Sorry for the length of the post. What I want to talk about is very specific and I have trouble verbalizing it. I did do tons of research before doing it. I’m trying to establish a repeatable, sustainable, no-market-timing strategy for the bulk of my portfolio. I started to manage my money myself about 2 years ago. I learned from many sources that you should only speculate on 25% of your total capital (for which I’m testing pure swing trading and different option strategies). For the rest, you should not do market timing. Note that this is a school of thoughts, but one that I agree with. I used the John Bogle method: a passive portfolio composed of broad market etfs and bonds. My first move was to get all my money out of my bank’s 2% fees mutual fund and into the market into different products, all with <0.1% fees. That was a huge win by itself as I’m saving almost 2k per year. What I want to talk about is the other 75%. I want to point out that I find it very weird that I have almost NEVER seen any mention of this principle. Maybe this is just something people don’t talk about because it’s more boring, but I’ve read hundreds of reddit and forum posts about any kind of trading, and there is barely any trace of discussing an efficient passive portfolio strategy. It looks like everybody is using a speculative strategy on 100% of their money, and the rest is just buying and holding 100%. I guess that if you’re really good, you can probably do riskier strategies without much stress… But I’m sure a 100% passive approach is not the best answer. If history repeats itself, in 30 years I should be looking at an average of about 10% annualized gains, probably less. That’s ok, but not great. The way I was diversified, I had 0 stress during the pandemic market crash because I knew it’s always just a question of months before it comes back up. But I feel like I should create a revenue during those drops, to get a better average total return. So, I started researching relatively safe option strategies. There’s not much you can do in RRSP and TFSA accounts. I think the answer is in covered calls. I just find something attractive into getting paid to MAYBE sell your stocks at a certain price, on which you still make a gain, then buy it back immediately. I just can’t wrap my head around a simple, effective, repeatable way to do it to manage two things at the same time: tanking market, and too fast rallies. My problem is that I can’t find any information other than the really basic stuff on how to establish a covered call. I think that the real answer resides in not doing it mindlessly. Timing things a bit, and adapting strike prices and expirations. I don’t want to do it for nothing, in the sense of losing too much capital gains for some revenue. I think the only official additional information I’ve found is the CBOE study that showed that selling OTM overperforms buying and holding the market, whereas selling ATM underperforms it. Here is some of my train of thoughts: -I never want it to be too complicated. I work between 50 and 60 hours per week, so if I spend time on my trading, I want it to be for the 25% more speculative trading that have greater potential. -I realize diagonal spread (poor man covered call) could yield a better return. Unfortunately, you can only sell premium backed by stock in registered accounts. -Underlying: I don’t want to spend time creating a portfolio of several companies that would yield good covered calls, nor do I want to speculate that in the long run, they will do well. I think the answer is in the ultra-liquid, juicy premium SPY. Being on total market removes doubt from my mind when a drop happens, as I know that it’s only a question of time that it goes back to the top. This gives me more flexibility. -Expiration: I’m going towards selling really short calls. Every resource concludes around 30 DTE is the best because of theta decay. I think that’s true for some other strategies, but not for what I’m trying to do. The way the market moves around, I feel uncomfortable being locked for such a long time. I’m totally against concretizing a loss by rolling a losing call up, just to have more capital gain potential. It makes no sense, as I’m in for the long run, and the market could just drop again before going higher, making your loss completely useless. I’m juggling between going weekly, or even every Monday-Wednesday-Friday. When you add up the repeated small premiums, it seems the return is between 2 to 4 times greater than monthly calls. And I love the fact that if you buy-write and the underlying shoots past your strike, yes you leave some money on the table, but you get exercised right away and buy back instead of a potential huge rally that can happen in a month. The amount you get from the frequent selling, in normal market conditions, seems higher than the difference between the stock price and your strike from some gaps. -Strike: Not sure where to go with that. Studies showed 30 delta OTM beats ATM. I think it’s more complicated than that. I feel like the huge ATM premium is too good to pass. If I ignore some stuff, just for the kick of it, let’s imagine a perfect world where you have unlimited capital to buy back your 100 shares when they go up and you get called away, and that you still do it when the market tanks and the stock recovery is super gradual so you don’t fuck up your capital. Selling only ATM 3x a week, forfeiting any capital gain, with the option prices I’m seeing now, would yield 26 676$ revenue on a 