Peter Spann Strategy, anyone made it?

[crc_error]

Personally I found it impossible to execute Peter Spann's Protected Buy Write strategy. In the real market, the ratio between the cost of the put and the income from the covered calls was quite different from the examples he gave.

But the main problem was the part about if you are exercised (if the calls you sold are exercised) then you should just re-purchase the share at the higher price - smaller number of shares but adding up to the same previous dollar value. The rationale being that you still have the put protection. The problem is that the put level is now much further away from your share price so if you the shares drop to the put level then your potentially going to lose quite a bit of money.

Ethann, the put will never give you 100% protection, until its way in the money. When you re-buy the stock, you buy the same dollar value, but less shares, hence because the put is more out of the money, its still protecting the same dollar value, but less stock.

I personally only write covered calls, as I too found buying the put is to expensive, basically taking away most of your call premium profit.

No strategie is 100% bullet proof, so there may be a situation where you will loose money, but it does offer a strategie with certain outcomes possible.

 

[crc_error]

I don't like covered calls. What you are doing is being fully exposed to the downside, whilst capping your upside. If you take a portfolio of stocks, it is the few star performers that make the return for you. Covered calls will ensure this doesn't happen!

Covered calls are usually marketed by people who don't really know what they're talking about. If you really must do it, write puts instead! You will have exactly the same return profile but with less brokerage costs. Short put = long stock + short call.

I think you don't understand covered calls. Covered calls are good for stock going sideways or slightly up.

covered calls also force you to take profits, so essentially your setting up a trade from the start, and you know your profit right from the stratergie inception. I have been writing covered calls on LGL for the last 12 months. This stock has quite nicely been moving between $3 and $4. Even when I do get exercised, the stock has always come back down below by original buy price so I usually re-buy at a similar price again.

You can sell puts, but if you get exercised, then you can write covered calls, so this is another option available to you.

If you were expecting the stock to shoot up, then you wouldn't write a covered call over it.

 

[s_t]

crc_error, you are right, but then so is mupeteer

As mupeteer says, writing a put is identical to a covered write, but more efficient (in many instances anyway). A good options book (eg. McMillan) will soon have you understanding that.

I think you don't understand covered calls. Covered calls are good for stock going sideways or slightly up.

covered calls also force you to take profits, so essentially your setting up a trade from the start, and you know your profit right from the stratergie inception. I have been writing covered calls on LGL for the last 12 months. This stock has quite nicely been moving between $3 and $4. Even when I do get exercised, the stock has always come back down below by original buy price so I usually re-buy at a similar price again.

You can sell puts, but if you get exercised, then you can write covered calls, so this is another option available to you.

If you were expecting the stock to shoot up, then you wouldn't write a covered call over it.

 

[Humphrey]

Ethann, the put will never give you 100% protection, until its way in the money. When you re-buy the stock, you buy the same dollar value, but less shares, hence because the put is more out of the money, its still protecting the same dollar value, but less stock.

The problem I see with subsequent stock purchases is that the put can get way of of the money and if the market dives that you have a much bigger loss than the call incomes provides. For example.

Let's work through an example. I haven't had a coffee yet so you need to give me some leeway here

purchase 5000 shares at 1.00
take 5000 long-dated puts at 1.00
write 5000 calls at 1.10

stock moves up to 1.30, call exercised at 1.10

purchase 3000 at 1.30 (only 3000 to stay within original $5K)
write 4000 calls at 1.35
stock moves down to $0.70

exercise 3000 puts at $1.30 = $3,900
sell 1000 shares at $0.70 = $700
Sales proceeds = $4,600
Capital Loss on shares = $400

So we're down $400 or 8%, plus were also down cost-of-put minus (2 x covered call premiums).

Completely hypothetical scenario but this is the type of situation where I think that this strategy falls to pieces. I still don't "get" that the re-purchase up to the same dollar amount works. Maybe you can show it to me in a different light?

