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The ideal portfolio is one that fits the owner like the perfect suit or dress. Trading options is just a tool to help create that perfect portfolio. Books written about options tend to focus on the options themselves with no regard to the investor's situation or to the current market behavior except for the advice not to trade "directionally." At first I thought this advice was nonsense, I was doing very well trading options directionally until I wasn't! This became perfectly clear during the covid-19 pandemic. While investing in basically the same stocks as Saul, I was underperforming Saul by a considerable margin. The cause became clear, the very high volatility of the covid-19 market amplified the opportunity losses in very fast growers like ZM and TDOC to unacceptable levels. The cure was simple, split the portfolio into three parts

1.- Security cash, enough to cover my ordinary expenses for at least one year

2.- Income, enough to cover my ordinary expenses two or three fold, currently 1/3 of the non cash assets (stocks)

3.- Growth, what's left over after funding security and income, currently 2/3 of the non cash assets (stocks)

This split is not arbitrary, remember what I said at the open, "The ideal portfolio is one that fits the owner like the perfect suit or dress."

The above led to two different trains of thought that solved the serious conflict of interest that caused the high opportunity loss,

1.- Which are the best covid-19 growth stocks for the growth part of the portfolio? This is strictly Saul type investing, options are off topic! ;)

2.- What's the best income strategy using covered calls? This is applicable only to the income part of the portfolio.

Once the above division of labor is applied to the portfolio, the covered call strategy becomes incredibly simple! Sell weekly at-the-money options with the highest premium to price ratio. Don't worry about "losing the stock," you are after income, the highest premium you can collect. The closest to the money you can get, the better.

This week I found over 10 stocks which would yield over 3% if assigned. 3% in a week is 150% per year!

ticker close expiration strike b-a disc

FSLY 94.92 07/17/20 105.00 2.65 2.7%
BILL 89.60 07/17/20 90.00 3.40 3.7%
DDOG 96.45 07/17/20 97.00 3.20 3.3%
DOMO 35.62 07/17/20 37.00 1.18 3.2%
DT 43.38 07/17/20 44.00 1.40 3.2%
PLAN 49.00 07/17/20 49.00 1.60 3.2%
APPN 49.40 07/17/20 50.00 1.55 3.1%
SFIX 28.26 07/17/20 28.50 0.91 3.1%
WORK 33.83 07/17/20 34.00 1.07 3.1%
UPLD 34.87 07/17/20 35.00 1.10 3.1%

You probably noticed that FSLY is only 2.65%, that's because I'm breaking my own rules, a strike price of 105 is not at-the-money because I would not mind keeping the stock.

Of course, on Monday I bought high (FSLY, BILL, DDOG, & DOMO) and the market crashed. This gave me the opportunity to buy back the options at the end of the day collecting a good chunk of cash. "But the stocks crashed" you might say. Yes, but they are stocks that I would not mind holding and there is a good chance they will bounce back. But the real issue is that your list of candidates to sell calls on must be stocks that you like as long term investments. My list currently has 75 stocks on it, mostly Saul style growth stocks. To diversity the option positions I use lower priced stocks from the list, currently under $100

This pretty much sums up my current thinking about portfolio management and income from covered calls.


I received a couple of emails asking about my covered call strategy. I believe the above answers the questions generally, but specifically:

I'm responding via email because I wanted to ask you about your strategy regarding covered calls, which is OT. I like the idea of covered calls but the trick is finding that sweet spot on the strike price and duration. What is your strategy on which strike price to write covered calls on? Many of these companies are so volatile and I'd like to hold most of them, but would consider selling covered calls on my FSLY, OKTA, and COUPA shares.

The problem with "finding that sweet spot" is that it creates the conflict of interest between keeping the stock and earning a premium. I spent over ten years building the algorithm and it worked well enough on slow growth, low volatility stocks but the opportunity loss was much too high with Saul style stocks. The solution is to specialize, one group of stocks for growth and another for income.

I am particularly interested in your covered call strategy. I have sold puts for income for a few years and if "assigned" I will typically write covered calls on those stocks. My timeframe varies between days to weeks, but rarely more than 30 days from expiration on both the puts and calls.

My strategy changed quite radically these past couple of months. Originally I was trying to navigate "that sweet spot" between income and growth. As reported in previous posts, that strategy was underperforming Saul during bull runs but holding up much better during bear markets. Before the fantastic pandemic induced bull run the underperformance wasn't big enough to bother me and the downside protection was most welcome. That changed this year when the gap widened enough to take action. First I optimized the selection criteria to find sweeter sweet spots. Because this required abandoning dollars-per-day in favor of discount (premium over stock price), the rates I was finding were so high that a rethink of the strategy was required. Making three or four percent per week sounds like usury but option buyers are happy to pay the price!

One has to sell what people want to buy!!!! I have often heard the argument that the professional at the other end of the trade knows more than you do. So what? The agendas differ but if you can find an agreeable price, you strike a deal. There are thousands of stocks out there with long option chains. Our job is to find a handful of stocks with options we like to sell.

Two Stock Markets, Primary, Secondary, and Liquidity

People who don't understand the stock market complain that traders are just parasites trading paper wealth that neither helps the economy nor the world population. This is a grave error based on a lack of knowledge of economic history. One of the most powerful inventions of Capitalism was the Joint Stock Corporation that encourages thousands to pool their smallish resources to fund giant businesses that no single person or even a group of them could possibly afford to fund. When Joint Stock law went into effect in the 17th century, the rate of growth of the world economy increased significantly.

Consider the individual investor in relation to "his" company. The company cannot afford to return the capital any time the investor demands it and the investor cannot afford to "lend" his money if he can't get it back when he needs it. How to solve this conundrum? The primary stock market is where the investors pool their money to fund businesses via IPOs. The secondary stock market solves the liquidity conundrum, instead of getting the money from the company, the investor gets it from some other investor who currently has a surplus. As if by magic companies are freed from pesky investor demands and investors have the liquidity they crave. There could be no primary stock market without the secondary market to solve the unwanted side effects.

But there is more to markets than investors. The key requirement for efficient markets is liquidity and that's the function of speculators. They provide the added liquidity by offering to be the counterpart to any trade, buy or sell. The option market is just a more sophisticated market for speculators.

That's my global strategy, to better understand markets and how to take advantage of them.

Selling puts to buy stocks on the cheap is a good idea provided you stick to solid companies not likely to go bankrupt. The test I would do based on my experience with calls is to compare the results of selling puts vs. just buying the growth stocks. You might be experiencing an important opportunity loss. Do the numbers. It was my opportunity loss that led me to change my strategy.

Denny Schlesinger
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