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Author: blacktreechaser Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35367  
Subject: buy/write IBKR if interested Date: 6/20/2014 12:56 PM
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Interactive Brokers IBKR is $23 +. Dividend yield is 1.7%

Jan 2015 $24 strike has a bid of $1.15. After commission, I think that's roughly 8% return. Add it the 1.7%, and you get close to a 10% annualized return.
They report earnings in early July.

For what its worth, I previously bought shares and wrote call options against only some of it. And I also bought a few call options, which I very rarely do. And to date, I've been happy with the results.
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Author: tjberko One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35325 of 35367
Subject: Re: buy/write IBKR if interested Date: 6/20/2014 11:59 PM
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These covered call writing strategies seem to me to be a very risky way to earn 10%. You have little upside and the downside could be substantial. IBKR, trades at a 20 PE and traded close to 30% lower than its current price during the year. If it drops just 1.5 points between now and January you will lose money on the trade. Then you will be looking for a trade that gets you 20% over the following 7 months to get back to your 10% goal :-)

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Author: aleax Big gold star, 5000 posts Top Favorite Fools Global Fool Pro Community Winner Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35326 of 35367
Subject: Re: buy/write IBKR if interested Date: 6/21/2014 11:47 AM
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These covered call writing strategies seem to me to be a very risky way to earn 10%.

Yeah, unfortunately buy-write (and put-writing) returns are currently depressed by the market's very low implied volatility (which some have even tagged as a sign of over-confidence in the market, though there's plenty of controversy about that interpretation), as exemplified e.g by a ^VIX below 11 (!).

As a result I've curtailed my use of buy-write (and put-writing) strategies, until enough "normal" fear and anxiety return to the market (I'm not asking for a panic -- a "normal" ^VIX above 15 might be enough!-).

In the meantime, there are still slightly more complex option strategies, such as diagonal spreads, that can provide more acceptable income returns if deployed with savvy and prudence.

But, I don't think they're suitable for discussion on a bonds-focused board as they do require more learning and ideally some hand-holding until the investor gains experience and confidence in deploying them -- used otherwise, derivatives can indeed prove to be "weapons of mass financial destruction" as Buffett once tagged them.

To anybody interested I would recommend the premium service "Motley Fool Options" -- not sure if it's open to new subscribers right now, or if it has one of those great offers for "all your money back if you cancel within one month" which let you get a good feel for how a service operates, without paying for the subscription unless you really like what it buys you; if not, I'd advise waiting until it opens that way again (and meanwhile one can get on the waiting list to be alerted when it does).

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35328 of 35367
Subject: Re: buy/write IBKR if interested Date: 6/30/2014 5:18 PM
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These covered call writing strategies seem to me to be a very risky way to earn 10%

Can you name anything these days paying 8% that is not risky; likely even more so?

You have little upside and the downside could be substantial.

The upside is locked in - the 10%.

The downside is locked in. The price of the stock minus the call premium if the stock goes $0. In that respect, the downside risk is less than simply owning the stock without the covered call.

If it drops just 1.5 points between now and January you will lose money on the trade.

No. You will still make about 7-8% in income (call premium + anticipated div). You will only "lose money" (principle) if you were to sell it after January and while it is still down.

There is no requirement to sell it in January if the option expires out of the money. In fact, that is often the desired result for those that wish to roll their options forward.

Note, if the stock drops any time prior to January (those 1.5 points), the value of the option will also go down in value, allowing a person the ability to buy it back, at a small profit, and allowing that person to cut their loses on the initial stock purchase.

Covered Call writing is generally considered a conservative method of income investing, not a risky one.

http://www.investopedia.com/articles/optioninvestor/08/cover...

Widely viewed as a conservative strategy, professional investors write covered calls to increase their investment income...

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Author: tjberko One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35329 of 35367
Subject: Re: buy/write IBKR if interested Date: 6/30/2014 6:54 PM
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Can you name anything these days paying 8% that is not risky; likely even more so?

Here are some ideas for you:

A preferred like ISH-B. It has an 8.5% qualified dividend giving it an after tax equivalent yield of 10 percent or more depending on your tax bracket. And it has a very narrow trading range unlike IBKR which has much more price risk.

I would also suggest you use IBKR as a broker and not as an investment. You can borrow there at 1% there and use margin to create a very safe 8% yield.

The preferred UBP-D is very safe and almost has a 7.5% yield. You can use 30% margin and create an 8.5% yield or use 100% margin and create a 14% yield. I am currently 100% leveraged on UBP-D.

Covered Call writing is generally considered a conservative method of income investing

If covered call writing is a conservative method of income investing, than what forms of income investing do you consider to be riskier than covered call writing?

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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35330 of 35367
Subject: Re: buy/write IBKR if interested Date: 6/30/2014 9:50 PM
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tiberko,

You wrote, The preferred UBP-D is very safe ...

I would beg to differ. UBP is a very small REIT with a market cap of about $160M. The common has only traded 2 blocks in the past 5 days.

