Global Correction

[sonicdragon]

Fletch, the starting price is not irrelevent when you quote the loss of $5 in isolation from the gain of $10 on the stock, which is the error in your post #157. It is only irrelevent when you consider the two together (or "incrementally" as you now put it)

Totally agree. If you buy a coverage call and evaluate in isolation you are right I was comparing the two together or incrementally. Hence starting point is irrelevant .

This gives the answer to the original question of why everybody isn't simply "collecting rent", which was the original point I was making, albeit not so clearly .

Collecting rent on a long position, by lending the stock, is a completely different thing, and I'm sure that anyone who is writing covered calls knows that. In fact there's no reason why you couldn't lend your stock out and write a covered call on it.

I thought unless you took possession of the certificates, or expressly instructed your broker not to, that shares were always subject to lending to short sellers.

That should depend on the terms and conditions of your brokerage account.

[fletchsmile]

Simply put: price doubles. Which is better long position only or covered call? By writing a call on a position you already hold, you are risking missing out on significant share price increase.

With the benefit of hindsight, one can easily say such things, but ex-ante it is meaningless. By the same logic I could say that holding a stock instead of shorting it was high risk because it subsequently went down.

Think you're still missing the point. How risk is measured varies, and what is low risk to one person could be high risk to another depending on objectives. eg banks generally believe for them variable rate funding is lower risk. For a corporate the opposite is often true and they wish to fix funding costs to minimise risk. Similarly, for some investors income received in absolute terms is more important than income in % terms or yields. For some a rate of return above inflation (variable) is more important. In some of these cases a covered call is not appropriate.

You need to measure risk in terms of variability of your own desired/expected returns. eg you have a retirment portfolio of USD 1mio in US equities. You want USD 50,000 per year to live off for the next 20 years, and grow in line with inflation. (Humour me by assuming div growth rate keeps place with inflation). NB Not 5% per year but 50k per year. Initially they look the same, but

Now assume equities give a dividend of 5%. If share prices fall or rise as long as your dividend in absolute terms is held you don't care. Now say you take out your covered call, 3 months, to gain that couple of extra % points. 10,000 shares Equities $100 (paying div of 5), strike price $104. Receive 1%. Market moves to 130 within 3 months thru very bulllish economic sentiment, expectations, temporary excess liquidity in market, short term problems in other countries so a flight to quality, etc. What happens:

Buyer exercises call against you. You sell your (now) $1.3mio portfolio for $1.04mio. So you have got USD 1,040k + 10k premium = $1,050k. Great you made a quick $50k. But you now want to find equities that will give you 50k absolute interest per year. Now you have a problem. If you buy your equities back and the business fundamentals underneath haven't changed, it's still paying 5 div on 1 share, but the share now costs $130. Unfortunately you've only now got a little over 8,000 shares. These are going to give you a div of 5 each, so you get 40k p.a = less than the 50k you need. i.e a 10k income hole which needs to be filled in line with infation for the next 20 years.

Someone with a simple long holding still has 10,000 shares worth $1.3mio, paying div of 50k. This is what traders in banks overlook for the little guy. The difference is the trader in a bank doesn't care too much. He wants his short term trading bonus and moves on to the next opportunity, perhaps takes some other derivatives positions - who knows. He focuses on the 50k he made short term. But the little guy has a hole in his retirement income, and 250k on paper less than he could have been.

Identical product, identical outcome, identical risk profile in isolation. The bank trader is happy, the little guy p****d. You can't look at trades in isolation to measure risk. You need to measure vs your desires/requirements and in context or their environment.

For the bank trader it's highly likely he could have borrowed in the market at variable rate funding to buy his $1mio assets in the first place. He pays back his borrowing, and now has 50k in his pocket. No assets, no liabilities. The little retired guy has his life's savings tied up. He probably doesn't have access to create a bigger pool with taking more risk.

That's one risk in Lannarebirth's covered call strategy. I guess he probably looks from a financial institution trader perspective. The trader is looking short term, with someone else's borrowed money. That's fine that's his strategy. The retiree needs long term income from his own capital, which is not easy to replace

Wouldn't you agree the above scenario holds more risk for the retiree than perhaps he wants? Even tho' the transaction in isolation is OK. Effecttively by getting a little greedy for a couple of % points income the retiree has a 250k hole in capital to be filled to be able to generate the same income, or suffer 10k less incomeper year.

