Higher highs, higher lows

[hendi_alex]

IMO, I've been operating over a fallacy for the past couple of years. It relates to playing defense and limiting volatility. This idea just hit me a minute ago, and is so obvious, that I'll just give myself a big 'duh'!

One of my rationalization related to call writing is that writing calls is defensive and also that is reduces portfolio volatility. And it does reduce volatility in that the portfolio rises a little less in and up market and drops a little less in a down market. I have always perceived that as a good effect, a good trait of call writing since it causes me not to get nearly so emotional during strong market movement in either direction. If I'm not overly emotional, then I'm much less likely to make so knee jerk reaction during such moves.

This morning I was was thinking about what the most desirable trait would be for my portfolio NAV. I'm thinking that answer is, [a steady pace of hitting higher highs and hitting higher lows during all stages of market expansion and contraction while at the same time beating S&P500 performance.] Especially with dividends being retained and with additional funding as well, given a long enough tracking period, the trend line should clearly show decent upward progress, characterized by both shorter term and longer term higher highs and higher lows.

My conclusion is that selling calls is self defeating in so much that they get [in the money] and then put a damper on the upward momentum of the portfolio value. The options cash flow is attractive, especially to boost income from lower yielding stocks, but I am beginning to think that the overall effect is to decrease total returns, while only providing only slight benefits as a defensive strategy and only giving the illusion of increased cash flow.

I'm seriously reviewing the extent to which I've been using my covered call strategy and will probably reduce the times and amount that such is being done.

[fiveoh]

(09-30-2013, 07:40 AM)hendi_alex Wrote: IMO, I've been operating over a fallacy for the past couple of years. It relates to playing defense and limiting volatility. This idea just hit me a minute ago, and is so obvious, that I'll just give myself a big 'duh'!

One of my rationalization related to call writing is that writing calls is defensive and also that is reduces portfolio volatility. And it does reduce volatility in that the portfolio rises a little less in and up market and drops a little less in a down market. I have always perceived that as a good effect, a good trait of call writing since it causes me not to get nearly so emotional during strong market movement in either direction. If I'm not overly emotional, then I'm much less likely to make so knee jerk reaction during such moves.

This morning I was was thinking about what the most desirable trait would be for my portfolio NAV. I'm thinking that answer is, [a steady pace of hitting higher highs and hitting higher lows during all stages of market expansion and contraction while at the same time beating S&P500 performance.] Especially with dividends being retained and with additional funding as well, given a long enough tracking period, the trend line should clearly show decent upward progress, characterized by both shorter term and longer term higher highs and higher lows.

My conclusion is that selling calls is self defeating in so much that they get [in the money] and then put a damper on the upward momentum of the portfolio value. The options cash flow is attractive, especially to boost income from lower yielding stocks, but I am beginning to think that the overall effect is to decrease total returns, while only providing only slight benefits as a defensive strategy and only giving the illusion of increased cash flow.

I'm seriously reviewing the extent to which I've been using my covered call strategy and will probably reduce the times and amount that such is being done.

Are you retired or in the accumulation phase?

[ChadR]

Your covered call strategy is more aggressive than my strategy. I only sell covered calls on stocks that I think are greatly overpriced (WM though it then rose even higher after it was exercised) or on stocks that are specuative in nature (currently WIN collecting the great dividend while hoping it gets exercised). I don't like to sell calls on stocks that I plan on keeping. On my shares that have been exercised, I will rebuy WM once it drops in price since I believe that it is currently grossly overvalued and increases it dividends better that what it currently does.

[hendi_alex]

Retired about 9 years now. My plan is to invest 100% of our social security in a cash account and to only spend the income generated from that accumulation. So I would call that accumulation and figure that it will help us deal with inflation.

I'm drawing IRA's down for five or six years (three more years), then after that period will only draw off about 80% of the income stream until RMDs kick in.

Each year NAV growth is adjusted for both withdrawals and freshly invested money. My plan for investing our social security benefit is temporarily on hold, but should get back on track early next year. We are a bit ahead anyway, as the account is up to a little over $30K but have only been drawing my modest s.s. check for about 18 months. All dividends have been allowed to accumulate thus far.