Peter Spann's new book title

[geoffw]

Not directly answering this question.

My understanding of what Peter had to say abouts shares was that there were two entirely different strategies for different ends.

Buy and Hold is for long term growth- using Warren Buffet type strategies to choose what shares are more likely to grow.

Options trading, using a simple subset of available technical analysis techniques is promoted as one way of earning an income- but a path which most people will not succeed at.

 

[DaveJ]

My thoughts...

Hi all,
I have been reading this thread with great interest... I have a few comments.

Bill: - Yes a short PUT has the same payout as a covered call AT EXPIRY. The Protective PUT which Peter uses will actually skew the payoff away from the short PUT as there is no 'unlimited downside'. Also if you actually construct this strategy over a share that pays dividends then this will provide further income. A short PUT will NOT allow you the dividends. (yes a warrant will but another story). It appears your are arguing a strategy with only half the story... Peter does teach what to do in various situations, ie if sudden big drop, trend change, big increases... I am not going to go into the details (you don't get things for free). However it is not as simple as Buy shares, buy put, sell call... wait... 'Active monitoring is required'.
You also need to have Margins lodged with short PUTS, risk of exercise, If there is a market crash then the short PUT will 'kill you' while with the CC strategy you will have the protective PUT AND the Shares. Yes you will lose money but you can always just turn the position into abuy-and-hold whereas the PUT will most likely be exercised. Don't forget you also have a wasting asset only...

Warren Buffet also BUYS THE WHOLE COMPANY and then puts in a GOOD management team. I don't think you can compare his buy and hold with a Mum&Dads $10,000 of shares. His actions will change the company (usually for the better).

Finanlly i have read Peter Spanns first book (but not the second), and have also been to his Seminars. I found them an Excellent 'kick in the pants'. I don't agree with all his strategies/thoughts however he certainly does have the gift to get you motivated. it IS all about mind-set. Change that and you are halfway there.


Regards,


DaveJ

PS... And I always thought my own home was an asset!! until...... ;-)

PPS... Options are much more complicated then being discussed here. If you don't know the effects : Delta, Gamma, theta, and especially VEGA has on an option price then you are just playing with fire... IMHO.. Back to Property!!

 

[Bill.L]

Hi Dave,

If you only read half my post that you commented on then of course you only get half the story!!

"If you have "protective puts" in place in the strategy, why not just a spread using puts at 2 different strike prices?? Again a simple, easy and cheaper strategy than the covered call/protective put strategy."

Do you not THINK the above covered it??? You can also use any amount technical/fundamental strategies to implement, as it is THE SAME risk profile but cheaper(less brokerage and LESS capital up front).

I'm not argueing that the Tau is important to you, but at least try and criticize my entire post instead of not even reading half of it!!

bye

P.S If you get one good idea from a book then it is worth the price(even motivation is a good idea), but that does not mean that you have to believe everything in the said book.

 

[Peter Spann]

Just 'cause - that's why

Hi all,
Since you wish to refute a few things, perhaps you could answer why you don't promote a simpler and easier strategy of naked puts instead of covered calls??( Oh and cheaper to implement as well).

'Cause most people who attempt to implement this lose their shirts - writing naked puts is one of THE most dangerous and potentially loss making strategies for all but the most experienced of traders - I TOTALLY disagree that it is "easier". (In fact, it is actually covered in our trading seminars but with the appropriate warnings).

As I said, covered calls is simple, easy and most (although not all) people can implement it and make money. It is not my intent to argue the merits of these strategies here - not only is it a property forum but you and the other people here (apart from those who have attended my seminars) do not know the context of the overall strategy within writing covered calls plays a small part in wealth creation. And it is impossible to summaries a 4 day seminar in a forum. Everything I do is part of a well thought out overall strategy and nothing (like covered calls or even buying property) that I do should be taken out of context (as it is so easy to do here).

So my answer to any more questions on option trading is going to be "Just 'cause - that's why". Childish I know, but a lot of fun, especially if done with your toungue out at the same time.

 

[Peter Spann]

More on options (sigh)

If you have "protective puts" in place in the strategy, why not just a spread using puts at 2 different strike prices?? Again a simple, easy and cheaper strategy than the covered call/protective put strategy.

Teach that as well and execute it with our clients when appropriate but a different strategy used for totally different reasons for the Covered Call and Proptected Buy / Write strategy.

