WHAT WE DO? WE SELL OPTIONS FOR INCOME. WE USE THAT INCOME TO BUY DIVIDEND GROWTH STOCKS!
CHECK OUR TRADES ON OUR MeWe PAGE!


Posted by Martin February 17, 2018
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Trading options process


In order to trade successfully and stay in your comfort zone, I believe you need to know exactly what to do in any situation of your trade outcome.

No analysis, no oscillator, no market prediction will tell you what the market would do next. It is impossible and if anyone tries to sell you a miraculous winning strategy secret, he is lying. If any such secret exists, the one selling it to you would use it for himself and get awfully rich.

Trading is 90% about psychology and the rest is skills and knowing what to do. In order to trade successfully and have consistent returns, you must do the following:

 
1) Have a trading plan and strategy. Always know what to do in any situation.

2) Have enough money in your account so you can manage your trades when they need adjustment. The worst case what can happen to you is to be forced closing your trade at a loss due to a margin call.

3) Never predict the market. Always trade what you see is happening and not what you think will happen because it may not happen at all.

4) Trade only a handful of trades you have time to handle and manage. If you still work a full time job, opening 1000 different trades will knock you out in a sharp sell off. You will not be able to manage them when needed.
 

I am a visual person. It helps to have the process visible. Here is what my strategy decision process looks like:
 

Strategy flow chart
(note, I took the IT classes about 10 years ago and no longer remember exactly how to create the flow charts properly. So some ways above may not be correct and I apologize for it.)
 

When trading options, you must be perfectly OK with anything what’s depicted above. If you are OK with any of the point shown above you will not be surprised, angry or anxious about it and you will trade comfortable. And when comfortable you will also become consistent.




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Posted by Martin August 05, 2015
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Strategy


2020 Strategy
 

A lot has changed since I last updated my strategy. The biggest change is that I decided to stop trading all sorts of long or short SPX trades as listed on subsequent pages of this section. Yes, I realized that this type of trading is not for me. But you must give me a credit for trying hard. I refused to accept the nature of this trading and agree that this was not the way to make money long term. It is fine to make a trade or two when opportunity arrives and grab nice profit here and there, but, I was not able to make it a sustainable profitable trading. I had a few successful months, quickly made $20 or $30 thousand dollars just to get it wiped out by one bad trade. And I decided to stop it and go back to what I was always writing about on this blog (but rarely followed myself – sad).

 

 · Dividend Investing – asset accumulation

 

This is the primary goal and strategy this year – aggressive accumulation of assets. I will be buying dividend stocks, ideally dividend aristocrats and accumulating them to the point when I reach 100 shares so I can trade options against those positions.

I consider the stocks to be my property, like real estate, which I will monetize by collecting dividends, and trading options around those positions.

We will never sell our property (stocks). Once we buy shares, we will not sell. It is like a home you buy. You do not buy a house just to sell it next day because someone thinks your windows are not pretty. No, we buy and hold. That’s why we want to buy a good quality stocks so we can hold them. We want businesses, which grow their dividends, and their managers and CEOs act responsibly. Difficult task as I will have to learn a lot on how to choose the proper companies. In the past, I tried to simplify my selection to pick companies which were on the dividend aristocrats list, yet, it didn’t help much either as in 2020 a few dividend aristocrats cut their dividend.

I will use the benefit of zero commissions trading and will be buying shares of the selected stocks one by one. Now, I can buy one or two shares and start collecting dividends, and it will cost me nothing.

 

 · Monetizing stock positions – Options trading

 

As I said above, I will be monetizing my stock holdings by trading options around those positions. If I save enough cash to trade puts, I will sell put options to buy the stocks (100 shares). The premium from the put option will be immediately reinvested to increase my stock holdings. I will invest into the same underlying stock which generated the income, or re-invest into another stock (mostly the ones which I do not own 100 shares yet, to quickly raise the position up).

If the put gets in the money, I will attempt rolling the put lower and away, but only if such roll will result in a credit trade. If a roll cannot be done for credit, I will let puts assign.

If I do not have enough cash to trade puts out right, I will be just accumulating the stocks until I reach 100 shares. Once I reach 100 shares, I immediately proceed to selling covered calls. Income from covered calls will be reinvested either back into the company acquiring more shares or another stock to raise shares to 100.

If a call option gets in the money, I will attempt to roll higher and away. This can be done for a credit, or I may allow to roll for a debit as long as the debit is smaller than a gain on the stock by raising the profit ceiling. For example, if an original strike was 36 and I roll the call to 40 strike, I raised the ceiling by $4 dollars per share. Thus the debit paid must be smaller than that otherwise I will let the calls assigned, sell the stocks and start selling puts again.

