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Covered Calls: A Passive Options Strategy

Covered Calls: A Passive Options Strategy

I’ve decided to pivot towards a more passive option approach with covered calls.

The reason is twofold. First, I haven’t done well with options (except for August) because of mistakes I’ve made.

Back in November, after the surprise election of Donald Trump and the ensuing stock market melt-up, my option positions blew up and I lost around $1,500. My account size at the time had been around $10,000 so that is a big, big percentage loss over a short period of time.

The second reason is I don’t have free time during trading hours.

Reason One: I Made Mistakes

It should not have mattered much when the markets moved a lot. I pay to follow Kirk DuPlesis’s trades over at Kirk was only down around 2%. I was down around 15% even though I was in very similar positions.

Why the difference?

The main mistake I made is that I only had about $100 in free margin, which is a big no-no. I should have had $5,000 in margin available. Because I only had $100 when the markets went crazy I didn’t have any dry powder to make adjustments add additional positions to balance out the portfolio or hold positions to expiration.

Kirk was using around 50% of his available margin, so he is able to hold positions to expiration, make adjustments, sell additional premium, and keep his portfolio diversified.

It’s frustrating because while I know the rules I wasn’t following them.

Follow the Rules to Be Successful

To be successful trading options long-term there are several inviolable rules: small position sizes (1-5% of the portfolio per trade), only use half of your available capital, and place a lot of trades so the probabilities work out.

There are other factors too, like using the correct strategy, making high probability trades and being on the right side of volatility, among others.

But I don’t follow the rules! I’m afraid of missing out on a trade, or I allow myself to make an exception “just this once”, or I get greedy. And it burns me every time!

So I’m putting myself in time-out.

I’m going to stop trading options for a while. I haven’t had the discipline to follow the rules that must be followed in order for the math work out in my favor and be successful.

Reason Two: I Have Less Time

Not only that but I don’t have the free time I did when I was seeking out a new, full-time career.

Even though it might be possible to trade options and work a full time job it’s hard. One is confined to placing limit GTC orders before or after work or trading over lunch. However, a lot of the market movement tends to happen in the 30 minutes after the market opens and 30 minutes before the markets close.

When I was doing a lot of trading (July-September) I didn’t have a day job. I had this website, option trading, and selling coins. I set my own schedule.

Now I’m on the road or in appointments 8-9 hours a day during trading hours and I rarely have time to place 3-4 trades 30 minutes before the markets close. I don’t have time to make the appropriate adjustments to existing positions and I don’t have time to look for new trade opportunities.

I need a more passive approach.

Covered Calls

So I’m winding down my existing option positions. I’m also increasing holdings in some of my Value Stock Picks and selling some covered calls on them.

Covered calls they work like this: first buy shares of a stock, say 100 shares of Acme Amalgamated for $40/share. Then sell an out of the money (out of the money for a call option contract would be a contract with a strike price above where the underlying stock is currently trading) call contract for a theoretical $100 premium. 10% out of the money would be a $44 strike price.

A call contract legally obligates the call option seller to sell 100 shares of the underlying stock to the option contract buyer at an agreed upon price (the strike price) at any time before the contract expires.

For a more in-depth introduction to covered calls I suggest checking out Investopedia.

With the covered call approach, I sell an out of the money call with a strike price about 10% above where the stock is currently trading, with a contract expiring 30-60 days out, and I buy 100 shares of the underlying stock. This provides some downside protection, regular income (from the option premium) and the only downside versus owning the stock outright is gains are capped at 10% until the contract expires.

With covered calls three things can happen.

1) The stock goes down

In the above example, the stock price could drop as low as $39 at the time of expiration and the position would still break even. Because even though $100 would be lost on the price of the stock (if one were to sell) the call option would expire without being exercised and the $100 premium is still retained.

If the stock fell below $39 a loss would occur, but it would be $100 less than it would otherwise be.

2) The stock goes up or down a small amount, or stays the same price

A $100 profit would be realized plus or minus the gain or loss of the stock. If the stock price was below $44 at expiration the sold call would expire worthless and not be exercised.

3) The stock goes up beyond the strike price

In this case the position would return about 10%. It would be $400 gain plus the $100 option premium. One could either close out the call contract for a wash/loss or just let the position get assigned and the 100 shares of ACME bought for $40 per share would get sold for $44 per share.

So by selling covered calls, you give up some upside potential in exchange for some downside protection and recurring income.