Markets often move on sentiment not on fundamentals. Options can give short term volatility could be excellent for traders, but inappropriate for long term investors. I believe the original question related to retirement income, when Lannarebirth suggested his strategy. If you were retired would you want to reguarly take that risk? I wouldn't. It would mean regularly having to monitor volatilities. Exactly what a retiree doesn't want.

BTW Would hate to be that same retiree if the market then went thru a correction a month or so later. i.e market fell back from 130 to 100 after he buys his shares back. He'll now have 8,000 shares @ USD 800k in shares, compared to a buy and hold of 10,000 shares at USD 1mio. Again trader doesn't care he exited with a profit. Retiree has $200k loss.

Edited October 26, 2007 by fletchthai68

[fletchsmile]

Collecting rent on a long position, by lending the stock, is a completely different thing, and I'm sure that anyone who is writing covered calls knows that. In fact there's no reason why you couldn't lend your stock out and write a covered call on it.

No reason at all. Yes they are different. The key point is stock lending is much more akin to collecting rent on your investment, than writing a call option.

It is incorrect to compare call options to rental income. It is taking a small premium and hoping there is no significant increase in price you miss out on/sacrifice. Stock lending - you get the income and the gain in price. You retain the asset and "rent/loan" it to someone.

[sonicdragon]

Fletch,

No, it is you who is apparently missing the point. In your example, the investor who sold the covered call reduced his risk and his return. The investor with the long-only position took more risk anf got a higher return.

It's that simple.

[sonicdragon]

Collecting rent on a long position, by lending the stock, is a completely different thing, and I'm sure that anyone who is writing covered calls knows that. In fact there's no reason why you couldn't lend your stock out and write a covered call on it.

No reason at all. Yes they are different. The key point is stock lending is much more akin to collecting rent on your investment, than writing a call option.

It is incorrect to compare call options to rental income. It is taking a small premium and hoping there is no significant increase in price you miss out on/sacrifice. Stock lending - you get the income and the gain in price. You retain the asset and "rent/loan" it to someone.

I haven't mentioned anything about rent.

[fletchsmile]

Collecting rent on a long position, by lending the stock, is a completely different thing, and I'm sure that anyone who is writing covered calls knows that. In fact there's no reason why you couldn't lend your stock out and write a covered call on it.

No reason at all. Yes they are different. The key point is stock lending is much more akin to collecting rent on your investment, than writing a call option.

It is incorrect to compare call options to rental income. It is taking a small premium and hoping there is no significant increase in price you miss out on/sacrifice. Stock lending - you get the income and the gain in price. You retain the asset and "rent/loan" it to someone.

I haven't mentioned anything about rent.

Lannarebirth talked of "collecting rent" on equity investments. That was the point I mentioned stock lending if you're really looking to "collect rent". Of course cover call and stock lending are different.

Was just pointing out that stock lending is more like the collecting rent he describes. Covered call has very different risk profiles, as illustrated in my example above where if marketing timing is out you could find yourself down 200k on USD 1mio. That is not a rental profile at all.

[fletchsmile]

Fletch,

No, it is you who is apparently missing the point. In your example, the investor who sold the covered call reduced his risk and his return. The investor with the long-only position took more risk anf got a higher return.

It's that simple.

If you read the BTW at the end, you'll see the "lower risk call" investor actually ended up with a loss given events.The guy needs a portfolio to generate ongoing income

Scenario. 1) Market rises 30% in a few months. 2) Then falls back to original level:

1) Long hold only = return to start. Gain to 1.3mio. Falls back to 1.0mio

2) Covered call. Hold 1mio. write call for 10k. Total 1,010k. Call exercised when market rises 30%. 1) Now has 1,050 in cash. Buy back shares, but can only now afford 8,000 shares as they cost 130. 2) Market crashes back to original level. He now has 8,000 shares at 100 = 800k

The covered call exposes the original investor to short tern market fluctuations he wouln't be exposed to if he just bought and hold. That's the key point. If the option buyer excercises between two large market movements the covered call gets hit badly if his intention is to retain an investment in a particular portfolio.

