Book Review on Covered Calls: “Show me the Money” – Ron Groenke 11/19/11

I just finished reading the book “Show me the Money” by Ron Groenke. It is about placing covered calls and naked puts for a monthly cash income.  I give the author a rating of “A” for the book. It is an easy read despite his including tables and charts on trades that might scare off some readers. I think it reads like a simple story book with a happy ending – showing you how you can make 25% return per year or more on your investments. Sounds too good to be true? Read the book. His website is:  http://www.rongroenke.com/index.php

What are covered calls? A covered call is when you buy the stock and sell call options against it, collecting the call premium. By doing covered calls on a portfolio of stocks that are either going sideways or moving up, it is possible to generate an average of 25% returns on your portfolio. Ron also shows how one can sell naked puts that are out-of-money (OTM) to rack up additional premium; but only do it in stocks you intend to buy for covered calls. If the stock crosses the strike price at expiration, then you land up owning the stock or the stock gets “put” to you so to speak. Ron would immediately turn around and do a covered call on the stock that he purchased at a discount, as he collected premiums on the put options sold.

The obvious weakness to this method is that there is no downside protection other than the offset the call premiums provide. If the market changes and is in a freefall, there would be significant losses. And I dislike losses. Ron points out this risk; but still presents the method as an almost sure thing. That is only true if the stocks are going sideways or going up. If we can combine Covered calls with market timing, it can be a powerful tool and one can truly generate significant money of your portfolio, making it in fact  a money tree.

In order to follow this technique, it would be wise to learn about options first. I learned options through Optionetics. That gave me a good grounding – but I must say it was rather expensive classes. Still, it gave me an added tool I wanted to use for protecting my portfolio, and just reading books was a hard way to learn options.

Ron also offers software that you can lease at about $220/year for the whole package that enables you to select the right stocks to do covered calls on, and time it, and find the best options to sell against these stocks. There is a free walk through software demo that is not too bad. Like any software, it would take some getting used to. Overall, it would be possible to generate $120K income against a portfolio of $360K.

My next steps will be to read the book over again. There are many useful nuggets of information. I am probably more comfortable selecting stocks using TC2007 software from Worden Bros from the S&P500, using some of the fundamental criteria that Ron mentioned. Then I would generate technicals off Metastock to give me Buy and Sell signals that are relatively slow. I would like to use this method on five stocks that have good fundamentals and have a buy signal against them. Run the covered calls on a portion of my portfolio and see how it does. No hurry to jump in immediately. I will do my homework over the next month and start in 2012. Using covered calls to generate income of your portfolio such as Rollover IRA accounts is certainly a good idea but it is best to have a plan and then trade the plan. Still need to know when to enter, when to hold it and when to fold it…

DIA Up and the Money tree 11/13/11

Attaching a chart on DIA. This is an ETF on the Dow Jones 30 stock. The signal is up on this since 10/11/11, more than a month ago. Meanwhile my more elaborate system on SPY still shows an exit on long, which holds me back a little. And my 1/month 401K system has had me dipping my foot back into stock funds like Vanguard Explorer Admiral and Artisan Mid-Cap value. I did buy some SPY put options in one of my R/IRA accounts as protection on my 401K long positions and will leave them on till I get a positive up signal on SPY.

Other than that, I have been thinking about a money tree. I went to the local chapter AAII meeting this weekend and picked up a book for reading. It is called “Show me the Money”, Covered Calls & naked Puts for a monthly cash income by Ronald Groenke. The money tree method so to speak. Plant a tree at the back that grows dollar bills that you can keep taking, as long as your underlying stock doesn’t get decimated..

I have rarely practiced using covered calls as I consider them risky with no downside protection. Yet I have met at least a couple of people who have practiced this strategy quite successfully. I think it might be worth considering when combined with tactical asset allocation (market timing) based on slow signals that don’t get you in and out frequently.

