Cashflow Solution

[Peacock]

Cash flow solution!

Hi Damo,

You mentioned Peter Spann as your inspiration! As you know, he only buys for good long term capital growth, not yield. To get the cash flow he draws down on the equity and puts it into the stock market and trades options. Sounds risky, but in fact if you learn about protected buy write strategies, you'll find that it is a capital guaranteed investment generating 2 - 5 % per month income. You then cover your -ve geared properties, and are able to service more and more.
This method Peter Spann promotes is a sure way of success!!

Tony

Edited in by Moderator:
I recently split this topic off so that it has a place of its own. Tony's comment to Damo was originally made in this thread
http://www.somersoft.com/forums/showthread.php?s=&threadid=9636

Regards, Les

 

[ocean view]

cash flow?

Peacock

I agree with you!!!
But one thing!! Why do we need to pour it into share options??
When we can get 4-5% per month from more purchases!

No shares needed!

Trick is to keep borrowing..... CG at say 20- 100% P/A each new purchase then borrow against it at 7% & keep rolling!

ocean

 

[Andrew]

Peacock, have you actually tried implementing Peter Spann's protected buy-write
options trading idea or are you just regurgitating what you have heard at one
of his seminars.

I think that you will find there's not as much fat in it as Mr. Spann will have you
believe. Let's look at an example from todays quotes.

NCP FPO: 11.60

Since the minimum contract is for 1000 options you will need to outlay
$11,600 to take an options tradeable position in News Corp.

Buy long term put contract with a strike price of $11.50, lets say 3 months.

NCPFT September put $11.50: $0.63
$630 + $50 brokerage.

Averaged over 3 months that's $225/month.

Okay, I know that we're in the middle of the month so the time value is reduced
so I'll average it with next months option series in my comparision.

NCP5M July call $12.00: $0.08
NCPQK August call $12.00: $0.36
Average: $0.22
$220 - $50 brokerage.

Extrapolating the over generous use of next months options series over
3 months you would earn $510 with a protection outlay of $680. This leaves
you with a net loss of $170.

-$170/$11600 = -0.02.

I guess you could write contracts with a strike price at $11.50 but that will
likely churn your holdings every month, brokerage eats up your slim margins
pretty quickly.

NCP5L July call $11.50: $0.26
NCPQJ August call $11.50: $0.58
Average: $0.42
$420 - $50 brokerage

If you could get this result 3 months running, somehow without being exercised
out. You would achieve a profit of $1110 minus costs of $680, $430. The
likelyhood when writing in-the-money contracts is that you will be exercised
hence I'll deduct $50 * 3 to resume your position each month. This leaves
a net profit of $280. That's a little more than 2% profit, over three months,
not one. Even if you are lucky and aren't exercised out, the profits don't
even approach 2%/month.

I'd love to see an example using real numbers to prove me wrong. Easy
money is a dream of mine too.

andy

 

[damianr]

Re: cash flow?

Originally posted by ocean view


Trick is to keep borrowing..... CG at say 20- 100% P/A each new purchase then borrow against it at 7% & keep rolling!

ocean

I agree, Ocean View, with your strategy especially in the current market of great CGs. But what about the ongoing serviceability of the loans?

For example - if your serviceability is close to full with neg geared properties what would be your best approach to the bank to borrow more money on a neutral or positive geared property.?

Damo

 

[Peacock]

Protected Buy Write

Andrew,

Your right with one thing, the returns at the moment for call options is low, as the market is still uncertain, however I've been getting between 2.1 - 2.8% per month for the last three months on WBC! The long dated put should be at least for 12 months, it costs about the same as a meduim dated put, I paid 6.9%! Therefore it would take you about 3 - 4 months to pay for your hedge. (Which is 100% tax deductable by the way!) After you have paid for you hedge (Insurance) you capital is protected and the call premium from there on in is straight profit!
Your also correct in saying that if your not careful you can get excercised out, but if you have knowledge in charting analysis, you time your actions. i.e writing calls, rolling up, rolling out, or rolling down!!
Damo has an issue with serviceablity so properties for the time being could be out, so another income producing strategy is needed to prove to lenders that you can service the loans.
One thing for sure, protected buy write is only for income, wealth is created from collecting assets like property!

I was just offering some other options!

If Protected buy write is managed correctly, it can be a good means of income!!

Tony

 

[Andrew]

Hi Peacock, perhaps you could illustrate with some figures for me. I'm not
doubting you, just interested in the whole picture. Are you including
brokerage in your calculations? What sort of money do you have invested
to make it worthwhile?

