Completely against stefans advice, I’ll do my best to answer your queries.
Yes I write 1.5 plus million per month, and then once that month expires I move on and write it again and again when the following months arrive.
Total downside is obviously that fmg goes broke and I lose 1.5 million. Will that ever happen, highly unlikely? Also there are many protection strategies that can be deployed to protect your capital when you enter an options trade.
I don’t see it as picking up pennies on a railway. I will try and use an example to explain, and this is just my view and trading style.
I don’t tend to have much luck with day trading or short term weekly trading, however I seem to do well from selling puts for some bizarre reason.
Investor A can buy 1.5 mil of fmg today for say 5.95 and go long with the hope and speculation that it goes to say 7,9,13 bucks, this may happen in 1,3,5,7 years, no one knows for sure, the point is what if the stock tracks sideways for 2 years for whatever reason??? You’ve just lost 2 years of potential profits.
Let’s look at another scenario
Investor B with the same equity sells 1.5 million worth of premium every month for 2 years. Trading fmg on a monthly basis is far more easy in my view to predict were the sp is tracking as opposed to 2 years from now. If one was to look at today’s put options contracts they are as follows.
5.25 sep 2017 strike paying approx. 10 cents premium per share 1.9%
5.50 strike approx. 16 cents 2.9%
5.75 strike 26 cents 4.5%
If we take the 5.75 strike at 4.5%, that’s 67,500 for the month. Now, is this strategy really more risky than buying the same amount of stock on the market today for 5.95 on speculation that it needs to go higher to make money. Not in my view, personally I would prefer to sell the premium which at worst would see me buy the stock at 5.49 (5.95-25c to strike price – 26 cent premium) at the end of September if I was exercised.
If an investor is good enough they can repeat this process every month, month in month out forever. If we compound the example above over say 2 years, the options trader has locked away (not paper profit) but $1,620,000 in real profits (67.5kx24 months), which might I add may be even more, because a smart investor would be reinvesting some of these profits into selling more premium every month, so a compounding effect could see profits of over 2 million in that 2 years.
In addition every month whilst the options trade is in progress, some 80% of your equity is sitting in a high interest bearing account receiving a further 2% P/A interest, because the bank only wants say 20% equity as collateral for options trades on these Bluechip type companies.
It gets even better, what if someone’s risk appetite is fairly robust, they go off and get a line of credit for say an extra 500k to 1 million to add to your already 1.5 million, your now selling premium on say 2.5 million, too risky you say, not really, the line of credit is not even drawn because the bank only requires say 20% equity per month (obviously dependent on how the sp tracks). What if sp falls below strike price on options expiry day, well that’s the beauty of options, pardon the pun but they give you options, you can buy the options contract back, you could have bought a put option at the start of the month at say a 4.80 strike for protection. Or you simply just buy the stock and wait for an uptick and sell, or you buy the stock and start selling covered calls etc etc.
Whilst all this is transpiring Investor A, the subjective long sits around for 2 years crossing his fingers hoping that the stock hits like 13-14 bucks to see a comparable profit to investor B.
Now it sort of becomes clear that going long is not always the winner. Cash flow is king in my view. 20 years of investing in both property and shares has taught me that cash is king. I personally got sick of being equity rich and cash poor holding onto several properties or several stocks that tracked sideways, and when they did rise never taking profits because emotion sets in and you just think these assets are going to just keep going up in a straight line, all to the detriment of my lifestyle and my families lifestyle.
It’s a bit like the long term property investor that holds property for say 2 years expecting millions in profit. To then decide to sell and realise there’s not as much profit as they thought, all they did for the last 2 years was field phone calls from the tenants, attend court, keep the bank manager happy with mortgage repayments, constantly repair properties due to tenants and worse than all, throughout all that time they were what they thought equity rich but cash poor meeting the loan repayments because rent didn’t cover the full monthly loan repayments. Worse still their stress levels were through the roof dealing with tenants trashing your property.
Also Speak to all those pending retirees that were months from retiring when the GFC came, I know what option I prefer, the days of long term set and forget are gone in my opinion. Buying fmg today at say 5.95 and expecting it to hit say 15 bucks is just not for me, yes certainly some people bought at 2 bucks and watched it go to 7.30, but let’s be serious how many of these people do you really think exist, and how many do you think got greedy and didn’t sell to see it fall back to 4.50.
Speak to the long term players that bought RIO at near 165 bucks, BHP at like 45, blackmores at like 220, belammys at like 15. Have a look at this reporting season, its been far from impressive, look at the likes of dominos, CSL, CBA going to 100 bucks, Telstra in the 5s now in the 3s. The long game doesn’t look too lucrative does it??????????????
Why do I hold this view, well pretty basic, all comes down to lifestyle for me and my family? Life’s to short, I’ve seen far too many family and friends die of cancer and the like. They were all investing for the long-term game, you know the game everyone is brainwashed into following, work hard put your money in super and hopefully get the opportunity to spend it when you reach retirement age of say 67. Well from what I’ve personally seen, unfortunately many people die before that age.
Anyway that’s just my view, in summary I much prefer to absolutely lock in profits every month trading options on FMG so that I have a disposable income immediately to spend on education for my kids, good healthcare for my kids, several family holidays per year and son on.
It is these reasons that direct my trading strategy. Everyone to their own I guess.
Regarding your query about handing my hard earned dollars to a diversified portfolio, have you looked at your super statement lately, the portfolio that is managed by the so called experts. I think the above example clearly shows that there is far superior annual profits in other strategies like options trading as opposed to say a 5-8% PA diversified portfolio. I can’t see the point of this when I can achieve say 15% to 40% PA trading options.
Your other query, when the price rallies I am not nervous, as it generally means my chance of getting exercised becomes almost impossible. I may be slightly peeved that I missed a big run, however im still making money and I find it generally pulls back anyway at which point I sell more premium.
Hope that helps you roshan, now as Stefan’s has clearly made me realise, that’s it from me I’ve divulged far too much about how to make profits out of FMG stock.
Best of luck with your trading strategy, wish you all the best.
Disclaimer, Please everyone this is a very simplistic example, it takes a great deal of self-education and trading experience to perform these trades, it also takes serious daily following of all market conditions, please DYOR before even attempting options trading, especially with big sums of money. The above is just my personal opinion; follow the trading path that you’re comfortable with.
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