Edited October 26, 2007 by fletchthai68

[lannarebirth]

Collecting rent on a long position, by lending the stock, is a completely different thing, and I'm sure that anyone who is writing covered calls knows that. In fact there's no reason why you couldn't lend your stock out and write a covered call on it.

No reason at all. Yes they are different. The key point is stock lending is much more akin to collecting rent on your investment, than writing a call option.

It is incorrect to compare call options to rental income. It is taking a small premium and hoping there is no significant increase in price you miss out on/sacrifice. Stock lending - you get the income and the gain in price. You retain the asset and "rent/loan" it to someone.

I haven't mentioned anything about rent.

Lannarebirth talked of "collecting rent" on equity investments. That was the point I mentioned stock lending if you're really looking to "collect rent". Of course cover call and stock lending are different.

Was just pointing out that stock lending is more like the collecting rent he describes. Covered call has very different risk profiles, as illustrated in my example above where if marketing timing is out you could find yourself down 200k on USD 1mio. That is not a rental profile at all.

OK, if you want to be a stickler, it is not rent you are collecting, but premium. I was using a colloquialism. BTW, do induviduals "lend" stocks. I know brokerages do, with the consent or lack of non consent of individual account holders. My recollection is that it's a pretty piddling sum.

fletchthai, I think this article answers some of your questions regarding relative returns:

http://www.businessweek.com/magazine/conte...21/b3733128.htm

Edited October 26, 2007 by lannarebirth

[sonicdragon]

Fletch,

No, it is you who is apparently missing the point. In your example, the investor who sold the covered call reduced his risk and his return. The investor with the long-only position took more risk anf got a higher return.

It's that simple.

If you read the BTW at the end, you'll see the "lower risk call" investor actually ended up with a loss given events.The guy needs a portfolio to generate ongoing income

Scenario. 1) Market rises 30% in a few months. 2) Then falls back to original level:

1) Long hold only = return to start. Gain to 1.3mio. Falls back to 1.0mio

2) Covered call. Hold 1mio. write call for 10k. Total 1,010k. Call exercised when market rises 30%. 1) Now has 1,050 in cash. Buy back shares, but can only now afford 8,000 shares as they cost 130. 2) Market crashes back to original level. He now has 8,000 shares at 100 = 800k

The covered call exposes the original investor to short tern market fluctuations he wouln't be exposed to if he just bought and hold. That's the key point. If the option buyer excercises between two large market movements the covered call gets hit badly.

You've just quoted back to me the same point I made to PCA !

Again, the logic is flawed - to properly analyse this you have to consider all outcomes. You only consider two. Obviously there are scenarios where a covered call makes a loss - there is no free lunch. The covered call writer is not compelled to replace the position upon being exercised. I can just as easily give you another scenario where he waits and buys the position back at original level. He now has more shares than the long-only investor. If the investor is looking for a 5% per annum return, then he would not buy after a 30% rally since the div yield would be only 3.8%. He would choose a different asset to invest in. However, he has made made 5% in less than 3 months which is an anualised rate of return more than 20% (and a lot more than 20% the nearer to the start date that the exercise occured), and consequently requires a lower rate of return for the rest of the year to get to his goal.

[fletchsmile]

The covered call writer is not compelled to replace the position upon being exercised

Sonic

To go back to the original premise Lannarebirth raised on Rainman's portfolio. The call writer kept his portfolio, and was continuing to do this. In his view he believes he is simply "collecting rent". He needs to reinvest as its his retirement portfolio. We are not talking simple one off trades. That was the whole premise from the start. Lannarebirth highlighted how his friend repeatedly did this on GE and impliedyou could use it for retirement portfolios to simply enhance yield. Below highlights how if you get it wrong. Which is what I've been trying to flag...

Graph and example below should highlight the danger of using a cover call on a retirement portfolio.

1) Retiree No.1 buys 1,000 shares @ 58 = 58,000 in Nov and holds till just afer Aug and still has 58,000.

2) Retiree No.2 buys 1,000 shares @ 58 in Nov and sells a call for a small premium of 1%=580, Strike 59 price.

