Decide For Yourself

On December 19th I had an article published on RealMoney (which you can read here for free) that warned of what I believe are the perils of a covered call strategy that involves trying to generate 3-4% per month. I wrote the article in response to a TSCM video (scroll down to December 14th to find the video) with the co-authors of a book on the subject called Covered Calls and Leaps a Wealth Option by Joseph Hooper and Aaron Zalewski. They also have a website called Compound Stock Earnings.

The basic tone of my article, which I hope you will read, was skeptical and I said then, as I do now, that I don't think 3-4% in monthly premium is available except in stocks that are higher in volatility. I have talked about this on a past video along with a couple of posts. In the TSCM article I give some examples of what I mean.

Yesterday I heard from Mr. Hooper, who had initially given me permission to publish his emails but then said it was only OK if I read his book. His emails were so insulting that this episode scores very high for unintentional comedy.

I did not know about their website until I saw it in his auto-signature. The site has two banners crossing the screen, one of which was called Covered Calls Closed in September. By my count this banner had results for six different stocks that they sold calls against. The returns for all six ranged from 2.7% to 7.8%. I did not find anything associated with this banner to tell me if the six stocks (which I list below) were all of the trades placed for that time period or not. If anyone delves into the site in more detail and finds this info, please leave a comment with the details.

Their video was about generating 3-4% per month. My article was a response to that strategy. In the article I posited that 3-4% per month would require buying very volatile stocks to get that kind of premium for just one month. The six stocks are listed with their respective one month standard deviations, keep in mind the one month figure for S&P 500 SPDR (SPY) is 6.71, all of the data is from PortfolioScience.com.

Gymboree (GYMB) 37.17
BE Aerospace (BEAV) 32.90
Select Comfort (SCSS) 17.09
InterDigital Communications (IDCC) 18.58
MEMC Electronic Materials (WFR) 31.69
Continental Airlines (CAL) 43.25

To be crystal clear all six of these trades worked.

Do six stocks make up an entire portfolio for a month? If so is this mix diversified? During the stress test that occurred in the market last spring (as measured from May 11-June 15), IDCC +12%, GYMB -5%, SCSS -18%, CAL -19%, BEAV -30%, WFR -32%. In that same time the S&P 500 was down about 7%.

Clearly I have mined data with these numbers and concede any flaw you care to mention but that is the most recent stress test the market has had, it came as a surprise, as they usually do and I think to my point in the TSCM article was that to get 3-4% a month these are the types of stocks you need to buy and they could go down by similar amounts as the six listed here in future market stress tests. While I believe some exposure to these types of stocks makes for good diversification an entire portfolio of them, which is how I take their video, makes for some sleepless nights.

I hope you will check out the various links I have put in this post and leave a comment on this subject.