The author starts of with an example where he shows a 21.44% return per year over 28 months. Buy the stock and sell the call options and collect premium. This method certainly has downside risk but I will keep my opinions bottled and take a look at what the author has to say. It will take me a little while to digest the strategies he promotes and then I can combine it with some of my own ideas. What is wrong with buying a chunk of high grade stocks like WMT, PFE and KO and selling options on it over and over again as additional income? I think there are nuances I will want to add and do the what if scenarios so that I am prepared with the proper reaction if the stock goes down. But even if one did this in a mindless manner through downturns, would we not come out ahead in the long term? Capital preservation is still important to me so I probably won’t participate when we get major downturns. Still, this might be a good method for sideways and up markets. I like a slow upward moving equity curve on my portfolio and this might add to it. More on this later.

401K transitional times 11/6/11

It is that time of the month when I take a look at my 401K choices and run my Metastock software through its monthly algorithm and decide whether to keep the same choices or make changes. This month I see that the results are mixed; suggesting a transition taking place.

I have two 401K plans to look through. One is the current company and the other belongs to a previous company. Both are with Fidelity. In the first one it is a tussle between Bond funds and Vanguard Explorer Admiral and Artisan Mid-Cap Value. The other is between Fidelity Govt Income and a Mid-cap fund and Spartan 500. That means I will turn my cash funds into equity based on about 40% of my 401K. I am going less than 50% as my slower weekly technical charts on each of the equity funds are still showing down signals. The only up signals are still from Fidelity Govt income and bond funds. Although I see that the daily chart on Fidelity Govt Income has turned in a down signal.

Therein lays the problem with technical analysis. If you look hard enough, you will always find a reason to do nothing – and with all the analysis, stay frozen - analysis paralysis. When the signals are all tuned together, it is usually too late. It is best to weigh the trading systems but have a trading plan to follow consistently without muddying the waters with additional analysis. There is plenty of uncertainty out there but I feel it is appropriate for me to dip my feet into the 401K equity funds now.

This is a change from previously being in money market, cash and Fidelity Govt Income funds only and no equity funds. I am also modestly into GLD (gold ETF) in my R/IRA fund based on my last week’s post.

Gold - AU 10/29/11

Gold - A precious yellow metallic element. Atomic number 79. Specific gravity 19.3 at 20 degrees C.

Friday I got a buy signal on GLD. Usually I like to see a pullback before I get in but the better method might be to get in partially and then add to my position when there is a pullback.

The simplest way to own gold is to buy into the Exchange Traded Fund GLD. It is not as nice as actually having gold certainly, but it is more efficient to buy and sell it just like a stock. I love the look of gold; whether it is the 22 Kt jewelry that my wife owns (and is safely in the bank vault) or the gold 1 oz coin that she has in a necklace (that is also in the bank vault). We don’t own that much of gold, but the investing public certainly is trading GLD in larger and larger numbers. I was not surprised to find that the volume of the stock Coca cola (KO) traded every day is around 12,500,000 and is half that of the volume traded in GLD, which is at 23,500,000.

My current chart on GLD is attached below. No guarantees that this will be a winning trade. But as part of my alternate investment portion of my portfolio, I have decided to keep gold as a certain percentage of it but using tactical asset management (timing systems). That means when I get long signals, I will buy gold and sell it when I get a sell signal. In the long haul, I will make a decent return on GLD but I have to keep in mind that any one signal can turn out to be a loss.

Waiting for my long entry 10/23/11

The market has been on a fast rise and my systems have flashed some long signals recently. The DJ30 symbolized by the ETF, DIA has now broken through its 200 day exp mov avg. That is a positive sign. I expect SPY to do the same.  The tough part for me is to be patient and wait for the pullback. Even tougher part is deciding how much pullback is enough and when to enter long. I want to go long when the trend is up but buy on a dip. In my 401K it is simpler as I will simply react to my 1/month analysis. I suspect I will see some long entries but that is TBD next week. No one said this personal portfolio management business is easy when you are a conservative manager and don’t like losses. Still, I should not complain.