- Call buyer exercises strike at 59 in Feb/Mar at market peak of 62. Now retiree has 59*1,000 +580 = 59,580.

- No.2 decides he likes this call idea and buys 960 shares back @ 62 (cost 59,520 and small transaction fee/rounding).

- No.2 writes another call as he's doing well, strike price 63 for 1% premium=595

- Call buyer exercises strike at 63 again in May/Jun at market peak of 65. Now retiree has 63*960+595=61,075

- No.2 really likes this now, and buys 939 shares back @ 65 (cost 61,035 and small transaction fee/rounding)

- No.2 writes another call, strike 66 for 1% premium=610

STOCK MARKET FALLS BACK to 58

RESULT: 939 shares @ 58 + premium of 610 = Total 55,072

These are small movements that happened this year on UK index tracker. Now magify the concept by hitting a steep bull run prior to a call being exercised. Buying back your prtfolio at the peak, then a large crash.

Edited October 26, 2007 by fletchthai68

[sonicdragon]

You seem to keep making the same point with verbose examples. We all know that most strategies can make a loss in certain scenarios. That is the risk taken by putting the trade on. If you are not willing to accept the risk, or the range of outcomes is not suitable for your risk profile, then you don't do it. It's really very simple.

[lannarebirth]

You seem to keep making the same point with verbose examples. We all know that most strategies can make a loss in certain scenarios. That is the risk taken by putting the trade on. If you are not willing to accept the risk, or the range of outcomes is not suitable for your risk profile, then you don't do it. It's really very simple.

And that is the question each person must ask themselves when putting on any trade or engaging in any investment. That, and how do you know when you're wrong, and what will you do about it. One size does not fit all.

[Naam]

what happened to BingoBongo's global correction?

[sonicdragon]

what happened to BingoBongo's global correction?

I don't think we'll hear much more about that, at least not from bingobongo, until the market has a few more down days.

Seems we went a bit OT for a while there. At least it's over with now (I hope).

[fletchsmile]

what happened to BingoBongo's global correction?

I don't think we'll hear much more about that, at least not from bingobongo, until the market has a few more down days.

Seems we went a bit OT for a while there. At least it's over with now (I hope).

Sonic,

Actually interesting to get an excahnge of strong views, tho' yes a bit OT. Here's my summary, and last post on this...

-------------------

'Dr. Naam': a question for the stock market/share lovers. how do you make a living with your investment (assuming you live of it and don't earn your money by working)?

'Firefan' :While I do not fit the description perfectly the way to live of ones investments, if holding equity, bonds, commodities, reits, Etc. is basically to first take the dividends/interest, and if that is not enough take from the main "winner" thereby re-balancing the portfolio back to the original risk profile ..

'Lannarebirth': I'm not a stock market/share lover, but I can tell you the strategy a friend of mine employs. He's got a core position of about 15,000 GE shares. Every month he writes covered calls against his position. Each month he takes in a cash premiun of 1% to 5%. This is in addition to whatever paltry dividend it pays and appreciation (if any). He's been doing it for years. He uses the proceeds, both for income and to increase the size of his position.

Fletchthai: Would be interesting to compare his returns vs a simple long position. Presumably sometimes the calls are exercised against him, and he then has to repurchase, which will attract transaction costs as well as subject him to price fluctuations between settlement dates.

'lannarebirth': He makes about 25% - 30% annually on the covered call transactions. Commissions are $USD 3.50/1,000 shares , so negligible. There's no real slippage due to settlement dates. Everything's instantaneous now. I can't imagine why anyone who holds shares in any stock wouldn't be collecting rent each month, as he does.

Fletchthai: If the options crystalise they lose [relative to a simple long portfolio]. Writing options doesn't simply generate income via cash premiums, it also brings risk with it. OK it is limited as the options are covered by shares, but there is still risk. That's why everyone doesn't simply "collect rent". ….

BTW If he continually wants to hold the same core position, might be worth looking into stock lending. That's much more akin to collecting rent.

