Most people are rational in their non-financial lives. They don’t believe in leprechauns or expect to throw a ball like Tom Brady, write poetry like TS Eliot, sing like Nina Simone, or cook like Alain Ducasse.
Yet many of these same people are overly delusional about markets. They constantly strive to maximize their profits, while ignoring the powerful forces under their control, such as dividends and compound returns. After all, dividends make up about 45% of historical stock returns.
These investors are so determined to “maximize” their investments that they routinely buy high and sell low even when they think otherwise.
The overconfidence extends to predicting how stocks will react to gaming interest rate hikes to corporate earnings reports. The more subtle the event or theme, the higher the belief.
All of this always kicks into high gear during the earnings season parade and ahead of Federal Reserve meetings like the one that ends Feb.
Investors are better served by focusing on the financial realities, rather than speculating about results that often flip a coin for anyone but the little-knowledge practitioner, or trying to play things that are opaque to most and beyond the control of many. becomes more accurate over time.
We have endorsed this theme quite regularly, and we repeat it in protest of the bullshit that is being passed over as more and more careful analysis. This approach seems particularly relevant at a time when rates are soaring and stock returns may not be so easy, given the competition from bond markets.
We’ve discussed options as portfolio hedges, cash margin sales, and stock proxies many times, and once again we’re back to the humble veiled call.
Strategy is something every stock investor can use in their portfolio. Trading involves nothing more complicated than selling a call option at a strike price above the price of the relevant stock an investor owns.
Covered search is typically created with searches that expire in one to three months. The goal is to increase the return on a stock. You can think of the money received for sales calls as “conditional dividends.” What is the status of the dividend? You must be willing to sell the stock at a higher price.
CH Robinson Worldwide
(marquee: CHRW). Freight forwarding and logistics specialist has just been added to the list.
S&P 500 Dividend Aristocrats Index,
It consists of companies that have increased their dividends every year for 25 years or more.
With CH Robinson stock at $96.84, investors can sell the March $105 for about $1.50. If the stock price falls below the strike price, investors hold the buy premium, which compares favorably to the stock’s most recent quarterly dividend of 61 cents.
If the stock is above the strike at maturity, investors are obligated to sell the stock at the effective price of $106.50 (the strike price plus the premium received). It can also be set before the search ends to avoid assignment.
The strategy has tax implications if used in a taxable account, but paying taxes comes with territory.
Simple investing strategies aren’t exciting and that’s okay. Good investment is the practice of repeatable, unemotional, effective discipline. If you can use options strategies to reinforce good investing habits – buy low, sell high, generate revenue and reduce risk – you have accomplished something worthwhile.
Steven M. Sears is president and chief operating officer of Options Solutions, a specialized asset management firm. Neither it nor the firm has a position in the options or underlying securities specified in this column.
Email: [email protected]