It’s been a while since we laid down a new blog post. We had planned to only write a new post if we had something to say, but we’ve been getting a few questions about whether or not we are still maintaining the site. The answer of course is that yes, we are definitely maintaining the site and responding to user feedback. But we probably still won’t have something to say all that often. So we’d like to open the opportunity up to our users to make contributions.
If you have a stock you think mainstream has missed, an investing idea you’re itching to share, a book review, an interesting or useful website, a success story using the site, or any other topic, write up a short or long article and email it to us at firstname.lastname@example.org. We’ll publish it here on our blog as a user contribution. And we’ll give you a free week of the Inflated Dividends service. (Didn’t even know that service was up yet did you?)
As an alternative, if you want to give us some feedback or submit an article anonymously, we’ve setup a Contact Us form where your email is optional. Its under the Contact Us link on the left.
The Inflated Dividends Daily Advantage Email service is now in beta. Our programmers have put up their first shot at it and we’re ready to try it out. Consequently, we’re looking for a few beta testers. If you’re interested in trying the service out, drop us an email at email@example.com. We’ll take the first few that we get, and those first few will get an extra month of free service after we exit the beta testing period.
Maybe this is a good time to throw out a reminder about what the Inflated Dividends service is. Basically its a daily email, probably about 4 hours after the market closes. The email will highlight the best opportunities for increasing the dividend yield of a stock by selling a covered call. When you sell a covered call, you own the stock and sell the right to someone else to buy the stock from you at a specific price for a specific time period into the future. They pay you for this right. Since they pay you, you now have less invested in the stock, but you still get the same amount of dividend. So your yield goes up. (For a more thorough example, take a look at Inflated Dividends on the left under Daily Advantage Emails.)
So if that appeals to you, email in to be one of the first few that we accept as beta testers.
We had a user email in a suggestion to put a donations link on the site (thanks Nathan!). So if you take a look at that bottom bar common to all our pages, you’ll see a “PayPal Donations” button now available. If you find the site useful and you’d like to help us keep it funded, make a donation. Or if you emailed in for our report on how to make money with credit cards and you’re already raking in the cash, here’s your chance to “buy” the report retroactively.
Credit Card Report
Speaking of the report, it’s now available via the box on the left with the “Send It!” button. Leave your email, get the report, and in about 3 months we’ll check in with you to see if you implemented the idea and started making some money. Hopefully you’ll be willing to toss a few bucks our way for showing you the path. (Update: click here to download the report)
We recently created a Google Gadget that lists the top 3 Optionables for the nearest trading day. Google Gadgets are little applications that you can add to your desktop and google homepage. Take a look at the Dividend Data link on the left. You’ll find the Gadget at the bottom of that page.
I recently read two books by the same author, Van K Tharp. One was called “Safe Strategies for Financial Freedom”, and the other was called “Trade Your Way to Financial Freedom”. I found both very interesting, and we’ve listed them for sale in our Products section (formerly “Gifts”) on the left. The links will take you to Amazon where we get a commission on the sale.
“Safe Strategies for Financial Freedom” first goes through a discussion of what financial freedom really means. Basically the idea that you don’t need to replace your income, just create an amount of income that is greater than your expenses. He calls the amount of your monthly expenses your financial freedom number. This kind of points out the fact that it’s your expenses that keep you from retiring, not your savings. The lower your expenses, the less you need to retire.
He then goes on to talk about how you can convert things that you own, but don’t use, into cash so that you can employ that cash to create income to get you closer to your financial freedom goal. I’ve heard this refered to as “resource conversion”. The idea that you have value locked up that you can employ in a more productive manner.
Then the book gets into investing and a few different systems for trading “safely”. It also discusses real estate, although not much more than a cursory glance at a few particular strategies in real estate.
All in all I enjoyed it and got some good ideas out of it.
The other book, “Trade Your Way to Financial Freedom” was very interesting. This book is basically a discussion about trading system development. This would be the set of rules that you trade by. So you could back test it and see what to expect, and whether or not the idea was even any good. And if you have rules, then its easier to take emotion out of the equation and trade without letting emotions hinder you.
The first part of the book deals with the most crucial part of a trading system, the person operating it. He says that even if you have a great system that could make a ton of money, you could still fail to do so if you aren’t ready to trade it. For example if the system loses $100 for 10 trades straight, but on the 11th trade pulls in $5000, you’d be up $4000. But you’d have to tough through all 10 of the losing trades. Could you handle that? What about an even longer losing stretch?
