Riskless(?) Covered Call????

wayneL · Mar 6, 2007

Hi,

I'm not a particular fan of covered calls, but was pointed to this blog post: http://www.callwriter.com/blog/2007/03/05/new-riskless-covered-call-strategy/

It's John Brasher's blog and of course he is trying to pull in some seminar business, but the concept intrigued me. I would love to have a look at this strategy to see what he is on about... haven't been able to bust it from the "clues".

Anyway here's the post - Any ideas what it is?:

New âRisklessâ Covered Call Strategy
March 5th, 2007 by John Brasher

At my intermediate-level covered calls seminar this weekend, the Prosperity Powerhouse, I will explain how to use a mind-blowing strategy for making money with covered calls and limiting risk to a few percent. This strategy starts out with a risk not exceeding 5% (sometimes less) and the actual risk quickly becomes zero.

Thatâs not literally and completely ârisklessâ - but to lose money you would have to make an effort.

The new âportfolio marginâ rules will really power this new strategy to the moon. On April 2nd the new rules will come into effect and will base available margin on the portfolioâs risk. For example, it will be possible when the margin rules change, using my new technique, to run a 1,000-share trade in IBM ($91.79 earlier today) and sell the APR 95 Call, putting up only about $5,000 when using full margin.

To run that IBM trade on margin today using my new technique, you would have to put up 50% of the total trade debit, about $50 per share ($45,000+) - compared to $5.00 per share or less under the new rules, about $5,000.

By the way, the risk when this trade is run is about $0.05 per share. Thatâs right, a nickel a share. Ooh, and trading commissions.

In my new ârisklessâ strategy, the risk - the maximum possible loss - in covered call trades is limited to 5% or less upon trade entry. And after one or two covered writes, the risk is eliminated entirely. Then the profits start rolling in and youâre protected no matter what happens.

(Iâm throwing out a lot of hints here.)

I will be teaching this technique at my seminar this weekend. There are no plans for another seminar this year, so you donât want to miss it. I may teach it via video DVDs later this year, but am undecided. I may add lists of trade candidates, a calculator and support for this strategy on CallWriter, or create a separate site. Itâs all up in the air, but seminars (which take a lot of time) will be increasingly de-emphasized - try to get to Orlando this weekend if you want to know how to do [nearly] riskless trades.
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Wayne Gibbous · Mar 6, 2007

I don't have time to beat this guy down (the blogger), let's just say he's FOS.

I'm sure some others will give him hell...

AmbushHillbilly · Mar 6, 2007

That excerpt is so full of crap it's hard to disect.

I suspect he's putting on equity collars or verticals and leaving that "minor" detail out to make you sign up.

DeltaSpread · Mar 6, 2007

The only riskless options/equity strategy would be where you buy an equity, write a call & buy a put at the same strikes. This will not work on most average stocks. You would have to get something with a little more beta. If you want a real world example, check out NVDA as it is hovering around the $30 mark. An April collar would yield you a dime & a June collar would yield you 30 cents or so with 0% risk.

Tying up all of your money for 3+ months to pocket 30 cents is really not prudent or practical, unless maybe you are a conservative billionaire. I think if you annualized this kind of return it would be somewhere around 5%ish. Assuming of course you use no margin in this kind of strategy, because that would wipe pretty much all of your profits out.

wayneL · Mar 6, 2007

I'm thinking along the same lines, in which case he certainly is FOS.

Each strategy I can think of either doesn't match the "clues" (eg collars) or contains significantly more risk than indicated.

More creative stuff usually has vega risk that is easily hidden from noobs.

just21 · Mar 6, 2007

Maybe he is using a LEAP or longer term put option that is paid for by a couple of months of short calls. You could just do covered LEAPS.

MTE · Mar 6, 2007

Quote from DeltaSpread:

The only riskless options/equity strategy would be where you buy an equity, write a call & buy a put at the same strikes. This will not work on most average stocks. You would have to get something with a little more beta. If you want a real world example, check out NVDA as it is hovering around the $30 mark. An April collar would yield you a dime & a June collar would yield you 30 cents or so with 0% risk.

Tying up all of your money for 3+ months to pocket 30 cents is really not prudent or practical, unless maybe you are a conservative billionaire. I think if you annualized this kind of return it would be somewhere around 5%ish. Assuming of course you use no margin in this kind of strategy, because that would wipe pretty much all of your profits out.
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Won't work, those 10-30 cents are cost of carry on the stock, so there's no zero risk profit there.

MTE · Mar 6, 2007

Quote from wayneL:

Hi,

I'm not a particular fan of covered calls, but was pointed to this blog post: http://www.callwriter.com/blog/2007/03/05/new-riskless-covered-call-strategy/

It's John Brasher's blog and of course he is trying to pull in some seminar business, but the concept intrigued me. I would love to have a look at this strategy to see what he is on about... haven't been able to bust it from the "clues".

Anyway here's the post - Any ideas what it is?:
More...

That guy is FOS as others have suggested.

FullyArticulate · Mar 6, 2007

Apparently it is a carry trade (buy conversions/reversals for a credit equivalent to the risk free rate). I pointed this out on the blog. He believes the new margin rules would allow you to own 1000 shares of google for $18k.

wayneL · Mar 6, 2007

BTW the "Wayne" commenting on the blog is not moi.