Hi Anthony,
I use options to add income primarily with the following three approaches.
1. I sell covered calls on positions that I think are fully valued. Rather than just sell the shares, I sell a
covered call to receive immediate income. Then, if the position is called away, I take the proceeds and invest in something I consider undervalued. Sometimes the called position drops below the call price. At times, depending on the decrease, I might rebuy the shares and repeat the process. The rebuys are rare. One recent example is that my 500 shares of VLO were called away. I bought 400 shares of VLO and then sold covered calls on those shares. YTD I have received $2,437 in options income on top of dividends for VLO. My dividend income 2022 YTD is $588. Therefore, options income exceeds dividend income. This is frequently the case.
2. If there is a position I want to add, or a position I already have and I want more shares, I sell a
cash covered put with a contract price in alignment with what I am willing to pay for the investment. This is far less frequent, but I have added shares this way.
3. Sometimes I buy a position, and then immediately sell a
covered call on the position. So, for example, if I buy 100 shares of XYZ at $50, I am willing to sell a covered call that expires on Friday for $52. Often I can receive over $100 for these trades and then receive the $200 if the shares sell at the contract price. (This is just an example, not the norm. For example, my average options trades usually give me more than $200 up-front.) A quick profit with minimal work. Then the cash can be used for other buys.
I have a series of data points I consider when selling covered calls. I formulated my requirements after experimenting with covered call trades in 2021. So, for example, I always want to be aware of the next ex-dividend date, the dividend amount, the earnings date, my cost basis, the number of days the position has been in my account and the theoretical likelihood that the shares will be called. I use Fidelity's Active Trader Pro software that gives me this data in the Trade Armor window. Most of my covered calls result in me keeping the options income and keeping my shares. Therefore, I can often repeat the covered calls week-after-week. I use a spreadsheet to track each options trade.
However, my approach is more challenging when the momentum is downward. If market sentiment seems to be negative, and there is an up day, I will sometimes sell a covered call or two in anticipation of further gloom-and-doom thinking.
Most of my positions are either giving me a decent dividend yield or dividend growth, so I don't feel compelled to sell anything during times of market pessimism or fear.
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WAYNE WINQUIST
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Original Message:
Sent: 04-27-2022 10:49
From: Anthony Sadler
Subject: Selecting and Managing Your Investments - Lesson 7
Hi Wayne,
Can you comment on how you use options in your portfolio, and what are your buy & sell triggers? thank you.
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Anthony Sadler
Original Message:
Sent: 04-23-2022 11:32
From: WAYNE WINQUIST
Subject: Selecting and Managing Your Investments - Lesson 7
I have my own set of rules for buying and selling investments. I don't think of stocks as "value" or "growth" so I don't use metrics associated with either of those styles. However, I am more of a value investor by holdings, than growth. I don't focus on value or growth styles because I don't see that as a helpful long-term strategy. I'm focused differently.
There are two key elements to my strategy.
- One is a primary focus on dividend growth investments. This can and does include large-cap, mid-cap, and small-cap growth and value stocks. 94% of our assets are in stocks and stock ETFs. Only 1% is in bonds and the rest in cash. I prefer value investments, but I don't pick investments thinking "value" or "growth."
- The second element is the type of options that are available. I prefer positions that trade weekly options, but I do buy and own some that only trade options monthly. I do not trade options on REITs or BDCs. I rarely trade options on ETFs.
My Primary Investing Rules are:
- Rule number one: Minimize exposure to bonds and bond ETFs and mutual funds. The 40/60 rule is of zero interest to me.
- Rule number two: Consider dividend growth investments that have weekly options trading for covered calls and cash covered puts.
- Focus on dividend growth via ETFs and stocks. This means that any position that suspends or cuts the dividend is likely to be sold with rare exceptions. Example: Ford was not sold when they suspended their dividend. I don't require dividend growth for all investments. So, for example, I am likely to buy a BDC regardless of dividend growth as long as the dividend is sustainable.
- Focus on the dividend 5-year growth rate of 8% or better and a payout ration (depending on the sector, of course) between 20-70%. For BDCs and REITs I focus on yield more than dividend growth. But I don't make yield the determining factor for any investment.