Sonic Dragon: "That is incorrect. The risk in writing covered calls is that the price goes down by more than the option premium collected:". (Fletchthai: yes for a covered call in isolation. Here we are comparing a long position to a long position with call. We talking about an "overwrite" on a portfolio held long term. You're statement of "incorrect" is a bit blunt, and out of context. the bit you've focused on, i.e on a cover call done as a "buywrite" in isolation for trading purposes. These are two very different intentions)

SonicDragon: "Collecting rent on a long position, by lending the stock, is a completely different thing, and I'm sure that anyone who is writing covered calls knows that. In fact there's no reason why you couldn't lend your stock out and write a covered call on it. "

Flectchthai: "No reason at all. Yes they are different. The key point is stock lending is much more akin to collecting rent on your investment, than writing a call option. It is incorrect to compare call options to rental income. It is taking a small premium and hoping there is no significant increase in price you miss out on/sacrifice. Stock lending - you get the income and the gain in price. You retain the asset and "rent/loan" it to someone. "

Sonic Dragon: "I haven't mentioned anything about rent". (Fletchthai: No but Lannarebirth did, and I responded to that with an alternative suggestion. You again make a very blunt comment highlighting the differences that we know already, without considering the conext of writing.

Sonic Dragon: You seem to keep making the same point with verbose examples. (Fletchthai: unfortunately because your blunt statements of right or wrong looking at only part of the picture, and not in context. You're not taking account of individuals dfferent risk profiles and objectives)

We all know that most strategies can make a loss in certain scenarios. That is the risk taken by putting the trade on. If you are not willing to accept the risk, or the range of outcomes is not suitable for your risk profile, then you don't do it. It's really very simple.

Lannarebirth' And that is the question each person must ask themselves when putting on any trade or engaging in any investment. That, and how do you know when you're wrong, and what will you do about it. One size does not fit all.

Fletchthai: (his last post on this):

Exactly the point

It also answers Lannarebirth's question of why anyone who holds shares in any stock wouldn't "collect rent", via cal option writing

Answer 1) It is not simply collecting rent. It is altering the whole risk profile, as verbose examples by both Sonic and Fletch show

Answer 2) Because as stated above there is a risk to capital over and above (relative to) a simple long portfolios risk. The call writer exchanges his small premium income for an agreement which perhaps forces him to sell his portfolio at below replacement cost .

Hence many people choose not to do this. Small couple of % extra yield vs selling a portfolio below replacement cost.

A retiree needs to replace his portfolio to generate income. A trader does not

Totally agree about willingness to take risk. Was simply explaining to Lannarebirth why some of us choose not to take the risk. He's a short term trader and interested in volatilties. A call option introduces additional volatilities around issues like replacement cost, that I don't want.

Covered call is great for neutral-bullish trading view where you expect the market to range trade. For an investor it creates capital risk around stress events which can impact his capital. Imagine this trade around a global crash. Run up to Oct 87, Oct 97 crashes. Oct 2007 crash..(poised now for a return to thread topic)

-----------------------------------------------

Back on topic. Actuallly a little disappointing nothing happened in October ... yet. In terms of global corrections

Edited October 27, 2007 by fletchthai68

[Naam]

what happened to BingoBongo's global correction?

I don't think we'll hear much more about that, at least not from bingobongo, until the market has a few more down days.

but i miss his "d@mn i'm good!"

[fletchsmile]

Wasn't actually going to post anything more on this, but ironically while I was looking for other stuff on portfolio management similar to Dr.Nam's question and Firefan, I came across the article below. In a few years I expect to be in the situation Dr.Nam and Firefan mention - hence it's of personal interest. I could actually be in the situation tomorrow if I chose to retire. So I'm looking at ways to reduce risk of a fall in capital value on my portfolios, while maintaining a large equity based element. The obvious one is buying put options. Others by diversification in uncorrelated markets. Hence posted elsewhere an interest in Africa and interest in Cat bonds.

I'm not looking to enhance yields, but to protect my portfolio investments. My average annual returns since Dec 99 are around 18% p.a. This includes bad years of 2001 and 2002. I don't necessarily expect this to continue, and would be very comfortable with 7%, living off 4%, keeping the rest as a buffer for bad years, and inflation. Actually have a strategy lined up, but would be wordy to explain.