31200$ investment (85%). I know this is simplistic, false and delusional, but damn I feel like I need to put that in the equation. Of course, the OTM also has its place. In a bull market, it’s pretty cool if the gaps are not that much higher than your strike, and there’s either no exercise or one but it makes you sell barely lower than the underlying, while still making around 30-50$ 3x a week. In both situations, I feel like the short-term choice is giving you more control. -Adjustment when underlying shoots past strike: Maybe I’m wrong, but I feel like the only thing to do in this case is let yourself be exercised. You got paid to accept a certain gain. I feel it’s super weird when people say you should pay back everything, then pay hundreds of dollars more just to finally not sell your stock… or try to roll for a credit, which would imply concretizing the loss and locking yourself in a really far expiration to try to make that loss back. -Adjustment when stock tanks: Any small up and down movement is actually great. It makes you not exercise any short-term call, and you can even resell calls lower than your initial stock price, because the total revenue is going to be greater than the potential capital loss. But what to do when you have something like a pandemic or a popped bubble (or any medium drop really)? Do you continue like usual? When you have a capital loss in your account, I feel like it’s pretty dangerous to have the possibility of getting called away really low while the underlying keeps gapping up super-fast. After the covid crash, we all thought it would take much more time than it did to come back up to the level it did in three months. Maybe there will be a second wave and a second crash, but still, will it just again take the same time to come back up? In this case, is the answer instead just to do nothing at all (just like you should do when buying and holding) and just restart selling your calls a few months later? Or something in between, like switching strategies. Can’t do much in a registered account, so I guess you would simply buy puts. But they’re really expensive, and you’re entering market timing territory. -Collars: I’ve looked into constantly buying a put while selling your call. I can’t see how to make it worthwhile. You’re transforming your revenue strategy into a less-expensive downside hedging, which would only pay with good drops. Ugh! So many variables... I'm pretty confident that there is something to do with that. I can’t be alone trying to establish an efficient relatively passive long-term portfolio! Did anybody find a way to do it? I don’t want everything cooked in the beak, but I feel like testing everything in a paper money account would take years because of the nature of the portfolio! Many I’m really just on the wrong track and there is a way easier and efficient passive portfolio method. The only channel I’ve ever seen being excited about covered calls is “Core Position Trading” on Youtube, but he’s way too vague about everything (he sounds honest, but seems to be dragging every video by not saying much to get some revenue), and it’s not exactly what I want to do (more speculative). I'm also curious about what you guys feel about the 25% of portfolio to attribute to strategies that are speculative in nature. Do you care about that? How do you go about it? Thanks in advance for any insight anybody can bring!
Hi there fellow Canadian. I've worked at an IIROC registered firm for over a decade in an investment management role, essentially creating model portfolios mostly out of funds and stocks. Not all funds are bad - most are but not all. I'm also a day and swing + options trader. There are a lot of funds out there that give almost a guaranteed 6-8% with high sharpe ratios so why buy bond ETF's, unless it's for an asset allocation purpose when there is a buying opportunity in that space (typically High Yield bonds after a large market downturn)... You need to do more research into funds before going an all stock and etf portfolio. There are a ton of garbage ETF's out there; especially those that are built into robo advisors model portfolios. 25% speculative is a broad statement as everyone defines it differently and you haven't defined it for yourself. Generally speaking 25% is too much because the assumed risk is probably between losing it all and grossly under-performing the market if incorrect...? You should test your covered call strategy on a small portion of your portfolio before you do it for your entire accounts. Since you work ~55h a week I doubt you can keep up and rebuy the stocks that get called on you at a good price. If you are choosing good quality stocks and have presumably have alpha's greater than 1 and you are writing ITM contracts then guess what you are going to get these exercised almost every single time. Covered calls wont give you the return you are stating without leverage which I'm sure you know. What I suggest is if you REALLY believe that the stock is in a weekly top or set to go down then sure write an ITM call. Under normal market conditions, 70-80% of the year I would suggest writing OTM calls ~2% out. Half the income, possibly, but you'll at least capture the appreciation. Also if you want to rebuy a stock maybe look into selling ITM puts instead of market order buys. I wouldn't focus too much about the greeks when you are writing calls - especially ~ a week out - and when you are writing ITM or even slight OTM. Greeks are more important if you are buying options.