All collected dividends will also be reinvested to raise stock holdings to 100 shares.

Occasionally, I will be trading other options strategies, such as Poor man’s covered calls (PMCC), Butterflies, or equity spreads, to generate investable income, which will be reinvested back to acquire equities.


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Trading options is dead dangerous! Really?

Trading options is dead dangerous! Really?

If you received or read a disclosure from your broker about options trading stating that trading options is dangerous and you may lose money, do not believe it. If you know what you are doing and what to expect from options, they can be very safe and they actually can be less dangerous than trading stocks themselves.

Do you believe me? No? Then read the next text.

Meet the new Monster – selling options

A friend of mine sent me a risk disclosure given to him by a broker which was describing a few trading strategies and tools investors can use. A portion speaking about selling options was especially interesting.

All they were saying about selling options was scary and very discouraging. According to them, selling option contracts causes you taking an enormous risk which can wipe out all your money. Although they agreed that this risk can be partially mitigated by owning the underlying security or having enough cash.

 
(MORE: Covered Call Trading Plan Update)
 

Unfortunately such disclaimer is usually very generic and vague. It is aimed to protect the broker and not you, the client. But the primary goal is to scare you so you won’t trade options at all. It is now an industry standard to make a hype around options and mystify them as something a normal investor cannot do at all cost. Per brokers, trading options is something accessible only by rich investors and professionals. The opposite is true. Everybody can trade options and it is in many cases less dangerous than trading stocks.

Under certain conditions, options can be dangerous. For example, you have no clue how to trade them and yet you do it. Or if you decide selling naked calls, you really will be undertaking an enormous risk. But all other basic options strategies such as naked put selling, cash secured put selling, and covered calls are actually less risky than trading stocks themselves.

 
(MORE: Getting Paid To Do Nothing)
 

Why brokers came up with such disclosures scaring potential investors to death? It is because of their risk they undertake when their clients use naked put selling using margin. Then, put selling is not your financial problem, it is the broker’s problem. They do not want you to trade options because they are scared of you, and your options trading. Therefore, they will never tell you the truth but they will keep you in ignorance and scared to death. I will try to explain this later.

Why selling options is not dangerous?

Let’s take a look at the two basic options we have – calls and puts. Then you can do four basic trades with those options:

  1. You can buy a call (long) – bullish
  2. You can buy a put (long) – bearish
  3. You can sell a call (short) – generally bearish, but can be a bullish trade
  4. You can sell a put (short) – bullish

Buying calls risk

When you buy a call option, you speculate that the stock price will grow. What you can lose? You can lose 100% of money you paid for the call contract. In order to make money, the stock price must rapidly rise above the strike price of the call option, otherwise your trade will be a loss. The time value (theta) will destroy your option before it can even make some profit.

Well, not for me.

 
(MORE: Gambling Vs Investing – What’s the Difference?)
 

Buying puts risk

When you buy puts, you speculate that the underlying stock will go down. Same as with the call option, the stock must move rapidly down in order to make you money. Otherwise theta will destroy your put option. During violent bearish markets this trade makes sense to protect your portfolio and your current positions. Otherwise not for me either.

Selling calls risk

And now we are getting into the “deadly dangerous, risky option selling” (as per the above mentioned broker). There are two trades, two strategies with selling calls.
 

  1. naked calls
  2. covered calls

To be honest, naked calls can be very dangerous. How do they work? If you sell a call for a stock, let’s say AT&T (T) at strike price of 34 a share and you do not own the stock, you are undertaking an enormous risk. If something great happens with the company, for example over the weekend they announce a very good news, then the following Monday, the stock may open higher with a gap (for example the stock jumps up from $33 a share to $150 a share over the weekend). you will have no time and no option to fix this trade.

 
(MORE: Limited Partnership (LP) & Master Limited Partnership (MLP))
 

Then you are in trouble. You will be forced to sell 100 shares of the stock (which you do not own) and you would have to go and buy it for $150 a share in order to satisfy the call obligation. The loss can be huge. But who would trade such a trade? If you have no knowledge about options you may open such trade as a mistake. Or you need to be a very skilled trader in order to manage such a trade and avoid problems (usually traders cover such trade with a different option creating all sorts of option spreads, so they do not stay fully naked.

This was the only dangerous option trading I know of. And now lets see the “piece of cake” part.

Covered calls risk

There are yet another two strategies with covered calls. Each may have either a bullish or bearish expectations. The strategies are:
 

  1. total return strategy, or buy-write
  2. partial return strategy

I like the total return or buy-write strategy. How that works? You buy 100 shares of a stock, for example AT&T (T) at 34 a share, and at the same time you sell a call at 36 strike and collect, for example, 1.50 (or $150) premium. Your call contract is covered by 100 shares of the stock from the beginning.