In the book he goes through many of the steps to creating a good system. And specifically one that fits you and your personality. He emphasizes an exit strategy because as he says exits are all about taking profits, where as most “systems” emphasize their entries. Interestingly he says that you can make money on a system that has a random entry as long as you have good exits and position sizing. Position sizing is how much you risk per trade compared to the size of your trading capital. He also talks about calculating expectancy, which is the amount of money you expect to make per dollar risked on average.
His website, www.iitm.com, has an interesting game that teaches position sizing and risk management. The first 3 levels are free for a week. Try it out just to see what you think. I was able to get through each of the levels successfully, but it felt odd at first not knowing anything about the stocks I was trading. Eventually it became clear what was being taught, basically that the stocks didn’t matter if I knew the expectancy before hand. But even though I knew this, it got difficult to tough through and keep placing my trades when I started drawing a streak of losing trades. I was actually getting nervous and fearful, which has happened to me in trades I’ve placed for real before.
That got me thinking that I needed to do some work on myself.
I went looking for something to help me relax and destress. Eventually I ran across this website, Learning Strategies, which sells paraliminal CDs. Supposedly the CDs can help you deal with a number of the mental hang ups that can inhibit success in life and trading. I’ll be giving them a try and will let you know how it goes. We’ve also signed up for their affiliate program, so if you’re interested in trying them now or after I report back on them, please order them through the link in our Products section to support the site.
Calendar Spread Trading Results
Last time I talked about a strategy that you could put on for $0.10/share, with the possibility of making about $0.40/share. This was done by selling an option with an earlier expiration date, and buying an option with a later expiration date. But both options are about the same price (the $0.10 difference is the spread between the bid and call prices). If the stock goes up, then a put spread will be worth more.
So we tried this out in our trading account. We used a trading account at www.interactivebrokers.com because they have very cheap trading costs of about $1 per trade (although they also have a $10 minimum per month, so its not so cheap if you don’t trade often). We placed a number of these put spreads. The underlying stocks were Microsoft, Washington Mutual, Bristol Meyers, Intel, KB Homes. We placed the spreads so that the earlier option expiration would happen no more than a month before the stock normally paid a dividend. The plan was that this dividend would cover the costs of the spread.
So how is this turning out?
We were exercised on Bristol Meyers, KB Homes, Microsoft, Washington Mutual, and Intel. Not completely on each one, but at least partially on all of them. On the first 4 we didn’t have enough money in the account to hold them until the dividends paid out and we ended up borrowing on margin briefly before being forced to sell for lack of account liquidity.
On Intel, it went all the way to expiration this month, and we will be getting a dividend payment soon. We held until the ex dividend day and then exercised our put. So we owned Intel for a cost of $25/share, we had a put that covered us to sell it for $25/share, and we only had to hold the stock for a few weeks to get the dividend. But there was always the risk that we could get put the stock early and have to sell out.
They say you get smarter when you have money on the line. So what did we learn here? Never pay more than $0.10 for the spread. Look at the dividend history for the year before (I use www.bigcharts.com Interactive Chart for this), and buy the spread so that the earlier option expires less than a month before the dividend pays out. Make sure the quarterly dividend at least covers the spread (and ideally pays a little more). And try to get the strike prices as close to the current price as possible. Also try to sell your earlier put so that no dividends will be paid before it expires. At least one of the times we got exercised was due to someone holding the stock until just after the dividend payment (like we are planning to do).
Generally it doesn’t make sense to exercise a put option early. Usually its more logical to hold it right up to expiration. However if you own the stock, and you own a way in the money put option, it maybe worth more to put the stock than to sell the two separately. I think this is what happened some of the times that we got our puts exercised and ended up holding the stock. If the stock moves in your favor (for a put spread, thats up), then this should be less likely to happen.
All in all its an interesting strategy, but probably not one that we will continue using. The risk of getting exercised early is pretty high evidently (we had it happen 4 out of 5 times), and if you get exercised then you either have to hold the stock until a dividend, or sell out and take the loss of the spread amount. Although if you wanted to own the stock anyway, this might be a great way to put on a position and end up with a protective put. Another drawback is that the stock has to move significantly in your favor to make the $0.40 maximum gain. And if it really moves, you could end up missing your window, and not be able to make a profit.
As an alternative, we’re using the MITTs strategy I also discussed last time. This consists of holding the amount you want to invest in a safe money market, and using what you expect to earn in interest to buy options on the stocks you would otherwise have purchased. This way you have a position in the stock, but if you are wrong and the stock doesn’t rise, and the options expire worthless, then you will still be at even for the year. And if you are really wrong and the stock dives off a cliff, then you’re still even.