But if I could make 10% every 60 days I’d be thrilled. Lets say the stock is on a tear, and it goes up 15% in the first 30 days and I get assigned, I’d still make 10%. I could then buy the stock back and sell another covered call 10% out of the money, at the end of 30 days the stock goes up another 15%, I would have still make an additional 10%, etc.

I think it is a good strategy if you can execute it correctly. Plus it doesn’t take a lot of time.

Some important elements:

1) Picking a good stock

I want to sell covered calls on stocks (or ETFs) that I want to hold for the long term. I’ve previously talked about what metrics I use for selecting stocks.

Another strategy, for example, is to buy an S&P 500 ETF like SPY and sell covered calls on it.

2) Discipline

You need to limit risk and diversify in non-correlated assets. It’s a temptation to buy into the latest hot stock and sell calls on it, or try to use too much leverage on a position. Another temptation could be buying too much stock in a given company or industry.

I would like to go back to trading options in a more active way someday. And I’m not saying I won’t make the occasional earnings trade but if I get back into actively trading options it will require puritanical adherence to the rules.

Fed Raised Rates 0.25% – Rising Rates Positive For Gold

Fed Raised Rates 0.25% – Rising Rates Positive For Gold

The following is reposted from Goldcore with permission from Goldcore Founder and Executive Director Mark O’Byrne.

“GoldCore are one of the leading gold brokers in the world, serving clients in the U.S. and over 45 countries internationally.”

I receive no compensation for reposting this article. I thought it was valuable and want to share it with my readers.

– John

Fed Raised Rates 0.25% – Rising Rates Positive For Gold

By Mark O’Byrne – 15 December 2016 – From the Goldcore Blog, reposted with permission

The Federal Reserve increased interest rates by 0.25% as expected yesterday leading to gold falling to lows last seen in February 2016 and the dollar rising to its highest level against the euro in 14 years.

Gold actually settled higher at $1,163.70 for the day yesterday. However gold futures slid to $1,156.70 an ounce in electronic trading on the rate decision at 1400 EST and soon gold was pushed down 1.3% to 10 month lows after the decision in less liquid after hour markets.

Source: New York Federal Reserve for Fed Funds Rate, for Gold (PM fix)

Yellen announced a 0.25% increase in the benchmark rate to 0.50-0.75% as the Fed raised interest rates for the first time in a year.

The Fed signalled more rate hikes in 2017 as expected and once again attempted to appear hawkish and suggested they would increase interest rates three times in 2017.

It is important to remember that they promised three rate hikes for 2016 this time last year. Only one rate hike materialised – yesterday’s rate hike. It is prudent to focus on what the Fed does rather than what it says.

The Fed has been promising higher interest rates most years since 2008 and yet there have only been two interest rate rises since 2008. Yesterday’s rate rise was only the second rate rise since the 2008 financial crisis. The Fed frequently adopts a hawkish tone which consistently fools many market participants who buy into it.

Similar price weakness and poor sentiment happened at the end of last year when gold had an intermediate bottom on the last day of 2015, December 31 at $1,062.25 per ounce (LBMA AM Fix). This was prior to very strong gains in January 2016 and in the first half of 2016.

Gold prices in January, February 2016 (

Sentiment today is very similar to that seen at the end of last year. Part of the bearishness was because the Fed promised 3 rate rises in 2016. They managed just one – yesterday’s rate rise.

As the great orator, ex-President George W Bush once attempted to say:

“Fool me once, shame on you; fool me twice, shame on me…”

From a long term investor, pension owner and physical buyers perspective, it is prudent to ignore the noise and focus on the fact that the Fed’s monetary policies, along with most central banks in the world, remains extremely accommodating.

The market perception and narrative is that a rise in rates, even by a marginal 75 basis points will be negative for gold in 2017. This may be true in the short term as perception, even misguided perception, can drive markets in the short term.

However, rising interest rates per se are not negative for gold. What is negative is positive real interest rates and yields above the rate of inflation. This is unlikely to be seen any time soon.

The data and the historical record shows that rising interest rates are actually positive for gold. The most recent example we have of rising interest rates is when the Fed increased interest rates in the 2003 to 2006 period (see table above and research note here). As can be seen in the table above, in June 2003, the Fed funds rate was at 1% and by June 2006, it had been increased to over 5.5%.