I personally only write covered calls, as I too found buying the put is to expensive, basically taking away most of your call premium profit.

Ditto.

 

[Melbear]

The problem I see with subsequent stock purchases is that the put can get way of of the money and if the market dives that you have a much bigger loss than the call incomes provides. For example.

Let's work through an example. I haven't had a coffee yet so you need to give me some leeway here

purchase 5000 shares at 1.00
take 5000 long-dated puts at 1.00
write 5000 calls at 1.10

stock moves up to 1.30, call exercised at 1.10

purchase 3000 at 1.30 (only 3000 to stay within original $5K)
write 4000 calls at 1.35
stock moves down to $0.70

exercise 3000 puts at $1.30 = $3,900
sell 1000 shares at $0.70 = $700
Sales proceeds = $4,600
Capital Loss on shares = $400

So we're down $400 or 8%, plus were also down cost-of-put minus (2 x covered call premiums).

Completely hypothetical scenario but this is the type of situation where I think that this strategy falls to pieces. I still don't "get" that the re-purchase up to the same dollar amount works. Maybe you can show it to me in a different light?

Ditto.

Hang on. You've still got your 5000 puts that you purchased, not 3000. If the share falls down to .70, wouldn't you be laughing as you'll buy 2000 of them at .70 and immediately 'Put' them to your put seller/holder at $1, thus making an immediate $600?

 

[Melbear]

Or of course, instead of paying the brokerage etc. on the above transaction, you could just sell your Puts on the market and should get at least the .30 profit on them so still making the same $600, just not paying as many brokerage fees.

 

[Ol School Skata]

Ethann i don't think you fully understand the covered call strategy - i have made some comments below.

The problem I see with subsequent stock purchases is that the put can get way of of the money and if the market dives that you have a much bigger loss than the call incomes provides. For example.

Let's work through an example. I haven't had a coffee yet so you need to give me some leeway here

purchase 5000 shares at 1.00
take 5000 long-dated puts at 1.00
write 5000 calls at 1.10

stock moves up to 1.30, call exercised at 1.10
(so you have sold 5000 shares at $1.10 and kept your premium from writing)
purchase 3000 at 1.30 (only 3000 to stay within original $5K)
write 4000 calls at 1.35
(you should only be writing 3000 calls to cover your 3000 shares)
stock moves down to $0.70

exercise 3000 puts at $1.30 = $3,900
(you actually still own put options over 5000 shares allowing you to sell at $1.00 each or instead of exercising the option you could simply sell the $1.10 put options and repurchase some at $0.70 to protect you position again)
sell 1000 shares at $0.70 = $700
Sales proceeds = $4,600
Capital Loss on shares = $400



So we're down $400 or 8%, plus were also down cost-of-put minus (2 x covered call premiums).

Completely hypothetical scenario but this is the type of situation where I think that this strategy falls to pieces. I still don't "get" that the re-purchase up to the same dollar amount works. Maybe you can show it to me in a different light?



Ditto.

If you sell your $1.00 put options, they would have an intrinisic value of $0.30 per share plus whatever the value of time was remaining on term of the option.

OSS

 

[Humphrey]

Hang on. You've still got your 5000 puts that you purchased, not 3000. If the share falls down to .70, wouldn't you be laughing as you'll buy 2000 of them at .70 and immediately 'Put' them to your put seller/holder at $1, thus making an immediate $600?

Yeah, you're probably right. I hadn't thought about that aspect.
Actually there are $2000 shares to be sold at $0.70 as well, not 1000.

Coffee time.

 

[Ol School Skata]

The covered call strategy has floors, I think we can all accept that, but if you are going to a paper trade, you need to make sure you understand the concept of the strategy and how it works.

I did paper trades on this for 2 years before jumping into the market with just $15K and learnt a hell of a lot more on the psychology side of things and how i was feeling about this trade.

Ethann happy to share some info with you if you like. just send me a pm.