 

[DaveJ]

hmm.

Wow!! I did not mean to offend...

Just commenting that selling PUTs is EXTREMELY dangerous unless you really know what you are doing. I don't think a trader would last very long doing that as an only strategy. A lot more management. Yes you might make a profit for a couple of years but that one year (Sep11??) will wipe you out!!.. Many a trader has mistakenly thought options were simple and easy.

"...why not just a spread using puts at 2 different strike prices?? Again a simple, easy and cheaper strategy than the covered call/protective put strategy..." You forgot to add different different strategy, a call ratio backspread is better yet?...

BTW If you read my post i did actually say i didn't believe everything presented, vice you commenting i blindly believed "everything i read'. Not true and a cheap punch.

BTW2. I will not comment here about options again as i agree it is outside the scope of this forum. You trade short puts and others will trade blocks of land. More then one way to make $$.

BTW3. Spreads have a totally different payoff diagram then PBW. The idea was for a SIMPLE option strategy. less risk = less payoff. however i do believe 'blindly following a PBW strategy would be dangerous'. If it was that easy why do anything else. doesn't work in a long term downtrend and a low volatility market.

Good luck...

DaveJ

 

[Peter Spann]

Buffett

Warren Buffett does hold FX contracts, short $US. He holds these because....
"Berkshire holds many billions of cash-equivalants demoninated in dollars. So I feel more comfortable owning foreign-exchange contracts that are at least a partial offset to that position."
Berkshire-Hathaway 2003 AGM.

Could you please quote my where you think Warren Buffett has claimed to be in favor of trading options??

While I am happy to admit that there are people in Oz who know Warren Buffett and his strategies better than me (and I think I know all of them, at least by reputation), and Bill may be one of them (but I don’t know that either), I DO know that, without being too up myself (although what I am about to say will well and truly look that way), there is one thing I am happy to say I am on safe ground with and that is being one of Australia’s Top 10 Buffett fans.

I own shares (A and B Class) in BRK, have studied his methodologies for over a decade, have met him and Charlie Munger a few times (no, I am not claiming to be best buddies or having spent considerable time with him but this is more than most people can claim), and have talked on the phone to him. We’ve had Mary Buffett (the now disowned ex-wife of one of his children) and Robert P. Miles (author of 3 Buffett books) as guests at our events. We even run a managed fund with $15 million under management based (partly) on Buffett’s investment strategies (and partly on covered calls).

Thanks for the quote of the AGM but, (and this is going to sound way up myself but I’m good at that so I’m going to say it anyway), - you don't need to quote it to me - I was there. With 77 of my clients – wanna see the pictures? ( Just bein' a smart SOB - Ha Ha)

We all met Warren and Charlie personally and I even got to hold his wallet for a few minutes (surprisingly light I must say). I also got a private 7 minute audience with him again which was AWESOME!

I have also been to 6 other AGM’s since I have been a shareholder of BRK shares. So, along with a handful of others, I am happy to claim that I am one of Australia’s biggest fans.

So Bill, while you don’t have to quote WB to me, I would politely suggest that, before making claims about Buffett and his trading strategy you need to take a look at the role that derivatives have played in Buffett's trading in the past and currently, especially before you make statements like Buffett is “against” options trading (considering they have used them in their portfolio).

If you check I think you will find that he has come out publicly saying that he is against companies using non-disclosed options and other under the table deals as Director's incentives. Maybe this is where the confusion stems from?

However to conceed a point, as far as I am aware he has never come out publicly and neatly said “options trading is good”, but they use all sorts of derivatives in leveraging their portfolio so I know, if only anicdotally, that they must think they have a role.

Then again he has also never said, “options trading sucks” either. He has also never said that “currency trading is good” either and yet they have taken big positions in currency over the years as well (losses from their last stab at that are mounting by the day).

I do know Warren HATES being quoted so would never come out with a sound bite like that anyway - although I am sure that if anybody would say something like that it would come from his cohort Charlie Munger who much prefers these types of wise cracks.

Anyway, to go back to what my original point was (and its not got to do with Buffett supporting or being against options trading - I have never asked him and I believe that neither of us could win that argument without asking him), that everybody thinks Buffett is all about buy and hold forever, but when you look at what they actually DO with their portfolio I believe it is a myth.

