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Market MuscleLet's Pump Up Your Returns Using Exchange Traded Funds and Covered Calls with Protective Puts!
By Thomas Peterson
iUniverse, Inc.Copyright © 2012 Thomas Peterson
All right reserved.
Chapter OneDisclaimer Time
All the information, data, examples, opinions in this book (hard copy, soft copy, and / or E-book) are for educational purposes only, and they are not intended to give readers any investment recommendations to buy or sell a security or to provide investment and / or financial planning advice. This book does not endorse or recommend the services of any financial company. This book, Market Muscle, is not responsible for any losses whatsoever that may arise from any use of the content of this book or website. Options can be risky and you are solely responsible for using them correctly. Please note you are responsible for your trading and investing outcomes or for any losses that could result from the use of the content of this book. If you do not use a financial advisor, you must do your own due diligence before committing to any trading and / or investments. Stocks, exchange traded funds, and options do involve risk. Please be advised to use caution when buying or selling any type of security. Past performance is no guarantee of future results resulting in gains or losses. There can be no assurance that projected growth rates and premiums will in fact occur. Investing and option trading involves different types of risks, including the possibility of principal loss. The use of a financial advisor does not eliminate risks associated with investing but can help mitigate the risks. Please consider your investment objectives, risks, charges, and expenses carefully before investing. The CBOE ® and Chicago Board Options Exchange ® are registered trademarks and BXM is a service mark of the Chicago Board Options Exchange, Incorporated (CBOE). The S&P ® and S&P 500 ® are registered trademarks of Standard & Poor's Financial Services. Now that we got that out of the way, let's have some fun.
Let's Kick Start It
I have some housekeeping issues to go over before we get to the meat and potatoes in the pages ahead.
Now that I have thrown so much at you already, let's take a break for a humorous illustration.
Buy and hold today is more like buy and hope it goes higher.
Why You Need To Invest
There are many reasons for investing and saving money, but I like to keep it simply simple (kiss.) I have two huge reasons why we should invest and they are to stay above the eroding entity of inflation and to achieve financial goals. I will first talk about the lovely word inflation.
The impact of inflation is awesome. It is a constant, steady erosion of the purchasing power of money. It averages about 3% per year. I like to call it the thief in the night that steals every night. Inflation just seems to happen. It ebbs and flows through unexpected changes from news and other fun stuff from around the world. It could be news of a war or the financial impact of a war to an oil issue that can cause a sudden rise in prices. Inflation is very cyclical and it can be closely linked to our nation's overall stability and economy. On average, when things are going well, inflation is normally higher. You may be asking why I included this short summary on inflation, because the higher the real rate of return you are earning on your investments, the better your defense against the effects of inflation now and in the future. This naughty word inflation can make for some jaw dropping problems for people living on fixed income and tight budgets. This could include people living on pensions, annuity payments, payments from bonds, and other fixed instruments. The fixed income means that the dollar amount is fixed from the start and does not change. An example would be a $10,000 bond paying 5% will give you $500 a year for as long as you hold it. This of course means you're buying power will decline due to inflation. What about the flip side of the coin? The flip side is that bonds, CD's, and other fixed investments pay higher interest during times of high inflation, providing a better return. Covered call writing will help you combat the melting away of your money power by inflation by allowing you to get a better return.
The second reason we need to invest is to achieve our financial goals. This means different things to different investors.
These goals could be to invest for a vacation home, an education, a sports car, or for most investors a retirement of leisure. Many investors also just want a certain level of income during retirement and covered call writing can sure help with the goals mentioned above. I have also included some of the items that just seem to always be constant when talking about investing and they are the following:
As a general rule, if the majority of your investments are not in equities, odds are you will probably find yourself earning less than the ugly rate of inflation.
WHY YOU NEED TO INVEST QUIZ
1. In some years the rate of inflation is higher than in other years.
2. The effect of inflation changes.
3. Inflation is not cyclical.
4. A fixed income means that the overall dollar amount of the payment is the same from the beginning but can change.
5. Retirement is a reason to invest.
1. A (True)
2. B (False)
3. B (False)
4. B (False)
5. A (True)
Let's Make Some Money
Most of us already probably have an extensive library of books on investing. Why would you consider adding this manual to your collection? Well, my advisory practice collectively has over twenty years of experience in the trenches of the stock market. The collection of education and ideas comprised in this book will reveal to you as I said before, a strategy that is Wall Street's hidden little secret. A most important revelation would be the option market using covered calls. We want to share it because we have made millions of dollars for our clients using covered call strategies on a weekly or monthly basis over the years. If you want to know how we do it and why we do it, then you have opened the right manuscript. You will have some work, but I promise it will be almost painless. Please keep in mind the nature of learning and gaining experience will eventually take you to a higher level of wisdom that you may use for the rest of your life. I will try to communicate clearly and focus on the very real and very practical issues surrounding covered calls and how they can make you very respectable returns. In short, without sitting beside us watching how we invest, this book is the closest I can bring you to that experience. Again, thank you and please enjoy the rest of Market Muscle.
Covered call writing can help you double your money, but the fastest way to double your money is fold it over and put it back in your pocket.
Let's Connect The Dots
For the most part, option strategies are made out to be very risky, complicated investment tools. There is nothing that could be further from the truth. I will explain an option strategy that reduces risk and is considered so conservative that the government allows investors to do this strategy within their IRA's and it is called writing covered calls. We will then connect writing covered calls using ETFs (exchange traded funds). Exchange traded funds have become extremely popular in recent years and for various awesome reasons. Using exchange traded funds and writing covered calls along with protective puts is a lethal combination that could give you growth, income, and protection. Oh, and by the way, this strategy is considered CONSERVATIVE!!! I repeat CONSERVATIVE. In my opinion, by not writing a covered call is risky. Call writing can actually minimize downside risk. Market Muscle combines the use of writing covered calls with exchange traded funds hence offering investors a number of fantastic advantages that I will explain throughout the rest of the book.