Even if the Fed increases rates, interest rates remain close to zero not just in the U.S but in most major economies. Thus, there is no opportunity cost to owning the non yielding gold. Indeed there remains significant counterparty and systemic risk in keeping one’s savings in a bank and government bonds look like a bubble that is being supported by money printing and debt monetisation.

This period of ultra-loose monetary policies needs to come to end as soon as possible as debt levels are surging globally creating the real risk of a new debt crisis in 2017.

Gold is looking shaky in the short term and the technicals and momentum is on the side of the bears. This could push gold lower into year end, back to test support at $1,100/oz.

Today, after a near 50% correction in recent years, gold again has significant potential for substantial capital gains in 2017 and during the Trump Presidency.

For investors looking to diversify and hedge the significant risks facing us in 2017, gold is again at a very attractive entry point.

Value Stock Picks – December 2016

Value Stock Picks – December 2016

Value Stock Picks – December 2016

I’m a value investor which means I buy stock in profitable companies trading at a discount.

I have hopes for a paid stock newsletter (Global Value Intelligence). But I’ve decided to put GVI on hold and share what I’ve written in past GVI issues, as well as provide new stock information. I intend for this information to remain free for some time.

I’ll be tracking the stocks I like over at my Value Stock Picks page.

The information presented here, like all the content on this website, is not investment advice. These are stocks I own (or intend to own) but they might not be suitable for you. The information presented is accurate to the best of my knowledge, but no guarantee of accuracy is made.

Prices are as of 9 December 2016 on market close, unless otherwise noted. Market data is from

Below are some of the stocks I like:

Nissan (NSANY on NYSE)

PriceMarket CapShareholder’s EquityPrice to BookEarnings per ShareYieldReturn on Equity (TTM)Price to Earnings (TTM)
$19.58$38.7 bil$40.9 bil (converted from JPY)1.0$2.16 (converted from JPY)4.20%10.5%9.5

Nissan has a price to book of 1.0 and an attractive 4.20% yield. It is an ADR and has no options. I generally prefer to own a stock on it’s native exchange, with the ability to sell covered calls, but I still like this stock for it’s attractive metrics, brand and yield.

Transocean (RIG on NYSE)

PriceMarket CapShareholder’s EquityPrice to BookEarnings per ShareYieldReturn on Equity (TTM)Price to Earnings (TTM)
$15.42$5.6 bil$14.5 bil0.4$2.168.1%4.7

The oil market in general has been pretty beaten down of late. The price to book is 0.4 which amounts to a 60% off sale. Despite the low price, Transocean is profitable, boasting $791 million in net income in 2015.

Mount Gibson Iron (MGX on ASX)

PriceMarket CapShareholder’s EquityPrice to BookEarnings per ShareYieldReturn on Equity (TTM)Price to Earnings (TTM)
A$0.34A$372.8 milA$392 mil0.9A$0.0824.7%4.4

I first discussed MGX in the October 2016 Global Value Intelligence Dispatch (GVI has since been put on hold). At that time it was trading at A$0.29.

Writeup as of October 2016

MGX is an iron ore mining company in Western Australia. It can boast A$392 million in shareholder’s equity but is trading at a market capitalization of just A$318 million. This means the company’s stock could rise by over 23% before its market value would even be equal to its equity.

Mount Gibson Iron recently received a A$86 million insurance settlement and is set to receive an additional payout in the future. Not only is this company undervalued but it brought in A$6 million in the three month quarter ending in June.

PanTerra Gold (PGI on ASX)

PriceMarket CapShareholder’s EquityPrice to BookEarnings per ShareYieldReturn on Equity (TTM)Price to Earnings (TTM)
A$0.08A$9.6 milA$39 mil0.2A$0.41138.9%0.4

I first discussed PGI in the October 2016 Global Value Intelligence Dispatch (GVI has since been put on hold). At that time it was trading at A$0.08.

Writeup as of October 2016

This stock is currently trading for 1/3 the book value and presents an exceptional value.
Despite the low Price to Book ratio PGI is still profitable. PGI brought in A$8 million in cash in 2015. In the most recent quarter PGI reported a 4% increase in gold production over the prior quarter and operating costs
3.7% lower.

Gold and gold miners have been beaten down over the past few years. By purchasing a stock in a depressed sector below book value there is a great deal of downside protection.

Triton International (TRTN on NYSE)

PriceMarket CapShareholder’s EquityPrice to BookEarnings per ShareYieldReturn on Equity (TTM)Price to Earnings (TTM)
$19.23$674.3 mil$665 mil1.0$2.679.16%10.7%9.4

I first discussed TRTN in the October 2016 Global Value Intelligence Dispatch (GVI has since been put on hold). At that time it was trading at $13.19.