Personally I prefer his advice on health and happiness which went something like this, “Just avoid things like racing trains to the crossing, doing cocaine, etc. Develop good mental habits. And avoid evil, particularly if they're attractive members of the opposite sex.”

As I said, I don't think this is the appropriate forum to be discussing options so I am going to revert to “just ‘cause” from now on.

 

[Peter Spann]

Buy more books - Rup needs the cash!

P.S. I like your book though I have not read it all yet. I would recommend people added it to their list of purchases.

Fanks - personally me and my mum think it is AWESOME!!!

All of you - buy more of my books - NOW! - pretty please - Harper Collins (who is owned by Rupert Murcoch by the way) needs the money!

 

[Peter Spann]

Thank you all heaps!

And last, but certainly not least.

Thank you again to all of you who have posted positive comments about me, my strategies and my book.

I really do appreciate it.

 

[qaz]

As I said, I don't think this is the appropriate forum to be discussing options so I am going to revert to “just ‘cause” from now on.

If you have something interesting and insightful to add about investment, or any subject for that matter. I will happilly listen and im sure the majority of this board will to. Regardless of whether its percifically property related or not. Seems to me, some of the most interesting topics on this forum recently havent been directly property related (views on the general economy, effect of baby boomers retirement, Australian + International politics).

 

[Sim]

"Residential real estate is generally considered a sound vehicle for investment."

"Peter Spann has been known to invest in real estate."

Okay... I think that should cover the real estate requirements for this thread to be considered "on topic"

... now back to the other interesting stuff ... take it away Peter et al

 

[Bill.L]

Hi all,

I seem to have the ability to stir up the hornets nest

As there still ssems to be a misunderstanding by some, I'll give an example.

Sorry Geoff, but NAB is as good as anything to use.

The covered call, WITHOUT PROTECTION ; Buy 1000 NAB shares @ $32, sell one $33 call option.

If price remains below $33 by option expiry you keep the premium and the shares.
If the price goes to $38 by expiry, you can keep your shares if you trade out of the position before expiry, otherwise you have the option exercised and you receive $33 per share and keep the premium.(but you lost the gain to $38)
If the price of the shares go to $0 you lose $32,000 the original cost of the shares but you get to keep the premium.

The naked put. By putting up the margin(and you can use shares as colateral) you sell one NAB $31 put option.

Providing the price remains above $31 by expiry you keep the premium.

If the price drops to $26 per share the option is "put" to you and you have to buy the shares @ $31 or you could trade out of the position before expiry.

If the price of the shares goes to $0 you lose $31,000 but you get to keep the premium.

As you can see the risk profile of BOTH is exactly the same, the naked put is no more dangerous than the covered call(in fact slightly less dangerous)

NOW let's add PROTECTION.

In both cases you buy an out of the money put say $29.

With the covered call if the price goes below $29 you are protected but it still costs you $3000 less the premium received.

With the naked put if the price goes below $29 you are protected but it still costs you $2000 less the premium received.
By implementing the protection with the short put you have created a spread and the margin required is much lower.

With the spread created by the 2 puts you have to pay for 2 transactions.
With the covered call with protection you have to pay for 3 transactions.You also have $33,000 tied up in the purchase of the shares that could be put to better use.

Any questions?? I'm still yet to read any arguments that show the CC with protection is a superior position by ANY means.

bye

 

[NigelW]

Hi all,

I seem to have the ability to stir up the hornets nest

As there still ssems to be a misunderstanding by some, I'll give an example.

Sorry Geoff, but NAB is as good as anything to use.

The covered call, WITHOUT PROTECTION ; Buy 1000 NAB shares @ $32, sell one $33 call option.

If price remains below $33 by option expiry you keep the premium and the shares.
If the price goes to $38 by expiry, you can keep your shares if you trade out of the position before expiry, otherwise you have the option exercised and you receive $33 per share and keep the premium.(but you lost the gain to $38)
If the price of the shares go to $0 you lose $32,000 the original cost of the shares but you get to keep the premium.

The naked put. By putting up the margin(and you can use shares as colateral) you sell one NAB $31 put option.

Providing the price remains above $31 by expiry you keep the premium.

If the price drops to $26 per share the option is "put" to you and you have to buy the shares @ $31 or you could trade out of the position before expiry.