The biggest risk to me is the global correction at the start of this thread. Covered calls are not an option for me in my view. OK for short term traders, who are experts in that field. I believe the key for covered calls is buying stock after corrections, then writing calls later after a rally in the stock price. i.e it relies on timing. Not for me. My investment strengths are elsehere, and prefer "time in the market" to "timing the market". It also let's me sleep easier, and just adjust portfolios as I feel like it, without having to watch every day

Anyway article as follows explains why:

Covered Call Writing

Covered call writing is the most popular stock option trading strategy of individual investors. It's also the most widely misunderstood and misapplied.

The goal of selling or "writing" covered calls is to receive a safe high yield income. Unfortunately, people often end up getting a lower total return on their investments, and even lose money writing covered calls, by using this stock option trading strategy the wrong way.

Here's how that happens. They purchase several stocks and sell covered calls against them. After a month or two, some of the stocks have gone up, some have gone down, and some have stayed the same. The ones that have gone up the most were called away. The ones that have gone down are too far below the original strike price to make selling covered calls worthwhile at that strike price. The total portfolio is worth less than before the covered call writing strategy was attempted because the big losses on the stocks still held exceed the limited gains on the ones called away.

This problem is commonly referred to as cutting off your flowers and leaving yourself with a portfolio of weeds. The stocks that went up were winners and you don't own them anymore. The stocks that went down are the losers and you're stuck with them now. Applied this way, covered call writing can be a painfully effective way of sorting out the good from the bad, and keeping the bad!

Many a covered call investor has watched first with amusement then with grief as the stocks that got called away from him rocket to new record heights while he watches from the sidelines clutching the meager few percent income he received from selling the covered call options.

Likewise, it can be very frustrating to pocket a few percent option premium then watch as the underlying stock you own continues to fall. By the time the covered calls expire and you are ready to sell more for the next month, the premiums are so low they would barely cover the commission, and the prospects for you to ever "get out even" on that loser stock are very low.

What about the stocks that neither went up a lot or went down a lot but just stayed about the same? Actually these are the ideal cases, a covered call writer's dream, stocks that pay a high yield from covered call writing but stay fixed in price month after month, neither getting called away nor dropping precipitously. Wouldn't it be great if all stocks were like that?

The reality is no such stocks exist. Sadly, inexperienced covered call writers set up their portfolios as if they do. They hope all their stocks will either stay the same or go up a little, and if they go up a lot and get called away they think that's OK too, maybe even better because they pocket a little extra money from the capital gain between the stock purchase price and the strike price of the call option.

You cannot consistently pick stocks that both have a high covered call option yield and a stable price. In fact the opposite is generally true. Only stocks with high volatility relative to the average stock are likely to offer high option yields. The really safe, stable, established, high-dividend paying blue chip stocks that tend to just track the market and not fluctuate widely are the ones that offer the lowest option premiums.

If a stock has a high yield for covered call writing, the first question you should ask is why that's the case. In general there are only two reasons. Either the stock is extremely volatile and risky such as a speculative drug research company, or its prospects are perceived by many investors to be very positive. Now you might think that the difference would be simple to discern by merely examining the relative option premiums between calls and puts on the same stock. If it's just a volatile stock they should be roughly equivalent, while if it's a big winner the calls should be paying much more than the puts.

In reality, it usually doesn't work this way because for every hot stock soaring to new heights there's always a large group of disgruntled contrary investors chasing behind throwing away their money buying expensive put options hoping to outsmart the crowd by calling a top in this "overpriced" stock. In fact I've observed this happening so often during my investing career that it's become an old joke.

So you can't tell much by comparing the call and put premiums for a given stock because they both are typically high (or both low). Another reason for this is that there are complex option strategies that tend to make it so, but that's a subject to be discussed elsewhere on this site.

What about the misconception that it's OK for some of your stocks to get called away? This is like missing the forest for the trees. You can't have a successful option-investing portfolio by limiting your gains on your best stocks and absorbing the full losses on your worst ones. If you are very careful the best you can hope for is to achieve a lower overall volatility for your portfolio at the cost of accepting a lower total return than you would have by just owning the stocks outright without selling any covered calls. .......

-----

and the worst would be get the timings wrong, and losing capital as in the above examples.

Still leaves us with the idea of protecting portfolios in Global corrections. Any other ideas...?

