Covered Calls and Cash Secured Puts (Part 23)

My last post presented a SysCW example that did not meet the Math Exercise criteria. This sort of inconsistency makes me question whether a trading approach is legit.

I include this post to illustrate my thought process of how one might critically evaluate a trading strategy or financial proprietor, whether s/he be selling a newsletter, advisory service, or trader’s education program. I have waxed eloquent about the shadiness in the industry, which as a whole deals with some of the dirtiest stuff we touch on a day-to-day basis. MacDuff himself has a history of being less than clean. How can I not undertake these considerations?

As part of my due diligence, I absolutely should.

And you should too.

In this instance of the CC position on GIVN, MacDuff begins the trade by selling intrinsic value that would have resulted in a very poor return (about 2% annualized) if the stock were to move higher. Lucky for him GIVN moved lower! Now he looks like a genius except the SysCW guidelines tell us something altogether different. The Math Exercise dictates we pass on any trade that does not produce 15% annualized returns.

Sometimes MacDuff writes about accepting lower returns in the name of diversification. He says it can’t hurt to have positions involving mega caps and stable blue chip stocks, which are associated with lower option premiums. This sounds good but I question whether any evidence exists to support it. This certainly gives him justification to present additional examples that aren’t quite what SysCW shoots for.

While this may give reason to accept an 8-12% annualized return, I don’t believe MacDuff would ever target a 2% annualized return. That’s not worth anybody’s time.

If the strategy is not truly viable then one marketing approach could be to present tens upon hundreds of successful trade examples to make it look reliable and repeatable. If these are paper/backtested trades then I might be more likely to make mistakes. Personally, I am more cautious when real money is on the line. This means checks, double checks, and checklists: all to ensure nothing is overlooked.

Let’s file this under “optionScam.com” and move on.

The Rich MacDuff Investment Philosophy (Part 1)

In the last post, aside from illustrating the “rolling down” management technique I introduced you to Rich MacDuff and his Systematic Covered Writing (SysCW). Today I want to present a MacDuff disclaimer before I go on to further discuss his trading philosophy.

I mentioned in the last post that I recommend MacDuff’s free content and that I am trying to determine whether SysCW offers a viable approach to CC/CSP trading. Part of the reason I remain in evaluation phase and the reason I recommend you not pay him any money is explained here.

This SEC finding reverberates with suspicion I have shared in previous posts regarding statements of success by financial advisors, investment newsletters, trader’s education programs, and the like that litter the landscape of the industry. Because I am not a lawyer, I will not try to put into proper perspective how severe MacDuff’s transgressions are. Please read, become aware, and form your own conclusions.

All I will say is that given the financial industry I, personally, begin with a certain dose of skepticism. Knowing that someone has been found guilty gives me all the more reason to critically evaluate and identify any logical flaws that may exist.

Despite this Securities Act violation, from all my reading I believe that SysCW includes strategic themes that run through many different CC/CSP trading approaches. If CC/CSP trading is going to work then odds are implementation will include some of these more common themes. I find it worth my study for this reason.

Once again, the ultimate question will be whether the comprehensive guidelines represent a viable trading approach.

In my next post, I will talk more about some general tenets of MacDuff’s [professed?] trading philosophy.

Covered Calls and Cash Secured Puts (Part 6)

In my last post, I discussed some reasons why more investors don’t use CC/CSPs. While my citations are decisively in favor of options, is it possible that options are too risky and should be avoided?

Ultimately my answer is no because options are less risky than stock.

However, because I’m a hard sell I am going to discuss one point that takes issue with most of the references in my last post:  conflict of interest.

The author of the first article admits one reason he writes the option trading blog is to make money:

> It would be hypocritical if I say I am doing all this blogging
> just to tell the world “hey here is another sucker who is
> trying to invest his cash”. I must admit, that I am doing all
> this to create another stream of income.

Of course he wants to be pro-option trading since his option trading blog caters to option traders and their page views provide his stream of income.

The author of the second article writes books on stock and option trading.  Of course he wants to be pro-option trading because this positivity translates to interest among his readers.  Some of this interest and willingness to learn or develop trading strategy will likely translate into buying his books.

With regard to the third article, do you see any potential conflict of interest?

> Well, here at OptionsZone, we have our own set of MythBusters.
> Our team of experts is comprised of CEOs from the top options
> trading firms. Industry luminaries such as Tom Sosnoff of
> thinkorswim, George Ruhana of OptionsHouse,
> Wade Cooperman of tradeMONSTER, Don Montanaro
> of TradeKing and Stephen Ehrlich of Lightspeed,

The OptionsZone website caters to option traders and the same conflict of interest I described regarding the first article, above, applies here.  In addition, the “team of experts” are all brokerage CEOs.  They want everyone to be so excited and passionate about option trading that everyone goes out and trades options!  The more options traded, the more likely their brokerage firms are to make more money.

I will continue this discussion with my next post.