I know what you may be saying about the last decade and the investment returns that have not been stellar to say the least. I know that 2008 was an extremely deflating year to many investors. Do not fear, because using the upcoming strategies in this book will allow you to make more returns, help minimize downside risk, and lock in gains that will not vanish. Market Muscle will focus on many things; here are some of the important items to remember that the Dividend Index Plus strategy will do for you.
The last item is that there is one ton of information available on options and exchange traded funds. I hope to make it as easy and painless as possible to present this strategy. Something else I wanted to review before we move onto options 101 is that I am going to be saying writing covered calls probably more than saying selling covered calls. They both mean the same thing so I wanted to point this out to avoid confusion. Writing and selling can be used interchangeably. Writing covered calls is like growing your own money tree in your backyard.
It is ok to be entertained by the financial news, just discipline your appetite for it because it is poison.
Kiss for many people besides affection and some chocolate, means "keep it simple stupid." I am not going to use the word stupid; instead I am going to change it to "Keep It Simply Simple". This is what I plan on doing with exchange traded funds and covered call writing. I am also going to repeat words and phrases because repetition is great for learning something new. I will also be italicizing important words and phrases that should initially be looked up in the glossary.
Why do so many people make investing so difficult? I used to ask myself this question all of the time. I don't ask myself this anymore because after being in the business for over a decade it comes down to two emotions, and they are fear and greed. The greed part is from the competitive nature that we think we can beat the market. My neighbor gained 10%, and I am smarter than him so I can probably get 15% on my money. Does this sound familiar? Fear and greed are the two emotions that can have a profound and extreme detrimental effect on the overall way people use their money to invest. We get caught up in greed all of the time. Most of us want to have as much wealth as possible and make it as fast as we can. The majority of us talk about having an investment plan with risk control measures. In the real world most of us do not because the get – rich – quick mentality makes it difficult to keep gains and negates the discipline for an investment strategy over the short or long term. I will be trying to present something that has new operational standards but has been around for a long time and has relatively been kept in the background. I will call this strategy Wall Street's hidden little secret. It is implemented by some of the most astute investors and money managers around. I will try to present this within the "kiss" plan. The investment strategy will still stick to some of the basics like time horizons, diversification, risk control tolerance, dollar cost averaging, locking in gains without emotion, and avoiding INVESTMENT ARMAGEDDON. You will be shown a new strategy and all it takes is an open mind, a few new definitions to learn, and a few hours of your time to read and work through this educational book.
The other emotion "fear" can prevent you from learning something new, but we are not going to let this happen. Let's look at fear and its influence in the financial markets. As with greed, the market can become overwhelmed with fear. How many of us have felt this unpleasant emotion? When the market starts rolling over and large losses start showing up for an extended amount of time, the market participants can become more fearful of having further losses. Please, remember how greed dominated the market during the dot com boom, and how fear took over in 2008 during that financial debacle. The statement that I want to get across is that being too fearful can hurt as much as being too "greedy."
I remember just after I passed my training and I received my securities license in 2000 I was trying to find some good securities for clients and prospects. Around that time there was the technology correction and then September 2001. The one security that really sticks out is McDonalds. It was priced below $20.00 a share. Due to fear, there was not one client or prospect who would give me the time of day to talk about any stock. It was because of the fear factor of uncertainty. Now, look at the price of McDonalds today in 2012 in the mid 90s per share at the time of this writing. I saw the aspect of fear again in 2008 and early 2009. When investors start getting large losses, there is a huge exodus out of the stock market. Investors get the throw the baby out with the bath water mentality. Investment plans and strategies get axed and thrown away. Investors get upset and they no longer open monthly statements and their plans are tossed because of fear and the horror of realizing more losses.
Now after being worried and fearful, many investors plan their final surrender after their plans and strategies didn't have built in loss parameters to control risk. The final act is to say "uncle" and throw in the stock market investment towel. The next mistake many investors make is that they get ultra conservative and the new investment vehicles have not a snowball in hell chance of rebuilding that lost wealth. I see this over and over again. I am going to present a kiss strategy investing in exchange traded funds while writing covered calls and controlling risk with protective puts. Let's get down to what I am trying to present here and let's take some of the greed and fear out of the market for you along with the daily noise of market news. I know that you are the final decision maker for your investments, but don't you want to make investing fun and profitable again. I will show you an alternative way to invest that is a kiss strategy and allows you monthly income in the range around 1% to 3% monthly using a strategy I named Dividend Index Plus. Yes, the index part of the strategy refers to the exchange traded funds with the dividend being the dividend that the exchange traded funds pays. The plus stands for the covered call writing on the exchange traded fund. You should be getting pretty excited by now if you want to pump up your investment returns.
Just think, in today's investment environment, we are able to own hundreds of different companies within one investment. We are also able to rent out your investment on a weekly or monthly basis no matter what the financial markets do. The other little thing called risk can be controlled with another instrument for your investment toolbox called the put. The rest of the book will touch on all of this and much more.
I had a teacher once tell me that with ambition and doing some diligent homework, anybody can be a genius.
Excerpted from Market Muscle by Thomas Peterson Copyright © 2012 by Thomas Peterson. Excerpted by permission of iUniverse, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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