Edited October 27, 2007 by fletchthai68

[sonicdragon]

Is it just me, or do I keep reading the same thing in different posts ?

Thanks for that Fletch.

I repeat - if you want to participate in the upside, and expect rapid appreciation, then don't sell covered calls. I can't make it any simpler. You only sell covered calls when you are happy for the stock to be called away at the higher price. Nice and simple. No need for repeated protracted examples.

[fletchsmile]

Is it just me, or do I keep reading the same thing in different posts ?

Thanks for that Fletch.

I repeat - if you want to participate in the upside, and expect rapid appreciation, then don't sell covered calls. I can't make it any simpler. You only sell covered calls when you are happy for the stock to be called away at the higher price. Nice and simple. No need for repeated protracted examples.

So where's the answers for portfolio protection from global corrections? Put options? Diversification? others...?

[fletchsmile]

Email just read from Morning Star sums up the textbook on options. So that pretty much covers portfolio protection by options...

http://news.morningstar.com/articlenet/art....aspx?id=208753

....Nevertheless, the rampant fear in times like these creates great investment opportunities for long-term investors...

Edited October 27, 2007 by fletchthai68

[sonicdragon]

Is it just me, or do I keep reading the same thing in different posts ?

Thanks for that Fletch.

I repeat - if you want to participate in the upside, and expect rapid appreciation, then don't sell covered calls. I can't make it any simpler. You only sell covered calls when you are happy for the stock to be called away at the higher price. Nice and simple. No need for repeated protracted examples.

So where's the answers for portfolio protection from global corrections? Put options? Diversification? others...?

IMHO diversification is just the starting point, but a very important starting point. Many people just think in terms of equities when diversifying, but there are many other asset classes to consider (precious metals, base metals, agricultural commodities, bank deposits, soverign bonds, corporate bonds, currencies, hedge funds, art etc etc the list goes on). From there you can rebalance your portfolio by reducing, or even removing completely, exposure to assets you expect to fall in value the most, and vice versa for the ones you expect to benefit. And derivatives can be used as a form of insurance (eg buying puts on equities or equity indices). And all of this should be within the context of investment horizon, risk profile/apetite for risk, need for current income, capital presevation etc.

[sonicdragon]

what happened to BingoBongo's global correction?

I don't think we'll hear much more about that, at least not from bingobongo, until the market has a few more down days.

but i miss his "d@mn i'm good!"

He was right that the credit markets would get worse this week. Default swaps have continued to sell off. Meanwhile gold is up, oil is up, libor is still at a big premium to o/n, dollar is down, yet the equity markets are very resilient. Something has to give.

[disgruntled]

Strange stuff going on out there. It's a whole new investment world now.

[lannarebirth]

Tough market. I had a turn scheduled for today but tried to get filled higher so didn't get filled. I've got two intermediate term indicators which haven't been wrong in 25 years. One says the market bottomed into 4 1/2 year cycle lows on August 16th. The other says it's pushing on a string and just doesn't have the breadth to climb much more. One will be wrong for the first time in a very long time. Got some kind of confluence popping up in Nov 6-9 range, maybe nasty.

One thing's for sure though, it's all about the $USD. Every market on earth ihas been going up on the back of it's weakness. UST's confusing the matter even more.

[lannarebirth]

One wonders where they thought they were going without the Finacials and the Transports.

[bingobongo]

hold on boys and girls..........and hold on tightly......it is getting much worse in the credit world and a lot of that toilet paper was sold to Europe and Asia

Edited November 2, 2007 by bingobongo

[RonanTheBarbarian]

Citigroup in trouble?

More bad news. This could be serious:

from the UK 'Telegraph'.

"Fears of more turmoil hitting global stock markets grew last night after it emerged that Citigroup, the world’s biggest bank, has called an emergency board meeting for this weekend amid fears of escalating bad debts.

Citigroup is seen as a bellwether for the health of the financial system but has been rocked in recent days over concerns that its exposure to America’s sub-prime mortgage crisis is bigger than previously thought. News of the board meeting came after the US stock market closed so investors could not react immediately.

There were concerns in New York that the Citigroup board meeting had been called to discuss the possibility of the bank writing off an increasing amount of bad debt. This could seriously hit its profits.