Uncertainty? Shouldn't uncertainty == volitility, hence greater premiums?

andy

 

[Les]

G'day Andrew,

You provided a good bunch of figures with that scenario - and, the major point is (I guess) that 2% per month is 24% per year. And, if compounded, slightly more.... Not bad at all.


But you also said this:-

Peacock, have you actually tried implementing Peter Spann's protected buy-write options trading idea or are you just regurgitating what you have heard at one of his seminars

and I'd just like to say here that "I am simply regurgitating Spann's philosophy, and have NOT done any of this"

But, one (important?) part of his strategy, as I recall, was to Margin at 50% - THEN do what you were saying.

If I have any understanding of this at all (I think I do ) then the 2% per month would go close to 4% per month (allowing a bit less for the holding costs of the Margin - so let's say 3.5% per month...

That then gets pretty close to 42% per annum !!!! That's not too bad, is it? It looks a helluva lot better than 24% anyway....

But, hey, I really am "just regurgitating" here - but, could it add a different perspective?? i.e. is 42% worth having a shot at?

Edited later: Just re-read your article - you mentioned 2% over THREE months (changes things somewhat ) but you agreed it could get better, but would NOT reach 2% per month. My main point was to include the use of a 50% Margin to (nearly) double any gains (and losses??) you made... So please ignore my figures above as they don't apply, obviously.

Regards,

 

[geoffw]

Les,

I wasn't going to enter into this.

The borrowing you mentioned was a part of the strategy some years ago. But in later courses, he's saying that going that way is a risky strategy- and that you need to know what you're doing in order to even step in that direction. ie, practice a lot first- and even then be very aware that an options based strategy is inherently risky anyway.

I haven't visited the numbers recently, I'd like to.

On Saturday he illustrated figures using an example a few years old. That was a pity.

Brokerage figures in the example also were either .01 per share or .06 per share. If the brokerage was .01 per share, and an options (discount?) brokerage was $60, that would imply a lot of 6000 shares- with TLS at $5 (roughly, at the time)- so $30K investment.

The only way I could do that would be via an SMSF or using drawn down equity. And if I used equity, I'd need to at least have done a fair number of paper trades before I started.

Having seen this thread before I went, I did ask about brokerage and its impact on profit. The response was "point taken"- but my question was perhaps diluted by someone else a few rows back who said that they had written calls successfully to get a reasonable margin. That may have been true- but I would like to see for myself.

 

[Les]

This is the new "resting place" for a discussion that started in another thread (What's happening in Noosa).

Splitting it out so that this worthwhile discussion can have a place of its own.

Regards,

 

[GeeVee]

Have you all thought of the Steve Navra way?

 

[geoffw]

Originally posted by GeeVee
Have you all thought of the Steve Navra way?

You bet.

This is a way of generating real income. If it worked, I'd be much more comfortable with that method over a cashbond- which just effectively eats into the capital.

I'd need time to investigate though to see if it would work. I suspect it's not nearly as good as it was several years ago.

If it did work, you'd probably need to have it giving consistent results over perhaps 12 months before it could be considered as income by the bank.

 

[Bill.L]

Hi all,

This type of strategy is a good income earner for a broker and ties up a lot of capital.

Instead of a buy/write, selling a naked put has the same risk profile. Buying your protective future put ends up being just a spread.

High bid/ask spreads on many stocks options are what reduces the overall performance.

If you start to use technical analysis to time your entrance/exit of a position, Then a straight buy of either call or put would be the best strategy with your capital in an offset account against property.

The best strategy would be to purchase the following 2 books and read them thoroughly.

Options as a strategic investment. by Lawrence G. Mcmillan. NYFI(New York Institute of Finance).ISBN 0-13-636002-5
Options- Trading Strategies that Work. by William F. Eng. Wrightbooks ISBN 1-875857-93-1

bye

 

[Bill.L]

Hi again,

Forgot to comment on how Andrew seems right on the ball here. Remember you can lose also with the Spann formula.

Picture this. you buy 1000 AMP at $8.00 early this year. You buy an $8.00 protective put 12 months out for the 6.9% cost as indicated. = $552 +brokerage on shares and option. You sell 2 month call at 12% =$160 -brokerage. With 3 lots of brokerage so far you maybe only $542 down on the deal at this point. Shares drop unexpectedly to say $5.00 during your first 2 months. Your protected allright, but writing any further options against your position would not be profitable as the strike price would have to be $3.00 out of the money.

bye

 

[ocean view]

Cash flow- DAMO

DAMO,

in relation to Loans & cashflow for banks ..