 
(MORE: I’m Confused… )
 

What can happen to you? Two things. If the stock stays below 36 strike, the option expires worthless and you can sell another contract. If the stock rises above 36 a share, your 100 shares of the stock will be called away from you. You will have to sell 100 shares of (T) at 36 (strike) a share. You realize a gain by selling the stock ($3,600 – $3,400 = $200 gain) plus collected premium ($200 stock gain + $150 premium = $350 total return).

As you can see, with selling calls you actually make more money, than trading stock itself.

So where is the risk? The risk is in a situation when the stock drops too low. In that case the loss on the stock side is so large that premiums collected cannot compensate for the loss. But if you happen to own a dividend growth stock how often these stocks drop so low that you stop sleeping well at night?

And compare it to a single stock trading. What is the difference between a stock you bought at 34 a share and it dropped over the weekend to 10 a share because of bad news? The risk is absolutely the same as when owning a short call contract. You are losing money in both cases, but with options you are losing less.

 
(MORE: Retire Before Dad 2014 Financial Goals)
 

The total return covered call strategy is a bullish strategy and works well against stocks you want to buy and sell with gain.

What about the partial return strategy?

This strategy can be either bullish or bearish. If you are bullish, it works the same way as the total return strategy where you write call contracts against the stock you already own (so no stock buy portion) and you want to sell the stock.

If you are neutral or moderately bearish, this strategy can help you collecting premiums (sometimes called another dividend) while you are waiting for the stock to grow and make you capital gain. This works well in sideways markets.

 
(MORE: Dividends Aren’t Evil)
 

The third expectation is If are very bearish and expect the stock to drop significantly. This strategy is a protective strategy and again you write the contracts against stocks you already own.

If you expect the stock to fall down in bearish environment, you may decide to sell a deep in the money covered call. As the stock falls down, the value of the contract is diminishing and eliminating the loss on the stock.

For example, you have a stock (T) which currently trades at $34 a share. The markets are turbulent and you expect the stock to fall to $25 a share where you identified next major support. You sell a long term deep in the money call, for example June, or even January 2015 25 strike call. For such contract you will receive 9.6 or $960 premium. If the stock falls back down to 25 a share, the call option will become worthless and you either buy it back or let expire. You keep the full premium $960, but your stock will show $900 loss. The entire trade protected you and you are about 60 dollars in positive territory.

Where is the risk? The risk is in early assignment. If your expectations were wrong and the stock continues rising, the opposite trader who owns your call may exercise the option early and you may lose money. But that would happen if you originally bought the stock too high or high enough that the collected your premium won’t be able to cover the loss. Otherwise this trade will work the exact same way as total return trade.

 
(MORE: How To Manage Your TSP Like A Stock Professional)
 

Since I am a visual person I like to see charts and numbers to see the whole picture. If you are like me, here is a flow chart how the entire covered call strategy works:

Covered call


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Posted by Martin January 18, 2020
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AGNC – Time to say goodbye


I have been invested in AGNC since 2008 and I liked this company. But it is time to depart from this investment as it no longer meets my requirements for dividend investing. I wish, it was. But it isn’t.

At first, the company looked great. They started increasing dividend every year, although the very first increase in 2009 from 2.51 annual dividend a share to 5.15 was large and raised many questions but the company earnings and cash flow could cover the payout. So, why not. I liked it.

Then, in 2010, the company increased the dividend again to 5.60 a share Earnings and cash flow covered the payout well above. And that was the last increase investors ever saw. Two years later, as earnings started deteriorating, the company went on a path of 6 consecutive years of dividend cut.

 
AGNC dividends
 

At first, I believed in the company, and I loved them (a thing a true dividend growth investor should never ever do!) and provided excuses to myself and everybody who asked for the company, that “this is just a temporary, it is to protect the company’s ability to make money and improve”, and all sorts of other excuses. And when the company changed into monthly dividend paying company I loved them even more because I thought, I would be making money faster by re-investing the dividends.

There are better companies than this.

So I am selling all AGNC shares from all my portfolios and re-allocating to Helmerich & Payne Inc (HP) which is a dividend champion, increasing dividends every year since 1973 for 46 years. Their current dividend yield is 6.29%, and annual dividend growth 1.4%.




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Posted by Martin February 02, 2019
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January 2019 trading and investing results


S&P 500  2,706.53 +199.68 (+7.96%)  Dow 30  25,063.89 +1,736.43 (+7.44%)  Nasdaq  7,263.87 +628.59 (+9.47%)
 

September results

I just finished reporting December 2018 and we are again at the end of another month. True, I reported December late.