CREE has not participated in the markets improved behavior and is still in a down trend. Not good. AMD is also looking very weak and has no sign of life. ORCL looks better. The solar companies have got annihilated. Look at FSLR and TAN and how bad they look. Those would have been terrible for covered calls. It is a mixed bag in the conglomerates that I track. TXT is showing a little life but volume on the up side is fading. JCI is holding up and so is TYC.. HRS is still weak after its fall from 53 to 37.  IR must be reacting to its last fundamental news – probably less than optimistic. In the energy area, it is again a mixed bag. AES, BP and SU Suncor energy are moving up but the coal companies are hurting. PCX and ANR are way down. Materials companies have taken a beating as well and some are showing signs of wanting to get back up. DOW has a buy signal but SCCO copper is still down and FOE is still reeling from its dive down. RGLD has come down from its pedestal. X has moved down but with a divergence is looking like it wants to go up. In the currency sector, I see buy signals on FXA, FXE and FXY. UUP the US dollar is long but has been swooning of late as the US markets have climbed. One sector that has weathered the storm well are the non-cyclical; CL, CLX and HNZ. I like ketchup. Perhaps I should look to do some covered calls with these. In my transportation watch, I see F moving on up and FEDEX is also acting perky. The Utilities are also holding up well while paying nice dividends. DUK is certainly on a tear.

Summarizing my look at my stocks in various sectors, the non-cyclical and utilities look strong. Transportation is showing some early strength. The rest are all split and you have to find your spots. Think I will wait for the pullback.

Is it Time to Buy? 10/16/11?

The Dow Jones 30 stocks represented by the Exchange Traded Fund DIA fired off a buy signal last week. On the basis of the buy signal the answer is yes, it is time to buy; but I would prefer to wait for a pullback. I think it is inevitable, given the fast rise we have seen in the stock market in the last two weeks. I see that DIA is now hovering right at its 200 day exp moving average. That is looked upon as a resistance line and I am thinking that DIA will pullback, gather some strength and then climb again. Still, it is a lot easier not to second guess these signals and just follow them.

My 401K funds analysis is due next month, so I do not intend to jump in and violate my 401K fund management rules. If we keep up the momentum, then my 401 K monthly analysis will also pick up the up signal and tell me to get back in to rising equity funds. I can wait.

I am regretful that I missed picking up the buy signal that was on SNDK a while back. I saw it but did not act upon the information. Why? Because I am still somewhat plagued by a hesitation to enter stocks when the market majors still have a down signal. That is the super conservative nature I have. Yet it is logical that before the major ETFs perk up, we will see faster action from technology areas like SNDK.

I took a quick look at CREE and it still has a down signal although it has recovered from 24 to 29. It may be another stock to watch, although the long downward plunge since January is foreboding.

The 50 day ema (red line) on DIA is below the 200 day ema (black line). It will take sometime before this becomes another major up move which has to have the 50 day ema above the 200 day ema. If it wants to do its slow gyrations and collapse and take us to deeper depths, as the gloom and doom scenarios suggest, then we will get a down signal in due time and that might be quite a good spot to take on some put positions on DIA and make a little money on the down side…

For now, there is an Up signal and I will look for a dip to try to put on some long positions.

Growling Bear or Pooh Bear? 10/11/11

“It is far better to be wishing you were in the market when you are out than wishing you were out when you were in”

With the market taking off like a rocket over the several days, I was wondering about my post about the growling bear! In fact the bear appears to have been fed some German honey and is sitting back contented like Pooh bear from Winnie the Pooh. The bulls have charged forward albeit on rather low volume today.  

It is far better to have a system and stick to it in a disciplined manner, as long as the system is sound and solid in its foundations, than trade based on recency. I believe in the systems I have and when the signals give a change, I will change. I want to be a flexible reed. I can sway in the direction of the wind without breaking. Living in South Georgia, I have seen too many rigid pine trees break in a harsh winter storm.

Yes, I saw the reversal signal early last week

Yes, I feel bad I did not place some long positions on the S&P to pick up some of the gains from the reversal

No, I could not have expected the gains to have been so much so quick. My technicals are still weak and it is better not to fight the technicals.

But when I get a change in the charts through my trading systems, I will change my posture. For now I remain wishing I was in over the last few days; but glad I have been out over the last couple of months.