Yeah, no difference between selling naked puts vs covered calls, and as you pointed out CBOE indexes provide good indication of how you might do. I’d actually recommend signing up for WealthFront and let it design your portfolio with your input. No need for anyone else designing it when the technology has progressed to do it for you. Everything else you described is fluff and noise made by people who try too hard to make money and end up never outperforming the market, or basically losing more than they expected. You’re trying to do part-time what hedge funds are professionally doing full time and still fail. Many people may talk about temporary gains and “income” but if you could look at their P&L you may not see better performance than simply holding SPY. Anything that might have a chance of working was already implemented in the form of ETFs and mutual funds, or some hedge funds. But only a few hedge funds can claim having an edge, and even they may have couple good years and then underperform. There is just no proof and no sign of any income generating system from “passive trading”, except for some professionals who might’ve spent thousands of hours prepping, analyzing and testing variety of trading methods. And even then they trade very actively, not passively.
Don't listen to Guru lol. Do your own research. Wealthfront is a US firm you are obviously Canadian so it will omit all the Canadian hedge funds and alternative investment trusts. Not only but that their flagship fund that they advertise has a 5 year annual return of 6.16% - LOL.
4 ideas...In no special order. Could you buy a condo or townhouse in Canada. It sounds like you don't have time to maintain a house, unless you have a family. Next...Look into DRIPS. Royce Value Trust has them and they can do very well. Reinvest and no capital gains. The last two would be to buy QQQ or SPY...Do a leap. Do a covered call for Jan 22 at about 15-20% higher than the current price. If it drops you still have quality stocks that get revised once a year...The junk goes out, quality stocks in. If it gets called away...Repeat the process. If it doesn't get called away...Do another covered call (leap) way out of the money. If you have a March 2020 situation and your call expires...Wait a few months then write another leap...
Thanks for your answers! guru : For the moment, I don't believe a robo-advisor would do better than me with very little effort. I actually think the rest of what you said is true, but only partially. The market would eat people that don't define a good plan, or don't stick to it, or have ridiculous expectations that leads them to risky strategies. But I'm 100% sure that you can establish something repeatable and simple and beat the market. But it's an interesting debate, and I was actually totally on the side of buying and holding the market before. BlacknBlue : -I should have mentionned my asset allocations lol. I actually started with age% as bonds, to quickly realize how silly that was when I got more information and experience. Moreso because they didn't do what they were supposed to in the last crash, which I though was go up while stock crashes. So I not long after entering the market, I lowered to 10% as bonds, and today I'm even less than that. I'm thinking into going 0% as soon as I've got all the pieces of the my puzzle. The rest is canadian equities (VCN) and twice as much international or US equities (XAW and XUU). Because there is not much possibilities on the canadian side for options, I transfered enough to buy 100 SPY to do buy-writes. -I pretty much agree to your 25% statement. In my head, my very big objective would be to do between 10% and 20% per year, every year. My more realistic objective would be either to only have positive years, else to beat the market of at least 5%, no matter if it's a negative of positive year. -I do know I have faith that anything that seems easy is not. The only thing I can't get my head around is I could lower this number a LOT and still be at like 40%. I just mean the revenue from selling premium, of course any underlying capital loss would balance that. The juicy price of ATM calls keeps pushing me away from OTM, and also offers a bigger downside protection. -I absolutely wanted to do the wheel, aka sell puts to buy stock before doing covered calls, but unfortunately most of my money is registered so impossible to do. All in all, I just don't know where to look anymore. The info about this is very scarce or limited. I think I'm like at 40h of research, and I feel I'm hitting a wall. :/
For most people I’d just advise to invest into SPY over time, but when someone talks about portfolio and asset allocation, then there are tolls for that, with some guidance and control. While your example shows exactly how difficult it is to generate consistent income even for the pros who utilize modern theories and technologies.
Cabin111: I own a condo, but you probably meant buying a second one to rent? Like you said, free time is not on my side. I refused to buy a house because I can barely take care of my condo I did a quick look at Royce Value Trust, seems to have a very poor performance. But I do the drip principle myself. Every single dividend or interest I receive, I immediately put back in the market. Selling a leap is actually a good idea to think about. It's a more passive approach. Unfortunately, it barely pays and doesn't offer much downside protection as you probably have to wait around 2 months before the expiration to be able to buy it back low enough that it's worth it. I feel like having many many calls expire is better.
The guy is smart enough to get to this point but you are recommending just invest in spy but you also advise him to get a US firm to do his asset allocation for him - a firm that sucks at A/A themselves. Stop.