OSS

 

[Humphrey]

Ethann i don't think you fully understand the covered call strategy - i have made some comments below.
OSS

I actually do understand the strategy up to the point mentioned - the re-purchase of the shares. I just kept changing the numbers and forgot to change a couple back .

I just want to be clear here that in this posting I'm talking about Peter Spann's Protected Buy Write strategy as he defines it and not any other strategy.

I didn't bother getting into what the call/put values might be, but 2 months of call income will not cover a 6 or 9 month put.

The numbers should have been:

purchase 5000 shares at 1.00
take 5000 long-dated puts at 1.00
write 5000 calls at 1.10

stock moves up to 1.30, call exercised at 1.10
purchase 3000 at 1.30 (only 3000 to stay within original $5K)
write 3000 calls at 1.35
stock moves down to $0.70

exercise 3000 puts at $1.00 = $3,000
sell 2000 at $0.70 = $1,400
Sales proceeds = $4,400
Capital Loss on shares = $600

Would selling the remaining 2000 puts get me back the $600 loss? Feel free to provide a different scenario with different numbers.

 

[Ol School Skata]

I actually do understand the strategy up to the point mentioned - the re-purchase of the shares. I just kept changing the numbers and forgot to change a couple back .

I just want to be clear here that in this posting I'm talking about Peter Spann's Protected Buy Write strategy as he defines it and not any other strategy.

I didn't bother getting into what the call/put values might be, but 2 months of call income will not cover a 6 or 9 month put.

The numbers should have been:

purchase 5000 shares at 1.00
take 5000 long-dated puts at 1.00
write 5000 calls at 1.10

stock moves up to 1.30, call exercised at 1.10
purchase 3000 at 1.30 (only 3000 to stay within original $5K)
write 3000 calls at 1.35
stock moves down to $0.70

exercise 3000 puts at $1.00 = $3,000
sell 2000 at $0.70 = $1,400
Sales proceeds = $4,400
Capital Loss on shares = $600

Would selling the remaining 2000 puts get me back the $600 loss? Feel free to provide a different scenario with different numbers.

At this point the remaining puts would be worth at least $600 (puts covering 2000 shares x $0.30 intrinsic value plus value of time remaining)

OSS

 

[Ol School Skata]

The numbers should have been:

purchase 5000 shares at 1.00
take 5000 long-dated puts at 1.00
write 5000 calls at 1.10

stock moves up to 1.30, call exercised at 1.10

purchase 3000 at 1.30 (only 3000 to stay within original $5K)
write 3000 calls at 1.35
stock moves down to $0.70

exercise 3000 puts at $1.00 = $3,000
sell 2000 at $0.70 = $1,400
You do not have 2000 shares to sell here - you bought 3000 at $1.30 and then exercised your put options so sold 3000 at $1 each
You still own put options over 2000 shares but you do not own 2000 shares, you have control over 2000 through the put options.

If you sold the remaining put options you would get at least $600(2000 x $0.30)
Sales proceeds = $4,400
Capital Loss on shares = $600

Hope this clears some things up

OSS

 

[Bill.L]

Hi all,

Peter, if you read what I posted before you will find that I was just quoting your own words to someone who thought you had different views. Good to see you still capable of going in boots and all, we all still feel the love.

1. Hi Bill, willair, washington - good to see your positive, cheery comments again – I feel the love - BTW I still believe it is POSSIBLE for every person to become wealthy in a very short period of time, I have never said it is probable for most – frankly most people don’t have the “ticker” for it;

The problem I have with statements like the above, is that taken to the letter of what is written, you have the situation where EVERYBODY is rich in a short period of time.(if everyone had the right ticker)

The changing of one little word makes the above believable and easily understandable. Change EVERY PERSON to ANY PERSON.

bye

 

[Humphrey]

Hope this clears some things up

OSS

Thanks. No more posting before coffee.

 

[Melbear]

I actually do understand the strategy up to the point mentioned - the re-purchase of the shares. I just kept changing the numbers and forgot to change a couple back .