Writeup as of October 2016

Triton International trades and leases intermodal containers and chassis. It features an attractive price to book ratio combined with a high dividend yield.

Triton recently merged with TAL and paid out a $.45 dividend on 22 September. This high dividend is most likely not sustainable. Shipping has been declining of late, but TRTN still managed to bring in $18.2 million in pre-tax income in Q2 2016.

Noble Energy (NE on NYSE)

PriceMarket CapShareholder’s EquityPrice to BookEarnings per ShareYieldReturn on Equity (TTM)Price to Earnings (TTM)
$7.64$1.9 bil$6.69 bil0.2$2.065.07%3%7.8

I first discussed NE in the October 2016 Global Value Intelligence Dispatch (GVI has since been put on hold). At that time it was trading at $6.34.

Writeup as of October 2016

Oil has been falling and with it the value of energy producers. Despite falling oil prices, NE is a fantastic value. The company has $6.7 billion in shareholder’s equity, but is trading with a Market Capitalization of $1.5 billion.

The 5.36% yield is attractive but not sustainable. Despite low oil prices Noble Corp is profitable. The most recent quarter that ended in June resulted in $687 million in cash from operations.

Anthem (ANTX on NYSE)

PriceMarket CapShareholder’s EquityPrice to BookEarnings per ShareYieldReturn on Equity (TTM)Price to Earnings (TTM)
$47.07$12.4 bil$23 bil0.5$9.382.77%9.5%5.5

I first discussed ANTX in the November 2016 Global Value Intelligence Dispatch (GVI has since been put on hold). At that time it was trading at $46.83.

Writeup as of November 2016

Anthem is a mid-sized health benefits company that works with employers and individuals to offer network based healthcare plans. While recent government incursions into the healthcare industry make me leery to invest in this sector I find the metrics to be quite favorable.

The Price to Book ratio is excellent, the yield is attractive and the company is profitable. I also think Anthem is well positioned to benefit from the “baby-boomer” generation (those age 50-85) as more of them retire each year.


As of 11 December 2016 John owns shares of NSANY, RIG, MGX, PGI, TRTN, NE, and ANTX. When possible he has also sold covered calls on these same securities.

Data is from

Powerful Wealth Lessons Concealed by Schools

Powerful Wealth Lessons Concealed by Schools

“We teach about how to drive in school, but not how to manage finances.” – Andy Williams

I didn’t learn much about personal finance or how to build wealth in school.

Even though I find art history, World War II, and the Pythagorean theorem interesting and important areas of study–I can think of few topics with more day to day relevance than personal finance.

But if it weren’t for two finance electives I took in college I wouldn’t have learned anything about personal finance in school.

There are powerful wealth lessons that schools could teach but for some reason do not.

Five Powerful Wealth Lessons School Didn’t Teach

1) I must Produce more than I consume to Build Wealth

I can’t say it better than Simon Black:

The Universal Law of Prosperity is very clear– in order to build wealth you have to produce more than you consume. – Simon Black


This basic concept isn’t taught in school and as a result we get polls like: “Two-thirds of Americans would have difficulty coming up with the money to cover a $1,000 emergency.”


The United States can also boast the following numbers:



If you consume more than you produce, the only option is to go into debt, which is a sure way to become poor.

In school I never learned the powerful wealth lesson: I must Produce more than I consume to Build Wealth.

2) Money Loses Value Because of Central Banks

Marriner S. Eccles Federal Reserve Board Building by ctj71081

Marriner S. Eccles Federal Reserve Board Building by “ctj71081”

I think most people KNOW that money loses value (or at least that things are getting more expensive each year), but for anyone who disagrees here are some facts:

  • In 1950 a new house cost $8,450 in 2016 the average is over $300,000 (3,450% increase)
  • In 1950 a gallon of gas was 18 cents in 2016 it is $2.40 (1,233% increase)
  • In 1950 the average cost of new car was $1,510.00 in 2016 it is $33,560 (2,122% increase)
  • In 1950 the average income per year was $3,210 in 2016 it is $55,000 (1,613% increase)


Those are stats specific to the United States but I know you’d find similar statistics throughout the world.

Dollars (and other fiat currencies) are losing value. Incomes are not keeping up with the rising costs of homes and automobiles, the two major types of purchases many people will make.