I can only give you my situation ,, I have never repaid a loan from my wages or pocket. I have always simply borrowed against my assets for
No. 1 (Funds for repayments for my loans)
No. 2 (Funds to keep purchasing).

For this to happen your CG needs to be strong of course. But it is not that hard to find. Australia is a big place.. And outside the borders it is even bigger.

cheers ocean

"never judge a book buy it's cover"

 

[Andrew]

Ocean View, how are you able to show servicability to the banks to keep
borrowing? Low-docs?

As for the Peter Spann options trading scheme, it seems to me that it's a
form of risk arbitrage, with the price disparities between the long term
put and short term call contracts being the focus of profits. This strategy
would probably work much better long term bull market rather than our
current sideways trending limbo as the hedge premium would be lower
and the call profits higher.

I agree with Bill that anyone who wants to get into this should read
Eng in order to find profits in the options market.

andy

 

[kylie500]

I have read Peter Spann's book, but haven't done his course. I have done an options trading course, which taught me about buying options, rather than selling options.

I have made some 100% profits over a couple of days (and other times I've just as easily made 50% losses). Overall, I think the issue is not so much to do with your strategy, but with learning about the market thoroughly, and, once you've decided on your particular strategy, having the discipline to follow through with it.

Originally I got into trading to generate an income to fund property purchases. This hasn't happened (yet) but this is because of my lack of discipline rather than any fault in the trading system. I'm still working on it!


























.

 

[addicted]

hi ocean view i was thinking about your way for a couple of weeks ,,,and i thought i must be mad ,

BORROW to pay for borrowings ,now i thought ,this is it
I NEED A BREAK ha ha
so now i dont think im so mad !!!!!!!!!!!!!!!!!!
after all

 

[ocean view]

cash flow!

Addicted!

They say!

there is always a mad part in some one!

I am happy to waste it on increasing ones wealth .

cheers ocean.

 

[Robyne]

protected buy writes

I have been trading using Peter Spanns protected buy-write method for a few months and I agree that there is much less to be gained than in Peter's examples butit looks like we are heading for a modest return. By the end of 10 months we will have around 13-14% plus whatever dividends are paid in that time.

The main risk I see with this strategy is the share going up! If the share goes up you make the gain up to the exercise price of your call. That is assuming you are exercised. That's fine, you make a profit even though it is capped. The problem is that if you have the long term put you presumably want to keep going with the strategy so you have to buy back the shares at the higher price using up all your newly aquired profit and more capital input after that. That's fine too, if the share keeps going up, however, if it drops suddenly you have lost the extra capital you have put into the strategy (as well as the profit you made on the increased price of the share). Your put only covers you for the original price of the share and will not help when the price drops from a subsequently higher price.

Well that's not too bad in itself, because share prices change and you do not have to sell at a loss, you can just wait until the price goes up again but here's the probelm. If you want to continue with the strategy you have to keep writing calls on the share. You therefore risk being exercised and "crystalising" the loss of the extra capital you have invested in the strategy.

This is what has happened to us recently in NCP shares/options.

Perhaps, Peacock, you could give me your more expereinced view on the above issues.

Now Seaview,

I have been considering cash flow positive property. The idea sounds good but there are a few issues which have put me off. From what I see at the moment just about anything that is cash flow positive is in a capital growth dead area. I include in capital growth dead areas, those areas that have been dead for the last nine years and suddenly had a year of growth because chances are you would have to wait another 10 years to get any growth out of them. In the mean time you have to pay all your buying costs, maintenance etc. What if the house needs a new roof? Building inspectors aren't perfect.

From what I see the cash flow that can be obtained from these places is in the order or $20 or $30 per week which is easily eaten away by unexpected costs.

So, in a nutshell I am left wondering if cash flow positive property is really worth it.

Robyne

 

[BUNDY]

Don't forget, sometimes, the market does what it does - often for no apparent reason.

You can analyse charts and do your technical analysis etc and be 100% certain you're doing the right thing, then BANG, the share you've just tradded drops $1, or $2... and you whole world is blown out of the water. You can go back and try to work out what happened and where you went wrong and why there is now a sudden hole in your pants.

Often the only answer you can find is the Maket Did what it did, because it did.
No reason, just did.
You cannot control it. You may summise, you may guess, but History rarely repeats itself. History may be similar, but it is NEVER the same.

Anyway, it's fun having a bit of a punt now and then.

BUNDY