Citigroup’s shares have already slumped 25 per cent over the past three weeks after the bank wrote off $5·9 billion (£2·8 billion) worth of bad debts."

[bingobongo]

what happened to BingoBongo's global correction?

I don't think we'll hear much more about that, at least not from bingobongo, until the market has a few more down days.

but i miss his "d@mn i'm good!"

He was right that the credit markets would get worse this week. Default swaps have continued to sell off. Meanwhile gold is up, oil is up, libor is still at a big premium to o/n, dollar is down, yet the equity markets are very resilient. Something has to give.

i am "dam_n good" Naam as I am long gold and silver, and short the DOW and the stocks CFC (countrywide) and IMB (indymac), i noticed you dropped the "Dr" from your Naam, i guess you have realized you aren't as good as you thought as I already did long ago......

anyway, back to the worsening credit markets which will either cause global central banks to increase liquidity thereby making your som tham more expensive or a collapse of the credit market.........see my post #206 with the MARKIT charts before it is too late Naam and you may learn something.........additionally you may soon have a yen for yen

sonicdragon, what do you make of the credit market mess? you seem to be one of the few folks on this board who realizes the importance of the deteration in the "markit" charts, is a value of "0" possible for the AA and A tranches?

Edited November 3, 2007 by bingobongo

[bingobongo]

notice today's (Nov 2) "MARKIT" charts (only for AAA as you get the picture, the same bounce oocurs for AA and A tranches).....the ONLY reason for the bump in the tranches on Nov 1/2 is that the FED pumped in $41 billion into the credit market to stop the bleeding which consequently soothed the DOW, but this will not prevent the inevitable as a bulk of mortgage resets in the US occur in March 2008.........go long the YEN and wait for gold to pull back to US$725 as it is overbought.......IMB reports Nov 6 (i am short)

Edited November 3, 2007 by bingobongo

[LaoPo]

Citigroup in trouble?

More bad news. This could be serious:

from the UK 'Telegraph'.

"Fears of more turmoil hitting global stock markets grew last night after it emerged that Citigroup, the world’s biggest bank, has called an emergency board meeting for this weekend amid fears of escalating bad debts.

Citigroup is seen as a bellwether for the health of the financial system but has been rocked in recent days over concerns that its exposure to America’s sub-prime mortgage crisis is bigger than previously thought. News of the board meeting came after the US stock market closed so investors could not react immediately.

There were concerns in New York that the Citigroup board meeting had been called to discuss the possibility of the bank writing off an increasing amount of bad debt. This could seriously hit its profits.

Citigroup’s shares have already slumped 25 per cent over the past three weeks after the bank wrote off $5·9 billion (£2·8 billion) worth of bad debts."

Citigroup Chief Prince to Offer to Resign

Nov. 2 (Bloomberg) -- Charles Prince will offer his resignation as chief executive officer of Citigroup Inc., the biggest U.S. bank, the Wall Street Journal reported. The shares rose in extended trading.

The New York-based company's board will hold an emergency board meeting this weekend, the newspaper said, citing unidentified people familiar with the situation. Michael Hanretta, a spokesman for New York-based Citigroup, declined to comment on the meeting when contacted by Bloomberg News.

Citigroup reported $6.5 billion in writedowns and losses in the third quarter, casting doubt on the length of Prince's tenure. The CEO's departure would be the second in a week among the world's biggest financial institutions. Merrill Lynch & Co. ousted Stan O'Neal after his New York-based firm disclosed $8.4 billion of writedowns.

``The board may have simply reached the point where they can't take the pressure from stockholders and they have to remove him,'' Punk Ziegel & Co. analyst Richard Bove said in an interview. ``They have to have some issue which is huge, pregnant and wasn't previously considered to justify removing him. The only issue that they could utilize is that there's a big writedown.''

Citigroup fell 78 cents, or 2 percent, to $37.73 at 4:17 p.m. in New York Stock Exchange composite trading. The stock traded for $39.04 in extended hours. The company's shares have lost 32 percent this year.

From: http://www.bloomberg.com/apps/news?pid=206...&refer=home

Note: IMHO the 'credit crunch' is far from over...far from over.

LaoPo