January started off slow, but ended up well. Our accounts are up and recovering from last year slaughter. But the question is, are we out of the forest or is more carnage coming? Boy, I wish I knew.

In January, we continued trading successfully in our IRA account and made nice income of $2,661.00 in received premiums. In our other accounts, TDA and ROTH, we didn’t trade this month. We only managed opened trades to roll what was necessary to do.
 

We are posting our results:
 

 
IRA Equity:

IRA account equity
 

ROTH Equity:

ROTH account equity
 

TD Equity:

TD account equity

 

We post our trades on our Facebook page.

 
 

 · Dividend stock investing

 

Dividend investing is doing great on both accounts – ROTH and IRA. We keep using 50% of all options income and buy dividend stocks. IRA account keeps growing fast with new stocks being purchased every month. ROTH is more or less stagnant.

 

Here is a review of our accounts stock holdings:

 
Traditional IRA
Trading Results
 

ROTH IRA
Trading Results
 

TD account
Trading Results
 

January started very slow and at first, it looked like we will not be able to purchase any shares this month as we didn’t meet cash flow criteria to purchase new shares. However, two weeks before month end our income jumped up and it allowed us to buy a few shares to add to our dividend income portfolio.

In January 2019 we purchased the following shares:

 
IRA purchases:
Dividend growth stocks
 

It wasn’t easy to choose which stock to buy as many great sotcks in our watch list were indicated as “buy”. We decided to add STX in the end.

At the very last week of the month, our income increased enough to allow us more purchases next week.
 

We haven’t purchased any shares in ROTH or TD this month.
 

We keep spending 50% of our options trading proceeds to buy good dividend growth stocks using our screener to get a better entry into the stocks. Although capital appreciation is not our goal but a secondary target, timing the entry creates good results as our positions are mostly up. However, do not be too excited, any large selloff can temporarily send those stocks down again. It is a dividend income what matters to our portfolios, not the portfolio value and capital appreciation. It seems to be evident that using options to grow the portfolio is the right way to do.

 

 · Dividend Income

 

IRA dividend income
Trading Results
 

ROTH IRA dividend income
Trading Results

 

 · What’s next in the stock market?

 

I am unsure what to expect from the market in upcoming month. January 2019 was definitely one of the best months since 3 years ago. We went up +8%, almost 9%. We went up however, too much and too fast.

I wish this rally / recovery continues but, when reviewing historical charts, it could actually be bad for the market if we do not see any pullback or consolidation at the current levels. Many bearish charts from the past since 1955 indicated bad things happening in similar situation when the market hasn’t pulled back.

Thus the market is giving us mixed signals. I can’t say where we are heading from now.

Nevertheless, I held a believe through the entire 2018 year that the market selloff was just a correction and not a bear market. I still think, this is the case. Although we have mixed signals and we should expect any outcome in this market, it is starting to look like more and more as the previous bullish instances in the past:
 

Trading Results
(Source: CCM)
 

I recommend Chris Ciovacco’s (CCM) video who covers the historical charts and market behaviors and compares it to today’s market conditions to assess his equity allocation. I believe, his outlook can be helpful to assess the next market’s move and trade accordingly:

 

 

Happy Trading!




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Posted by Martin October 14, 2018
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Correction not bear market


It is funny watching people panicking about last week market decline.

Many panic and predict bear market. Many are guessing what happens next. Some are drawing their charts drawing lines of the next decline and claiming historicity of their claim.

 
Predictors
 

Claiming historical evidence and predicting the drop all the way down to 2275 indicates more a lack of studying the history than knowing history.

And ignoring broader context.

Bear markets don’t come in 2 days

Bear markets really do not start in a week or 2 days of a sharp drop. Drops are usually smaller not so violent and they are preceded by other warning signs. This market dropped suddenly and violently. Even the “we know all” media were baffled and guessing what may have caused such drop.

The bear markets are preceded by other signs which would warn you in time that bear market is coming: raising interest rates, declining corporate profits, and investors’ optimism.”

Although FED is raising rates, they are still historically low. In December 2007 interest rates were almost 5%, today, the rates are at 2.5%.

Corporate profits are raising with no sign of slowing. And investors’ optimism? They are spooked by any flow of a breeze out there. The amount of bearishness is outstanding. Many people are still sitting aside in cash, spooked by never ending predictions of bear market coming “tomorrow”. According to AAII 63% of regular investors are neutral to bearish. Only about 35% are bullish.

