just kept reiterating the mantra ... "I'll keep mine forever and when I die my children will keep them forever".
Well, if investors really believe that Mantra, they have one great buying opportunity in front of them now.
Hi Inv4$,
Unlike SPY, which trades till 4:15 ... SPX closes at 4:00, so the bid/ask spread on its options are pretty severe between 4:00 and 4:15.
I guess plenty of people trade that late, but I've always found it to be in-efficient.
Sure ... let's say it's Friday afternoon ... SPX is at 2000 and my put-write is at 2010 ... so I'm ITM.
If I don't close it out and just "roll" by writing a new put expiry for the next week, from that point until closing, I have both positions open. So, let's say SPX drops to 1995 between the time I "roll" and closing ... I lose on both expiries. Of course, if SPX rises to 2010+ I win on both expiries.
For that reason I write the new put as close to 4:00pm as I can.
Now, in a regular "roll" one would close the first position and write the second expiry.... mostly to avoid assignment.
But with SPX, that isn't necessary and I have found the bid/ask near expiry is usually pretty awful. So much so, that the dual-exposure gamble is usually the better way to go.
Hi Alpha,
The technique you mention from the book is a typical hedging measure ... which was the basis of this blog.
By writing puts on individual stocks and hedging an index, the investor is betting that their stocks will outperform the index. For example, in this case, the "write put basket" drops 2% and the index drops 3%.
He is correct in that the premiums for cumulative stocks exceed that of an index. Plus, the costs of maintaining multiple positions is expensive.
It is just another side of the coin ... hedge long positions with short positions in an index, not the stocks.
...".... I am notified when you publish a regular article, but how can I also be informed when you write an instablog? ..."
I really don't know SA procedures, but I always thought they alerted if a Blog or article. Perhaps it's in your settings.
Perhaps if someone at SA reads this response, they can add info as to how to get alerted to a blog.
Hi Alpha,
Glad to help.
In theory, you accomplish the same result whether you use calls or puts...just the mechanics change a little.
If you are already using put diagonals, you might find it easier to administer by just adding or increasing the current put spreads rather than mixing calls and puts. You can compute the targeted extrinsic returns the same way. That way your mind only has to follow one track.
Good luck.
Hi Alpha,
I think your first question is why I use calendar spreads instead of traditional long puts.
If so, in using Calendar call spreads I can adjust each week to whatever lever of profit/protection I want. There is also a "profit window" where I can gain on a move in either direction.
If your question was why call spreads vs. put spreads.... theoretically, calendar calls and puts are equivalent.... provided the strikes are the same. There are some slight variances that can favor one over the other, but it's 50/50.
For instance if one can let an OTM option expire, 100% of the credit is realized. If the option is ITM, then one must close it out to avoid assignment and this usually means sacrificing some extrinsic. This is probable on a call spread if ITM on the ex-div date.
So, it's a question of whether calls or puts are more likely to expire OTM. In a big rising market ... puts are more likely. In a fast falling market, calls are more likely, in a flat market 50/50.
One of the reasons that I use SPX instead of SPY is so I don't have to worry, either way. But that means I risk some double exposure if ITM and I roll before 4:00pm on Friday. So, my rolls take place on Friday just before closing.
In the past, I've mostly used put spreads, but switched to call spreads last year because I didn't see a big rising market.
I hope this clarifies it...if not... I'll keep trying, just let me know.
I disagree. ...
First, a "finding" implies some "discovery". It is not merely a disposition of unbiased data.
Second, the author has grouped data in a particular way to show a particular incidence. In so doing he makes choices as to what is relevant and what is not and what manner to present it. This carries with it an obligation that is not present. One might wrongly conclude from the article that the probabilities for an up/down year are reflected by January...which they are clearly NOT.
Lastly, regarding the title ... the author HAS answered the question (inaccurately). The passage you present relates to whether or not the first week will portend the end of month, not whether January portends the end of year. It is you that needs a closer read of the article.
HI Author,
The results you report, if properly analyzed, indicate nothing more than a random distribution. Nothing can be gleaned.
It is no different than stating that a sports team has a better chance of winning a game if they are ahead, or losing a game if they are behind.
So, "as January goes, so goes the year" is nonsense. The results for the rest of the year are independent of January.
Hi Cliff,
Thanks for reading.
My "Game Plan" on 11/23 looked at the probability of a Santa Claus Rally and I played it that way. When it didn't happen, I thought it best to do a little "soul searching" for 2016 expectations.
One thing I've always stressed is keeping flexible and willing to shift as necessary. I see "fear in the streets" and though it doesn't scare me away, I judged the beginning of January would continue down.
So, I'm a little more cautious. I wrote a blog about covered calls on December 24th and in the comment section I exposed my current "Game Plan" which is more cautious.
I'm taking a much more cautious stance. So far this week it has really helped, as part of the strategy sold DITM calls on SPY and the Put was DOTM. In both cases, the volatility increased the extrinsic enough to play it safe.
To save you some time, here's my comment from the blog. One note ... for next week, I intend to sell the weekly calls and put at the same strikes as this week ... so the calls will be OTM and the put DITM.
"Personally, I use calendars. But it starts with my assumption of the market for the year. This is the hard part. Right now, I think flat to slightly up or down ... but cautious with a possible large drop.