I just want to be clear here that in this posting I'm talking about Peter Spann's Protected Buy Write strategy as he defines it and not any other strategy.

I didn't bother getting into what the call/put values might be, but 2 months of call income will not cover a 6 or 9 month put.

The numbers should have been:

purchase 5000 shares at 1.00
take 5000 long-dated puts at 1.00
write 5000 calls at 1.10

stock moves up to 1.30, call exercised at 1.10 (receive $5500)
purchase 3000 at 1.30 (only 3000 to stay within original $5K)
purchase 4000 at 1.30 (equals $5200 - still have $300 in pocket)
write 3000 calls at 1.35
write 4000 calls at 1.35
stock moves down to $0.70

exercise 3000 puts at $1.00 = $3,000
exercise 4000 puts at $1.00 = $4,000
sell 2000 at $0.70 = $1,400 - nope
but do sell 1000 put at at least .30 each = $300
Sales proceeds = $4,400
Sales proceeds = $4,000 + $300 + $300 from earlier unspent
Capital Loss on shares = $600
Capital Loss on shares = $400, but you've received two lots of option income

Would selling the remaining 2000 puts get me back the $600 loss? Feel free to provide a different scenario with different numbers.

Hope I've got the above right

 

[Humphrey]

Hope I've got the above right

Thanks Melbear.

I did mention that I was only talking about Peter Spann's strategy. In his strategy, after being exercised you purchase a lower amount of shares at the new higher price, up to the value of your original investment. In this case you can't go 4000 x $1.30 this would take you above the original $5000.

(I could change the figures so that the shares went up to 1.25, allowing for the purchase of 4000 but the increase/decrease is arbitrary - I made them up - so I'm sure this model could be tweaked in a few different directions)

Yes I got the sell 2000 wrong. I would actually have 2000 puts which I could either sell as is of buy shares at market and then exercise put.

In your overall calculation I think that you forgot to take into consideration the cost of the original put, which as a 6 - 9 months put (as per PS strategy) would cost significantly more than the income earned from writing two months worth of calls.

Has anyone actually executed this strategy by-the-book in a situation where:
c) their calls were exercised
b) they re-purchased a smaller number of shares at a higher price and wrote calls on these.
c) the share price then dropped below the strike price of the put

 

[Melbear]

Hey Ethann, if you only buy 3000 shares at the newer price, that only costs you $3900. In that case, you've now got $1600 cash sitting in your pocket, so surely on the above figures you'll actually come out reasonably in front.

 

[Humphrey]

True. Let me put it in a spreadsheet.

 

[Peter Spann]

The changing of one little word makes the above believable and easily understandable. Change EVERY PERSON to ANY PERSON.

OK - I think this is two times in a year I have agreed with you - must be a record!

 

[Peter Spann]

This has been well debated elsewhere and dare I say it Bill L and supporters had some very good contributions solidly debated by me with supporters.

I don't know how to link it but I think it was better discussed there.

MANY people can not carry out ANY options strategies effectively. So, to be quite honest I have largely stopped "promoting" them. NOT because they are not effective (in the right hands) but because most people are not effective with them.

And finally I need to state (again) that while theoretically writing puts and writing calls are similar in risk profile in reality they are MILES APART. While I know of people losing money writing calls I know of people absolutely wiped out writing puts, and can cite a number of cases from the last month. And when I say wiped out I mean wiped out, not just a few painful losses.

Cashing out of your property portfolio is not easy and if I can be criticised for anything it was naivety that other people would find it as easy as I did to use options strategies to generate cash flow. In practice, while there have been many people who were very, very successful in emulating my successes, a number have not been.

In the now 9 years since I first wrote my book I have learnt a lot about people and their effectiveness at implementation of all sorts of investing strategy. People who have attended my seminars in the last few years have seen the huge changes I have made in my thinking since then and the significant changes to my strategy as well.

But in principle my philosophy is still the same.