Strategy

Covered Call Report for November 2015

Please see the Covered Call Report for November 2015 by clicking the link below:

Covered Calls – November 2015

Harry Hindsight – An Investor’s Best Mate

Over and over again traders fall for the trap of having too much hindsight. It is not just the new traders that I am referring to but experienced traders alike. No matter how long we have been trading for, it is very easy to fall into the “could have… should have” mentality.

For example, say we entered a bullish trade on the US dollar because the macro factors support a stronger dollar. We may have spotted a double top formation but neglected it as we believe that the fundamental forces should prevail in the long run. Next thing we know the US dollar enters a period of free fall and the trade quickly loses a lot of money.

In this situation it is very easy to go back in time (in our mind) and accuse ourselves of neglecting the double top formation that indicates a price fall. In reality our trades may have a two year time frame and short term technical analysis would probably have little effect on the outcome. Still when the trade starts losing money we start thinking, “I could have delayed my entry and got in at a lower level”.

Consequently, the next time we see a double top formation, we ignore the fundamentals and close the trade straight away, not wanting to make the same mistake again. This time though the trade reverses and rallies through the roof.

Call it conspiracy or call it karma, but the market does have an interesting way of teaching us lessons.

The thing with hindsight is that we look back at an event and see it as something that is bound to happen, given the facts at that time. That is not necessarily true.

Imagine a coin flip. Say we flip a coin and it turns up heads. Just because it did turn up heads doesn’t mean that it was bound to turn up heads. If we happened to go back in time and flip the coin again, probability theorem tells us that there is a 50/50 chance that the coin could turn up heads or tails (okay maybe the sci-fi guys might argue with me).

If something as simple as a coin flip could have two random outcomes, the markets with all their complex mechanisms would obviously have multiple random outcomes also. The one that happened is only one of many outcomes that may not repeat in the future.

It always bothers me to hear someone say I told you so as if the actual outcome is the only outcome that was bound to happen. With a different outcome, I told you so could easily be ‘oops’ and vanish into thin air.

Don’t get me wrong, the idea is not to abandon the analysis and due diligence process as that is what separates traders from gamblers, and lets us learn from our true mistakes. Instead, it is important to realise that the outcome we observe is only one of many possibilities, and future trades with the same facts may not have the same outcome.

Recognising the bias from having too much hindsight is important because otherwise we are prone to keep changing our strategy to try to trade perfectly. Unfortunately with trading there is no perfection as there always remains an element of luck at the end of the day.

The way that we succeed is to stick with strategies with a proven edge and make minimal alterations to our strategies. Any changes would require careful consideration on how any change would have affected all of our trades using the same strategy, rather than how it could have benefited just one trade.

As traders we are constantly bothered by our lack of foresight and the curse of having too much hindsight. The lack of foresight is something that we all recognise and that is why we seek further education and guidance from people whom we think have better foresight than ourselves.

Trending Tactics – Trading made simple.

Trending Tactics with Pilkington Trading has a fresh new look. Please press the link below to see yesterday’s report that has the current trends and our entry points/stop losses on each product.

Trending Tactics 6.5.15

Trade all of the products in the report from anywhere, at any time with one low commission account.

Receive daily information on new buy/sell signals and where to move your stop-loss in relation to your current positions.

Trending Tactics looks to take the guesswork out of currency, commodity and index trading. Markets can be fast moving and unpredictable, but once they start a trend it can last a long time. This strategy consists of being long or short the instrument at all times with a stop and reversal order in place that moves constantly to limit risk and increase returns.

Since this strategy has been developed (1999), there have been staggering results as you can see from the far right column:

Follow the link to find out more:

http://pilkingtontrading.com.au/trending-fx/

Please register your interest through the Contact Page if you would like to follow this simple, effective strategy.

Covered Call List – May 2015

Please click the link below to see the Covered Call Spreadsheet that illustrates the premium received on a Covered Call (Buy Write) strategy based on the last traded floor prices for all Dow Jones stocks. Also illustrated, is the return generated if the Covered Call is exercised upon expiry.

Covered Calls – May 2015

Performance (ROI):

11.52% (YTD, Annualised)
19.42% (2014 Calendar Year)

Covered Call (Buy Write) Strategy:

A Covered Call otherwise known as a Buy Write is when an investor purchases a parcel of stock and then sells a corresponding call on that stock so as to receive premium or cash for doing so. This strategy is very good at providing an additional monthly income stream for shareholders and somewhat protecting against a fall in share price.

One option gives exposure to 100 shares in the Australian market and 100 shares in the US market. (Can be adjusted occasionally due to Corporate Actions)

As an example:

A client purchases 100 shares of XYZ Corp for 50.00 on the NYSE. The client then sells a $51.00 call expiring one month from now @ $0.45 and receives $45.00USD ($0.35 x 100) in cash premium.

The investors upside is now capped at $145.00USD at expiry:

(Strike price ($51.00) – Stock purchase price ($50.00) + Premium Received ($0.45)) x 100

This equation is the premium received for writing the call, plus the potential capital gains from the stock holding up to the sold call strike.

The investors downside risk is that the stock can fall to $0.00 which would incur a loss of 49.65USD (Cost of Stock ($50.00) – Premium Received ($0.45)). The likelihood of this occurring is extremely slim as the investment will be made in strong, proven companies such as those in the Dow Jones or ASX20.

Calculations:

The Monthly Premium Received (%) is the option premium received divided by the purchase price of the stock (stock price).

Monthly Return if Exercised (%) is calculated by:

(Strike Price – Stock Price) + Option Premium = X

X/Stock Price = Monthly Return if Exercised (%)

1 Covered Call = 1 Sold call option and 100 bought units of stock.

If you have any questions regarding this strategy, please contact me or request a call.

The Benefits of Margin Lending

Margin Lending may be new to some of you. It is loan is a loan specifically set up to lend you money to invest. Typically a Margin Loan is set up to enable you to borrow to invest in shares and managed funds. A Margin Loan provides you with the opportunity to invest more than you could using your own money and increase your potential returns.

Similar to purchasing an investment property where you put down a deposit of 10%-20% and borrowing the rest, Margin Lending allows you to buy shares or managed funds with as little as 20-50% deposit, depending on the funds and shares you intend to hold within your loan. This is known as ‘gearing’ your investment portfolio.

As an advisor, I am constantly finding new ways to generate my clients greater returns and reduce the risk within their portfolio. A diverse portfolio is ‘spreading’ the risk and in the long term is the best known way to reap the rewards that the stock market offers. Diversity can be achieved through investing in different sectors, trading different products and employing different strategies within one’s portfolio. A strategy that is very good at generating long term results is known as Covered Call Writing (hyperlink takes you to my previous post about the strategy).

With interest rates at extremely low levels, variable interest rates on margin loans have followed suit and are extremely attractive at this point in time. With partners within the industry we are able to access discounted rates again.

Currently we have access to 6.5% margin loans of values less than $500,000 and the rate can be negotiated beyond this.

I am currently taking advantage of these low rate loans to get my clients into covered call writing strategies with strong, trending, high yielding stocks. The theory behind this is simple. The stocks I am looking to invest in with my clients have yields of:

BHP: 3.47% TLS: 5.37% ANZ: 5.23% NAB: 5.89% WES: 4.41% WOW: 3.78%

Lets take Telstra for example. With the yield of 5.37% our loan is effectively only 1.13% p.a. It makes complete sense to take advantage of these low interest rates when the equity market is recovering and leverage our portfolio to take advantage of this conservative strategy.

Let me known if you would like any further information.