UBP-D has only 1M shares outstanding. There is no liquidity to it either. Its seems to generate more transactions. But today's volume was a whopping 763 shares ... meaning its price could drop drastically if someone has a sizable holding and decides they have to liquidate RIGHT NOW. (Or if their broker exercises a margin call and sells a large block at market.)

Also, ...or use 100% margin and create a 14% yield. I am currently 100% leveraged on UBP-D.

Its true that REITs typically have hard assets underlying them, which should support a price floor. A reliable income stream would also help support a price - assuming comparable yields remain relatively unchanged. But REIT and preferred prices can drop drastically - as most did during the real estate / credit crisis of '08 & '09. This much leverage would likely wipe out your holdings if there were any serious negative news... I would argue that this is not "safe" by any definition. Bold? Yes. Safe? Hardly.

- Joel

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Author: tjberko One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35331 of 35367
Subject: Re: buy/write IBKR if interested Date: 6/30/2014 11:28 PM
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joelcorley writes about the safety of UBP-D:
I would beg to differ. UBP is a very small REIT with a market cap of about $160M. The common has only traded 2 blocks in the past 5 days. UBP-D has only 1M shares outstanding.

Joel, you should do a little more research before you oppose someone's
recommendation. UBP has a class A common stock, UBA, which gets all the trading. It trades 90,000 shares per day on average. The market cap of UBP is $650 million, not $160 million, and there are 2.45 million shares of UBP-D outstanding according to the latest 10Q, not 1 million.

Sure, UBP is not big, but why should that concern me? Bear Stearns, GM, AIG, Citigroup and Lehman Brothers were big. UBP is a very conservative REIT, in the safe shopping center segment, with good locations and a very good balance sheet. And on top of that, the preferred stocks makes up 44% of the company's liabilities so there is not a lot of debt in front of the preferred in the company's structure. That is what matters, not the size.

its price could drop drastically if someone has a sizable holding and decides they have to liquidate RIGHT NOW

If because of it's size, a large sell knocks the price down 5%, that is a positive - a great buying opportunity that I would not ever get in a large cap stock. Illiquid stocks make for the best trading vehicles. I've followed this stock for years and, unfortunately, I have never seen that kind of inter-day volatility except during the crash when everything was getting killed.

But REIT and preferred prices can drop drastically - as most did during the real estate / credit crisis of '08 & '09.

Yes, but UBP went from 18 to 13, much less of a drop than the S&P 500 despite its small size. So I don't concern myself with size, only credit risk. And since the discussion was about alternatives to covered call strategies, I maintain that 30% leverage on UBP-D (which gets you around a 9.5% yield) is much safer than any covered call strategy that might get you 9.5% at best. If you had done a covered call strategy on RIG (which was mentioned in the original post) in 2008, a lot of good that income from the $3 call option would have done as the stock went from $150 to $50.

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35332 of 35367
Subject: Re: buy/write IBKR if interested Date: 7/1/2014 9:57 AM
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If covered call writing is a conservative method of income investing, than what forms of income investing do you consider to be riskier than covered call writing?

Junk bonds with the same yield (in this market, that usually means a significant discount on the price). I'd take a stock I can sell before it hits zero than a bond than may simply default and go into bankruptcy even though it is trading at 60% of par.

I own some junk bonds, but I own them for speculation and not income. I usually win but just two weeks ago I received a bankruptcy notice on one that was trading in the $60 range.

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Author: aleax Big gold star, 5000 posts Top Favorite Fools Global Fool Pro Community Winner Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35333 of 35367
Subject: Re: buy/write IBKR if interested Date: 7/1/2014 7:34 PM
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Junk bonds with the same yield (in this market, that usually means a significant discount on the price). I'd take a stock I can sell before it hits zero than a bond than may simply default and go into bankruptcy even though it is trading at 60% of par.

I own some junk bonds, but I own them for speculation and not income. I usually win but just two weeks ago I received a bankruptcy notice on one that was trading in the $60 range.


I only own junk bonds through a well- and actively-managed fund (ETF to be precise), HYLD. The managers' background is in good part in "vulture" investing (focusing on recovery from bankruptcies), even though they haven't had a chance to show it off in HYLD especially (as bankruptcy rates have been super-low for years now!-).

I wouldn't own individual junk bonds any more than any other specific bond -- I used to, but I've come to realize actively managed funds with reasonable expenses are way better in the debentures world (no indexing makes sense there, esp. in junk!). I happily pay up for HYLD to do their own credit assessment (seriously, who trusts S&P, Moody's, and Fitch, AT ALL any more, after the subprime-mortgage debacle?!) -- they deliver better returns than indexed junk ETFs already, and when the fecal substance hits the fan (as inevitably it will), *watch out*!-)

I don't see my HYLD somewhat-overweight position as being at all speculative, within the context of a well-diversified debentures portfolio (which itself is about 35% of my overall portfolio, with 65% in equities AND a little options on equities and indices).

What's speculative? E.g, penny stocks (I don't have any of those)...:-)

Is any of MY portfolio speculative? Maybe -- exposure to NLY with its double-digits yield might fairly be classified as such, for example.

