Among the many reasons for stock declines that pundits threw out there while bond yields went up was that investors might be dumping stocks because the risk premium isn’t worth being in stocks compared to being in bonds. I understand bond yields reached the teens before I was a stock investor. Investing in bonds then makes sense, but for now the yield is only bouncing around 5.25%. Historically, stocks double that return over longer periods of time. Admittedly, the standard deviation of gains/losses is greater in the stock market than the bond market. That means that in the short term, bonds are safer, but for those of us who plan to stay invested for a while we should not run away from stocks now. That’s always been the mainstream logic, but apparently 5.25% made people question it.
5.25% doesn’t come close to the number I’d be happy to sit back and not risk fluctuations. The risk premium we are rewarded with for investing in stocks is easily worth making 3-4% more per year and that’s if you aren’t selling options. Selling options can reduce that risk and give you better returns. Many say risk and return always go together, but with options you have to footnote it to further explain that it’s not a straight line if charting risk and return. Selling options reduces risk, but can increase returns over the long term. Per stock, an option seller can easily miss some huge gains, but over time I believe the risk is reduced and potential returns are greater when measured with a higher number of trades creating diversification over time. So, for options sellers, we risk big one time gains, but gain better returns longer term with reduces risk. That certainly seems worth the risk.
While talking to other investors and reading other blogs and Web sites I continue to see people clamoring for what’s the next hot stock. I love a blowout stock as much as the next person, but since I sell naked puts and covered calls, I don’t see the need for such blowout growth in my trades. People are willing to lose big, just so they can win big sometimes. The over used analogy is baseball and how a string of singles and doubles will consistently beat a couple of homeruns coupled with lots of strike outs and pop-flies. I don’t mind missing the homeruns as long as I win.
While the risk in stocks has outweighed the security of bonds for years, the risk of what stocks are worth investing in is debatable still. I don’t get too risky (usually) per stock pick because I’ve taken the time to realize what slightly beating the index averages can do to your returns. Try to calculate returns using various percentages to realize how easy growth can be. I suggest taking a look at your time horizon and needs to determine what kind of return you need. When I did this I was surprised to find that based on my current contribution schedule and only using 10% returns we’ll have around $2 million by the time I’m 60 years old and that doesn’t count our retirement accounts. $2 million at 10% is $200k per year. Of course I plan to beat the historical averages by using my simple options selling investing model. To make that same $200k at a 15% return I’ll get there before I’m 52. If this dream world continues and I can continue to make 20% annually (1/2 my current), I’ll have my $200k in returns before I’m 48 years old. (My formula factors in paying 30% of my returns in taxes each year.) My son won’t be out of college until I’m around 55 years old, so any retirement plans before that will be a pure luxury.
All of this is to point out that reaching for massive returns on every trade is not worth the risk of losses when a steady options-based strategy can earn you a retirement that is likely to begin more than 10 years earlier than over 90% of the population.
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Agreed!! A thousand bzillion, million per cent. It’s obvious to me I prefer less risk, because even though I may now buy a call or put for trading reasons, I cannot pull the trigger. I’ve been cover call programmed for the last year. Also, I will admit a possible oversight. I did not know much about ENCY, but used it for a June covered call. Now, for risk reasons, I want to ease the pressure in my account from it. What I intend to do is buy my current calls back, and take an October or January so I can get much more money, in case the stock takes a dive. As long as it doesn’t bankrupt I should be able to do an additional cc at that time, and with selling the stock plan on at least breaking even as my worst case scenario. if i ride me current cc for today, i am in too deep if the stock is hit. of course, any good news in the stock will only help. I tried to do this last night, but the time value surprisingly didn’t erode the premium, so hopefully i got one more day.
Otherwise, cc are safe and secure way of 20% annual returns expected, especially with strong stock choices. I am currently waiting for some movement in AMAT and YHOO prior to choosing cc’s. To Trader: Do you ever reveal how many people comment at your blog in a month? Or how many email you? A co-worker of mine thought I should ask, and I am realizing that fluid conversation is the only way I would benefit if I did start a web page. But how many people can actually be expected to respond? PS The other day I felt both AAPL and CROX were due for drawbacks, good put buy opportunities, and I didn’t do it for either. If I ever do start buying these options, I will try for many months out to hopefully increase my chances. I do currently have 3 Sept. calls on USB (US Bancorp), not looking real good right now, and also 2 Jan. calls on AMAT. , up some now.
K, good day. Kadena
Kadena, All comments are visible, so no secrets there. You are the main one who comments. I don’t get many emails more than just a few saying hi. I enjoy the comments from you and others and continue to welcome feedback.
Kadena, I hope you got out before this news hit about ENCY.