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Tom Armistead
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I'm a well-informed retail investor and post on SA in order to expose my thought process to critical examination and comment from readers. It makes me a better investor. I'm particularly proud of bullish macro articles posted in 2009 and later, in which I presented ideas that encouraged me to... More
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  • Adjusting The Synthetic Dividend Growth Portfolio 3 comments
    Jun 30, 2013 3:02 PM

    Friday I adjusted the portfolio by rolling short calls expiring in October and November out to January and February. Trading calendar spreads in very small size, I was gratified that market makers for the most part met me close to mid bid/ask. I started there and kept lowering my limit until they filled.

    Before trading, I verified that the premiums received for the approximate 90 day increase in the time to expiration, when multiplied by four, were greater than the annualized dividend for owning the stock. Portfolio strategy attempts to earn options premiums equal to or greater than the dividend income for the underlying.

    Going forward, I plan to roll December expirations out to March when they become available, and continue to roll out as new quarterly options start trading. The thinking is, by selling more distant expirations, I've locked in the premium income. Also, by doing the rolls on a monthly basis, the overall work is reduced since I don't have to think about it at other times.

    There were a total of seven trades involved, a couple of hours to get them all entered and closed. Both realized profit(loss) and premiums received for the roll were consistent with a 4% return on the hypothetical $250,000 portfolio amount.

    There were no adjustments to the long positions. The plan is, to adjust when the underlying moves 10% either way, by rolling in the same direction. By putting the starting prices of the underlying into a portfolio here on Seeking Alpha, I can check for the % change when I'm on the site, and deal with any that change by 10% or more.

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Comments (3)
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  • lpjblb
    , contributor
    Comments (40) | Send Message
     
    Tom--I've been looking at the synthetics approach versus selling puts as a method to get long on quality stocks.
    What are your thoughts on comparing the two?
    Thanks
    1 Jul 2013, 08:54 AM Reply Like
  • Tom Armistead
    , contributor
    Comments (5237) | Send Message
     
    Author’s reply » Sophisticated options traders will tell you the same position can be taken using either puts or calls. Tell them you're selling covered calls, and they say, "Great, you sold a put."

     

    In practice I've had trouble from selling puts, they caused me a lot of aggravation and financial loss during the financial crisis. I don't do it any more. The problem is volatility, margin rules and market liquidity. I did an article on selling puts, "How risky is selling puts?" it was a while ago, but it does go over what I perceive to be the potential problems.

     

    I've also done simulations of selling out of the money puts on quality dividend growth stocks. Assuming they are cash secured, there isn't that much risk, and the returns on such a portfolio will be attractive compared to bonds or money in the bank.

     

    As Warren Buffett says, selling puts won't get you in at the bottom. It will make you a guarantor of market price, not a good place to be during a financial crisis.
    1 Jul 2013, 09:44 AM Reply Like
  • giorgiolb
    , contributor
    Comments (5436) | Send Message
     
    TOM,

     

    "As Warren Buffett says, selling puts won't get you in at the bottom. It will make you a guarantor of market price, not a good place to be during a financial crisis."

     

    It's all how you look at things. I personally like buying stocks at a very attractive price, market bottom or not, and I don't find my viewpoint in any great opposition to Warren's methodology.
    1 Jul 2013, 02:01 PM Reply Like
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