If the price of the shares goes to $0 you lose $31,000 but you get to keep the premium.

As you can see the risk profile of BOTH is exactly the same, the naked put is no more dangerous than the covered call(in fact slightly less dangerous)

NOW let's add PROTECTION.

In both cases you buy an out of the money put say $29.

With the covered call if the price goes below $29 you are protected but it still costs you $3000 less the premium received.

With the naked put if the price goes below $29 you are protected but it still costs you $2000 less the premium received.
By implementing the protection with the short put you have created a spread and the margin required is much lower.

With the spread created by the 2 puts you have to pay for 2 transactions.
With the covered call with protection you have to pay for 3 transactions.You also have $33,000 tied up in the purchase of the shares that could be put to better use.

Any questions?? I'm still yet to read any arguments that show the CC with protection is a superior position by ANY means.

bye

I suppose fwiw the upside with the covered call is that you get the premium if you're not exercised before the stock goes ex dividend

 

[Bill.L]

Hi all,

On Warren Buffett.

From earlier posts there appears to be the implication that part of the option strategies used were according to Buffetts ways of trading options.

I am totally unaware of any public statements by Buffett on there favourable use(this includes the different books on the investment style and the life of WB).

Now, as I don't own BRKA shares and felt how heavy WB's wallet isn't, I may not know his inner secrets.

BUT I do know that while he was amassing his earlier fortune in the partnerships, he wasn't trading options. The listed option market in the US originated in April 1973. Buffett had already accumulated a fortune of over $25,000,000 by this time( allowing for inflation the equivalent of well over $100,000,000 in todays money).

So I will stick to my original premise that it is a bit rich using option strategies and WB's methods in the same sentence as for the average joe to get to $10m in 10 years.

just cause thats why.

bye

 

[keithj]

BUT I do know that while he was amassing his earlier fortune in the partnerships, he wasn't trading options.

I recently read another Life of Buffet type book. According to it, the only time he used options was to write 1,000,000 puts for Coke shares @ $34 strike price when they were trading at $39. He would have been happy to buy them at $34, but they never got that low, so he had to be content with keeping the US$7.5M premium instead.

 

[Bill.L]

Hi Nigel,
Thinking around the square. While you miss the div on the bull spread using puts, think of the $30,000 sitting in the offset account earning 7% pa.
Also think of how you could increase the profitability of the spread by using selling 2 put options and buying 2 lower priced put options, but the transaction costs will stay pretty much the same as for one.(of course by magnifying the profit you magnify the risk)

I should add that all the different ways of making money on options look really good in theory, but in practise the bid/ask spread and the high transaction costs in relation to the gains tend to defeat the original purpose.(making extra dollars)
When you look at it the cold hard light of day, you see full time professionals working for market makers and institutions on the other side of your simple option strategy, just waiting to give you extra income. Yeah right

bye

 

[geoffw]

On Warren Buffett.

From earlier posts there appears to be the implication that part of the option strategies used were according to Buffetts ways of trading options.

The implication was probably from me- because I mentioned the two things in one sentence.

But Peter gave two quite distinct strategies
.Buy and hold, for growth, using Warren Buffet type stratregies (and one or two others)- fundamental analysis
.Options trading- purely for income- technical analysis.

The two are different strategies, using different techniques, for different purposes.

My apologies if my mention ofr the two strategies led to nany confusion.

 

[Bill.L]

Hi Geoff,

No need to apologise, I noted that no-one refuted what you said. Also noted that there are a heap of viewings for this thread recently but mostly the same posters.

C'mon everyone else, opinions please.

Geoff, from the example on options for NAB that I gave earlier, did you have any comments or thoughts??

Peter, perhaps you had some comments or thoughts???

Keith, a great use of options, but hardly trading. By the time Buffett bought Coke I think he was already a billionaire. You can do things a little differently when you are a billionaire.

bye

 

[geoffw]

Geoff, from the example on options for NAB that I gave earlier, did you have any comments or thoughts??

Apart from the fact I would LOVE to see NAB at $32, I have not followed share trading stratgies at all.

The methodologies I learnt did ask for half an hour per night- and with a family (and this forum!) I found myself paper trading onle once every week or two. So I don't have any personal knowledge or experience of anything other than buying and selling shares.

I've done well in property, and I'm now starting to look into the world of business.

