"you will be stopped too frequently to make for a profitable portfolio over time"
DrJoe,
In my experience this is not true. Granted it only goes back to Jun-1998. According to my Price & Volume indicators (as outlined by IBD) - my system will work fantastically 80% of the time.
Not much in gains these last 2 years - but avoided the huge 50% drop. The market is GRADUALLY getting healthier. . .but when each high volume drop in the indexes is met with newer highs in low or no volume -- my system is going to sit on the sidelines and that is ok.
I do not have time to develop another strategy to figure a way to capitalize when my signals are crossed. But I will stick to my methods - and teach them to others. It bodes very well to know what *works* for the long haul and to not decimate your portfolio or to be relegated to just managing play money (small account).
Give it time. Once newer growth issues come to the fore (it has been a value play-driven market in '09) things will be different. My whole portfolio will get good entry off market bottoms and profit highly for months and be mostly ITM.
Then very few will get STOPped. But for now, I teach to be patient and bide your time protecting capital. Most CC or conservative option writers have given up on making the large jumps to their portfolio, as I do, for a variety of reasons.
So your also mentioned should have asterisks (*).
Gilbert
PS This is not easy watching the market make a joke out of my proven methods. But when things turn again it will be so right! Meanwhile ETF-plays and Dow stocks and loose STOPs and collars, etc. will make (limited) progess during this period. You see the thing is I do not KNOW what the market is going to do when - but it does repeat itself (profit from my indicators) with history. I just have to always play it like the next rally is/may be going really good for my MP - and it does. . .always.
If you go back through 10 years of management, you will see me going to cash once my stops are hit and distribution days stack up. Many, many times the market plummets further and corrects (makes it healthier for my plays 80% of the time) and I get in when it is best and ride for multi-month periods.
This give me the highest possible annual average.
G
--- In ConservativeOptionS
>
> lou,
>
> my point was that if one sets a stop-lose for covered call at stock purchase price minus premium....you will be stopped too frequently to make for a profitable portfolio over time...drjoe
>
> --- In ConservativeOptionS
> >
> > Stop losses can be extremely tricky and there are a plethora of methods to determine them; ATR,chandelier stops, etc, etc). There is or was a service on the web that seemed to offer a successful system for understanding and setting stop losses. Unfortunately I forget the URL. Personally, I've had perennially bad judgment in my own attempts. I've tried everything from 2% to 10% and inevitably I got stopped out only to see the stock rise dramatically. The only times stops have worked for me was when I had a large gain and placed a tight trailing stop to protect tne profit while letting the stock run.
> > Lou
> >
> > --- In ConservativeOptionS
> > >
> > > i've been reading the posts regarding stop-losses on covered calls. some are using the purchase price minus premium as a stop-loss. imo, that is too tight and surely the majority of the time one would be stopped out.
> > >
> > > one can use implied volatility (iv) to estimate how much a stock will move during the expiration period of your covered call. as an example let's use the closing price of an index etf ....spy. spy = 118.36; the may expiration atm 119 call is 2.07 with iv of 14%.
> > >
> > > volatility is usually expressed in annual terms and is a measure of how much a stock can move over a specific period of time and is defined as the standard deviation of daily percentage changes of the stock price. a standard deviation, up or down, encompasses 2/3rd's of all price occurrences.
> > >
> > > so using spy above with an iv of 0.14 theoretically means that spy will be up 14% or down 14% in one year. but we have a timeframe with our covered call expiring in may of 44 days. we need to convert that iv to our timeframe of 44 days. well standard deviations increases proportionately to the square root of time. therefore if there are 252 trading days in a year you want to multiply that 14% iv by the square root of 44/252 to get the standard deviation for this 44 day period. 0.14*sqrt (44/252) = 0.585 or 5.85%.
> > >
> > > therefore there is a 2/3rds possibility (ie 1 std) that spy now at 118.36 will fluctuate plus or minus 5.85% from 118.36. using math that is 111.5 to 125.3.
> > >
> > > using a stop-loss of 118.36 minus 2.07 (the premium) = 116.29 makes for many a stopped out trades.
> > >
> > > if there is a 2/3rds chance to hit 111.5 during the 44 days what do you think the chance of hitting 116.29? would say much higher.
> > >
> > > with high iv stocks the premiums are never enough to compensate and the odds get even higher of being stopped out......... definitely use stops wether mental or contingent orders but allow them wide enough not to be stopped out to frequently because those losses kills a portfolio returns....
> > >
> > > drjoe
> > >
> >
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