However, _in the context of a well-diversified portfolio_, SOME exposure to risky areas such as mortgage REITs is not "speculation", or, not necessarily -- as long as you have a case for low or ideally negative correlation to the core of your portfolio (e.g: NLY's beta 0.20, NKX's -0.08, &c), small positions in otherwise-"speculative" securities are actually feasible as helpful, prudent diversification!-)

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Author: CM001 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35352 of 35367
Subject: Re: buy/write IBKR if interested Date: 7/26/2014 6:27 PM
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In the meantime, there are still slightly more complex option strategies, such as diagonal spreads, that can provide more acceptable income returns if deployed with savvy and prudence.

I assume by diagonal spread, you mean buy outer month Deep in the money call and sell near month at the money or slightly higher than the current price of the underlying.

What you are essentially doing here is substituting the underlying with the deep in the money calls. Basically reducing your capital commitment and due to low volatility you pay low premium. One has to recognize the risk profile of such strategy is higher than buy-write, of course provides much higher income due to limited capital deployment.

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Author: CM001 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35353 of 35367
Subject: Re: buy/write IBKR if interested Date: 7/26/2014 6:34 PM
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The preferred UBP-D is very safe and almost has a 7.5% yield.
I see this is callable anytime. What are the chances this could be called in the next 1 or 2 Quarters. I am just too lazy to go through all the financials and would just take your opinion. :)

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Author: tjberko One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35354 of 35367
Subject: Re: buy/write IBKR if interested Date: 7/27/2014 12:05 AM
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I see this is callable anytime. What are the chances this could be called in the next 1 or 2 Quarters. I am just too lazy to go through all the financials and would just take your opinion. :)

UBP-D has been callable for over 4 years, and has not been called. Even when the 10 year yield was 1.6% they did not call this preferred, so why would they call it now in a higher interest rate environment. Additionally UBP-D is only selling at 20 cents over par so what can you lose. You will get a partial dividend if it is called in the near future and that partial dividend may well be higher than 20 cents.

You can see how cheap UBP-D is by comparing it to UBP-F which is not yet callable. UBP-F has a yield to call of 6.3%. A 6.3% yield on UBP-D would price the preferred at $29.75 per share. If UBP-D was not callable, this is the price that UBP-D would trade around, so you are getting an enormous price discount simply because of a very slight call risk which will cost you nothing if it happens. I have a massive position in UBP-D because at $25.20 the downside risk is extremely small relative to all other preferred stocks with good credit quality. If suddenly investors want a 7.6% yield from a UBP preferred, UBP-D will fall to 24.65 for a 55 cent loss, while UBP-F will fall from 25.60 to to 23.40 for a $2.20 cent loss. This provides great price safety for UBP-D.

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Author: CM001 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35355 of 35367
Subject: Re: buy/write IBKR if interested Date: 7/27/2014 12:24 AM
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thanks

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Author: tjberko One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35356 of 35367
Subject: Re: buy/write IBKR if interested Date: 7/27/2014 12:32 AM
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No problem. I hope you will decide to buy some UBP-D. As you know, I follow all preferreds and this one has the least downside risk of any preferred out there and yet has a higher yield and a better balance sheet (credit quality) than the most preferred.

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Author: aleax Big gold star, 5000 posts Top Favorite Fools Global Fool Pro Community Winner Motley Fool One Everlasting Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 35357 of 35367
Subject: Re: buy/write IBKR if interested Date: 7/27/2014 8:50 PM
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I assume by diagonal spread, you mean buy outer month Deep in the money call and sell near month at the money or slightly higher than the current price of the underlying.

Actually what I buy are typically very-long-time LEAP DITM calls (as deep as it's practical while remaining reasonably liquid in terms of bid-ask spreads) on which to repeatedly write not-too-short-term just-OTM calls (I'd rather not write every month, despite the higher TV/day this may appear to offer). There are multiple reasons for this, but, again, I don't think a board on "bonds and fixed income" is the appropriate venue, as such strategies' income is anything but fixed and their behavior pretty much uncorrelated with bonds (I do have a substantial allocation to debentures -- mostly bonds/fixed income, but there's nothing wrong with floating-rate senior loans either, though they're not fixed income nor are they bonds either, whence my preference for the broader, more accurate term "debentures").


What you are essentially doing here is substituting the underlying with the deep in the money calls. Basically reducing your capital commitment and due to low volatility you pay low premium. One has to recognize the risk profile of such strategy is higher than buy-write, of course provides much higher income due to limited capital deployment.

Actually the capital-at-risk in buying a DITM call is lower than in buying 100 shares -- if the company goes bankrupt you "only" lose the premium paid for the call, which, as you say, is less capital than you put at risk buying equity. The `risk` as weirdly defined in much of financial literature -- as equivalent to volatility -- is indeed higher, but, to me, `risk` has to do with permanent impairment of capital, not with daily or weekly fluctuations up and down:-).

But, again, this has little to do with bonds, or fixed income. There IS a free TMF board about options, and I think that's where (if anywhere) the discussion should be...

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