 

[Peter Spann]

Bill, the next seminar guru!

Bill, you should be a seminar presenter…

You make a compelling argument that seems entirely logical, yet in practice is totally wrong.

I come back into this discussion purely because I believe your statements are misleading.

The fundamental holes in your argument are on a practical level (not in theory as you presented):

1. It is highly unlikely that NAB (or most shares) would jump up from $32 to $38 in one month in the normal course of business, however is it quite likely that NAB (and any other share) could fall to the $26 as in your example;

2. When writing covered calls the trader has to be happy to own the shares at $32, and (in your example) sell them at $33 – this is very palatable for most people – they are comfortable with the concept of owning shares and selling them at a profit (even if that profit is capped), while people who write naked puts virtually NEVER want to own the share, especially when it has fallen to $26 from $31. Traders SAY, “Oh, it’s fine, I intended to own the share at $31 anyway” (my big fat hairy a%#@e they did (and it is)), but in practice they virtually never have those funds and scramble to find them. If used effectively, by an experienced trader, writing puts can be a reasonable strategy to generate income, however I (being a broker and financial adviser) have frequently seen people panic when shares are going down, frozen in fear and unable, despite the best of advice to sell their positions at a loss, thereby compounding whatever loss they were in. I have rarely seen people panic when using the simple, easy to understand covered call strategy;

3. And finally, I am not sure how long you have been trading options but and I’m going out on a limb here, my guess is you’ve never held a large options position when the market is crashing, when nobody (those lovely market makers you talk about) is prepared to trade you out of your positions and you are losing thousands by the second with no obvious stop. It was those people who were jumping out of buildings in 1987.

I am sorry, but there is no professional options trader, annalist or broker that I know who would agree that writing puts has the same risk profile as covered calls.

I work in the world of professional capital and money management. We need to match strategies to our client’s risk profile.

Covered Calls is ranked as medium risk (just slightly above owning shares). Writing naked puts is ranked as very high risk (because of the gapping nature of markets in a downward slide). About 7 out of 10 of our clients have a risk profile suitable for us to recommend covered calls, less than 1 in 10 has a risk profile that would enable us to recommend writing puts as a strategy, but even still, I am so convinced of the danger of writing naked puts on a practical basis that our clients must specifically instruct us to do it and sign a disclaimer that we have advised against it.

The ASX in their introduction book to Options trading says “writing calls on shares that a trader owns or buys is one of the simplest and easiest strategies traders can use to increase their profits”, whereas they have this to say about naked puts, “traders need to take caution in using this strategy and it should be deployed by experienced traders only”.

And finally, in all of this geoffw makes THE MOST IMPORTANT POINT…

Any of these strategies should NEVER be taken in isolation.

Even if we restrict our conversation purely to options trading, there are no professional traders who have been in the market for a decent period (over a decade) and are consistently profitable, I know who use just one strategy – most use a combination of 5 or 6 strategies, some even more.

However if we broaden the topic to investing in general then everybody needs to realise that I teach options to my clients as a small part of an overall strategy that includes buy and hold property, shares, managed funds, commercial property trusts, tax advantaged investments, international shares, and a bit of trading.

When acting as a Financial Adviser we then personalise it even further with intelligent asset allocation and risk management.

Moreover the argument is moot because we are comparing apples and oranges. All of these strategies have their place. Advocating one strategy (eg: Writing Puts) over another (eg: Covered Calls) or vica versa is highly egotistical, biased and myopic, therefore in my opinion, very dangerous. It is horses for courses and both or neither strategies may have a place in somebody’s overall wealth creation approach.

All investors need to develop an investment strategy that is right for their individual needs and circumstances that includes a range of investments to take advantage of cycles and give exposure to capital growth and income while implementing an effective and well thought out risk management strategy.

And if they are confused they need to seek the advice of a Licensed Financial Adviser.

It is impossible for me to comment any further on this debate and this is the last post I will make on it regardless of what anybody says from now on. To go on any further would be to teach strategy which takes me 4 days in a seminar and would need about 100,000 words. I am already doing that in writing my next book based on share and options strategies. Maybe we should all wait until that comes out? Alternatively subscribe to the forums of other professionals who teach these strategies and debate their merits there.

Now, has ANYBODY got a question on PROPERTY or my new book?