Add to it fear of valuation, trade war, political comments of the President, FED intervention, and fear of slow down in China, Italy, Greece, Egypt and others. The markets do not turn bear upon fears. Corrections? Yes, they do.

Fundamentally, this bear market is not showing signs of being rolling over.

Technically, this market is not showing any signs of a rollover either.

Look at the following charts with simple moving averages from 1930, 2000, and 2007, in comparison with 2018. Do they look same or similar?

 
technical analysis
 

If you think that they are same then yes, the bear market is coming!

But you may also need to visit an optometrist.

Some spooked investors claimed that we cannot compare long term trends with short term time frames. But the long term time frames determine the short term.

If the long term indicates that we are in a cyclical bullish trend, and in fact, we broke from a long term consolidation (24 year long) in 2016, we are more likely to see a growth than another bear market:

 
technical analysis
 

If you know in what cycle the market is you may rest calm about any corrections or short term bear markets. I recommend watching a video made by Chris Ciovacco analizing the market from a distance. This definitely helps not to panic and stay the course when selling like this happens:

 

 

Corrections are healthy and needed for the stock market to go higher. There is no need to panic. However, there is a need to watch the market because although fundamental and technical reasons for this bullish market hasn’t changed it may change any day. and it will change for sure. But be assured that you will be able to react to the change. The rollover of the market is a process and it takes days and months before you see the market making bearish moves. Last week’s movement wasn’t it, yet.
 




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Posted by Martin May 28, 2018
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Entering a trade


Market fear A reader of mine recently sent me a question: “…is it possible to show me step by step a trade you have recently made with puts?” I decided that it may be a good idea to write a post depicting the entire process step by step with pictures and show how I decide and place a trade.

Although, it may be difficult to do as no trade is exactly same and there will always be the “human factor” in each trade. I try to eliminate as much the “human factor” as possible but it is not always bad idea to have the judgment the computer doesn’t have. Some emotions and fear is good to have, some trade adjustments may be OK to let run or roll earlier than what a computer would do; and there will never be enough space to show all variations a trade may have.

Trading options is not same for every market. It is different when trading equities and when trading indexes. In this post I will explain why and how I trade options using SPX and stocks.

 
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Posted by Martin May 26, 2018
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Weekly results May 25, 2018


S&P 500  2,721.33 -6.43 (-0.24%)  Dow 30  24,753.09 -58.67 (-0.24%)  Nasdaq  7,433.85 +9.42 (+0.13%)
 

Market fearThis post actually contains results from the last two weeks as my internet modem refused to work last week so I was dependent on my phone only.

Last week trading was good for neutral trading. Opening Iron Condors paid the most as the markets got pretty much nowhere. Last week we rolled a few trades which needed attention and opened a few new trades which mostly ended successfully.

We also collected nice dividends last week and added a few new dividend aristocrats to our account. I consider the last two weeks successful.

If you wish to see details and our results on Net-Liq, options income and new dividend stocks we added to our portfolio, please continue reading.

 
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Posted by Martin May 05, 2018
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Weekly results May 04, 2018


S&P 500  2,663.42 +33.69 (+1.28%)  Dow 30  24,262.51 +332.36 (+1.39%)  Nasdaq  7,209.62 +121.47 (+1.71%)
 

Market fearI am trying to get back on track posting regularly our trading and investing results.

Why are we posting our results and financials when we are not a publicly traded company? Can it hurt our business and me personally? Does it make sense and can our readers be interested in these posts which some people consider boasting? And if it is a boasting, should we continue?

What do you think the stock market is going to do next? My outlook is mixed though. I can see bullish pressures but I also see bearishness in the market. Who will win this battle? Bulls or bears?

And at the end review our investing and trading results for the last week.

 
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Posted by Martin April 21, 2018
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Weekly results April 20, 2018


S&P 500  2,670.14 -22.99 (-0.85%)  Dow 30  24,462.94 -201.95 (-0.82%)  Nasdaq  7,146.13 -91.93 (-1.27%)
 

Market fearMarkets were again struck by fear selling and media were coming up with tons of reasons why. At first, it was tech stocks such as AAPL driving the markets down, then semiconductors, later oil… all in one day. You could play the miney, miny… game to pick the reason. Granted, they do it all to entertain. However, the selling appeared to be purely technical, as I will present in this article, and quite predictable. Not that I predict the markets, I still have expectations but I do not trade to fulfill those predictions but use them to help me navigate the trade.

Overall, I am still bullish in this market, although my convictions is getting slimmer seeing how weak the bulls are. Look at it this way, media were all in excited expectations of earnings season pushing this market higher. So far, it is not happening.

 
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