Personally, I look for an overall portfolio return of 10% and seek that out. It takes several steps, so here goes.

Let's say we're working with a portfolio value of $500,000 ... so I'm looking to generate $50,000 or about $1,000/week.

Step 1: I sell OTM puts for 1/2 my portfolio value ... in this case (with SPY at 204) it would be about 12 puts.

Step 2: To generate $1,000 the weekly put has to have an extrinsic premium of .80 ... or strike of 200.5 = 2% OTM (current volatility).

I could stop there, but don't.

I also sell a calendar call spread representing 100% of portfolio value ..... 25 options. I buy 25 far-dated ATM .... June 2017 strike $205 for $16 debit. In order to recover this $16, it requires about 21 cents extrinsic (x75 weeks).

But, to be "doubly safe", I also factor in a 10% return on this spread. So, to make my $1000 weekly. I need another 40 cents (25x100x.40=1,000).

So, my target extrinsic on the calendar call is 61cents (cost recover=.21 plus 10%=.40).

I go ITM (for protection) and the strike equates with a call at a strike of $199.50.

So, to start I have a naked put at 2005. and a short call at 199.5 (hedged with a far dated long call).

Here's what I do. If SPY keeps going up, I keep adjusting upward. As vol moves down, the strike will be less OTM, but probably always at least 1% OTM.

Now, if SPY drops, I drop down, as well .... EXCEPT .. if SPY drops below my strikes ... I hold both the call and put at the previous strike waiting for a bounce.

Now, I will ALWAYS hold the put on a large drop, but may decide to lower the call for protection. It depends upon my market outlook.

Now, this is all based upon my feeling that the market won't tank. Things may change my mind. If, on the other hand, it goes up , I stand to make 20%. If I do that, I don't care what the market did.

Now, if SPY drops to $200 week one ... I make $1000 on the put and my net on the calendar is about $5000...because I gain $4.60x24=$10,000 on the weekly but lose .50 delta= $5,000 on the far-dated. So, I'm more likely to move both strikes down to cement the gain.

So, the strategy is designed to favor a down move, but works just fine for an up move.

Now, regarding the 26%. This assumes on can earn 50 cents extrinsic per week selling puts on SPY. If one sold at $205 strike each week, and never changes, regardless of the market, they would have achieved this. Some weeks, when SPY=$205, they got as much as $1.80 (hi vol and ATM) and some weeks when SPY was up around $212 or down around $195, they got less ... averaging around 20 cents.

This could not be achieved if they chased SOY and moved the strike above A$205 on a run-up or below 205 on a drop.

p.s. For this example I used SPY. In fact I use SPX, but I'm dealing with a much larger portfolio than $500,000 and $500k would require fractional options on SPX. "
Hi Chaffey,
Turn the graph upside down and the trend is up.
Has about as much chance of being right as a chart is a predictor to begin with.