Covered Calls and Cash Secured Puts (Part 35)
Posted by Mark on March 7, 2014 at 06:06 | Last modified: February 20, 2014 05:54Before I continue the discussion of dollar cost averaging (DCA) as a position management technique, I want to present a disclaimer about my previous discussion of annualized return.
In general, the sooner CC/CSP positions go back to cash, the higher the annualized returns. Especially for positions that last less than one month, MacDuff notes:
> As always it is VERY important to realize that in order
> to actually achieve the calculated gains, one would need
> to successfully repeat similar transactions over the
> course of twelve months.
This particularly applies to weekly positions, which are becoming more popular with traders. A position that makes 1% in five days has generated an annualized return > 50%.
How can I realize this return on my whole portfolio?
First, since it is a 1-week position I must repeat the trade 52 times.
Second, if each position puts 1.5% of my portfolio at risk then I need to do about 66 of these trades at once.
At the very least, I’m looking at 52 * 66 = 3,432 trades per year.
That does not include positions that will have to be adjusted or manually closed, either. Unless I am willing and able to be sitting at my computer full-time during market hours, this is probably unrealistic.
What is more realistic might be to allocate a segment of my portfolio to weekly and “short-TERM” positions. I can recycle these frequently and book some supercharged returns in this segment while limiting trading frequency to something my time schedule and attention span can accommodate.
The bottom line here suggests I should continue to use annualized return as a guide to initiating and adjusting positions because this provides an apples-to-apples comparison regardless of position duration. I can be enthused about exceedingly high annualized returns–but not because I would ever expect to realize such a return on my whole portfolio. Rather, supercharged positions may serve to offset the periodic longer-term positions that will drag on for years.
The latter seems to be an unfortunate reality of CC/CSP trading just as “dogs” are an inevitable part of stock investing.
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[…] the matter of calculating returns. Recall the last post where I derived the possibility of having to make 3,432 trades in one year. That involved trading the whole account. The total return of the account drops proportionally to […]