Saving money in dollars is a sure way to get wiped out.

Money doesn’t lose value because of some mysterious force or greedy businesses, it loses value because of central banks. This is something I’m passionate about because it is simply robbery. Not only is price inflation robbery, but it most directly harms the poor. I’ve written about the Downfall of the US Dollar and What Causes Inflation.

In school I never learned the powerful wealth lesson: Money Loses Value Because of Central Banks.

3) I’m on my Own for Retirement

In over 18 years of education in US government schools I can’t recall ever learning about the failure of US government programs.

There are countless examples.

One is state public pensions. They are woefully underfunded. Alaska, California, and Illinois are some of the worst offenders when it comes to underfunded pensions.

However, all fifty of these United States plus the District of Columbia suffer from underfunded public pensions.


Two more in-progress failures are Social Security and Medicare. (To be fair, I did learn about the insolvency of these programs in FIN 232, my senior year of college.)Wealth Lessons

The Medicare Trustees’ report indicates the Medicare program is underfunded and revenue is less than expenditures.


The Social Security Trustees’ report indicates that Social Security is underfunded as well.


This isn’t some tin-foil hat conspiracy. Below is a direct quote (from 2015) from the Social Security and Medicare Boards of Trustees:

Social Security’s Disability Insurance (DI) Trust Fund now faces an urgent threat of reserve depletion, requiring prompt corrective action by lawmakers if sudden reductions or interruptions in benefit payments are to be avoided. Beyond DI, Social Security as a whole as well as Medicare cannot sustain projected long-run program costs under currently scheduled financing.


I never learned about the importance of saving for retirement in school. I never learned about investing, IRAs, 401ks, pensions, or Health Savings Accounts. (Again, I did learn about these in FIN 232, my senior year of college.)

If you’re under 40 and you live in the US and you think you can count on Social Security and Medicare (or a public pension) I think you’ll be in for a rude surprise.

Social Security and Medicare are broken. Plain and simple. “But politician X will save these programs!” you might be tempted to think.

Here is another quote from the above report:

“Social Security and Medicare together accounted for 42 percent of Federal program expenditures in fiscal year 2014.”

This is the same Federal Government that is $20 trillion in debt. If the US Federal Government bails out Social Security and Medicare, who is going to bail out the Federal Government?

People need to make their own preparations!

In school I never learned the powerful wealth lesson: I’m on my Own for my Retirement.

4) College Isn’t Right for Everyone

Will this guy have to go $200,000 in debt to get a degree in British Literature?

Will this guy have to go $200,000 in debt to get a degree in British Literature?

How many times have you heard something to the effect of: “Study hard, go to college, get a good job and then retire at age 65.”?

That approach CAN work, but high school seniors need to be asking themselves, “does it make sense to go $150,000+ in debt for an art history degree?”

I took an art history class in college and I really enjoyed it. But if I knew how much I was paying for that class I would probably have done a lot better going to a museum or buying a few books.

If, for example, you can get a chemical engineering degree for $100,000 and are then able to make $70,000 per year right out of college then it starts to make more sense. But people need to start making those cost benefit and ROI calculations.

Young people need to stop assuming that college is a good idea. It depends on the cost of the education and how much that degree will allow you to earn once you graduate.

In school I never learned the powerful wealth lesson: College Isn’t Right for Everyone.

5) There is a Difference between Good Debt and Bad Debt

wealth lessonsThere is good debt and there is bad debt.

Taking out a $35,000 loan to buy a brand new car is very expensive. Maybe you’re making enough money that you can afford to treat yourself to a new car every 2-3 years and maybe leasing an automobile makes sense in that case.

But a good used car that is 5-6 years old makes a lot more financial sense particularly if you aren’t making a lot of money.

On the other hand, taking out a $200,000 loan to buy an income producing rental property could make a lot of sense.

Taking out a loan to buy new shoes or a car or other consumable items is bad debt.

Taking out a loan to buy an income producing asset is good debt.

In school I never learned the powerful wealth lesson: There is a Difference between Good Debt and Bad Debt.

I Learned a lot about Personal Finance outside of School

I learned a lot about personal finance from my parents, by reading, talking to experts, attending seminars and trial and error. In some ways it’s a good thing I didn’t learn about personal finance in school because I probably wouldn’t have learned as much and most likely would have been taught things that aren’t true that I would have had to unlearn.

The important takeaway is that financial education is critically important and that it’s up to YOU to make sure you learn what you need to know.