- Focus on the best sectors, whether in favor or not. I am most interested in investing in these sectors: Financials, Information Technology, Health Care, Real Estate, and Consumer Discretionary. I am very "overweight" financials compared to the Dow Jones U.S. Total Market Index. I avoid utilities when they are pricey. Therefore, I have zero utility exposure at this time.
- I rarely will buy an investment if the Seeking Alpha Quant Rating is anything less than 3.00. I make exceptions for growth investments.
- I avoid mutual fund and ETF international investments. I would prefer to buy specific stocks with a focus on Canada and the UK. 13% of our investments are international, focused primarily on financials and technology.
- For income I prefer to invest in BDCs and REITs. I do not like REIT ETFs or mutual funds. They include far too much garbage and do not provide a good dividend yield.
- Never "rebalance" in the traditional sense of this word. I prefer to choose to invest using other criteria and won't buy and sell to rebalance. I am out-of-balance most of the time.
- I generally avoid stocks and ETFs with low trading volume.
- I am not afraid to buy a stock on Monday, followed by a profitable covered call option trade. Then, if the trade is called away on Friday, I consider rebuying the position the following Monday and repeat the trade. This is usually for growth stocks with upwards momentum.
- I have no interest in ESG-focused investing. That is just added noise. I do avoid some investments based on morals and convictions.
The first image shows my current holdings by style. The second shows the results of my approach from a dividend income perspective. My options income exceeds my dividend income, but that is not shown here.
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WAYNE WINQUIST
Original Message:
Sent: 04-07-2022 14:47
From: Jenna Brashear
Subject: Selecting and Managing Your Investments - Lesson 7
Buy Guidelines for Stocks: Value and Growth
Reflect
A big part of the AAII Model Shadow Stock portfolio's long-term success is an adherence to well-defined buy and sell rules – which were clear guidelines for a successful portfolio dictated by our founder, Jim Cloonan. We believe that following a similar type of process is key to being a good investor and creating a lasting portfolio you can rely on through thick and thin.
In this lesson, we'll provide guidelines based on two of the four most popular investing styles: value, growth, momentum and income. You can incorporate them directly into your strategy or modify them as necessary.
The goal of value approaches is to buy a stock at a discounted valuation. Here are some basic valuation metrics (as of March 25, 2021) you can use to set valuation rules:
- Price-Earnings: 13.4 or lower (cheapest 40% of all exchange-traded stocks)
- Price-to-Book: 1.5 or lower
- Price-to-Cash Flow: 10.8 or lower
- Price-to-Sales: 1.9 or lower
On the other hand, growth investors seek stocks primarily with rising sales and/or earnings. Some strategies require growth over a certain period of years while others require a minimum level of growth. You can combine both into a strategy, meaning X years of growth and growth in sales and/or earnings of at least Y%.
Here are some basic growth metrics (as of March 25, 2021) you can use to set growth rules:
- EPS Growth 12-Month: 53% (highest 60% of all exchange-traded stocks)
- EPS Growth 5-Year: 16%
- Sales Growth 12-Month: 21%
- Sales Growth 5-Year: 9%
These guidelines will serve as a basis that you can use when creating rules about which stocks you will consider buying, holding, or selling.
And if you've already created your own buy and sell rules for stocks, this is a great time to compare your list with ours to see if you're missing out on anything important.
Now, it's your turn to put your knowledge to the test with our discussion activity of the week.
Participate
For this lesson, we challenge our members to compare their own buy rules with the official AAII list. We want to hear what the differences are and how you will use these to select which stocks go in your portfolio.
For this activity, please review the attached checklist PDF and answer these four questions:
- In your own opinion, what is the most important rule to follow/create for knowing when to buy value stocks?
- What is the most important rule to follow/create for knowing when to buy growth stocks?
- Looking at your own list of buy rules for value and/or growth stocks, as well as the AAII "best practices," which ones were similar and which ones were different? Let us know in the comments below!
- If you don't focus on value or growth styles of investing, why is this the case? Please share your preference below.
Now, we want to hear about your findings! Please participate in the discussion activity.
Download the "Selecting and Managing Your Investments" worksheet
Download the "Buy/Sell Rules for Stocks" checklist PDF
Questions about coursework, webinars, worksheets, etc.? Drop your inquiries in the discussion below. We're happy to help!
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Jenna Brashear
AAII Community Manager
Chicago, IL
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