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« Weighing the Week Ahead: Can the Fed Meet Expectations? | Main | Weighing the Week Ahead: Time for some surprises? »

June 19, 2012

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Fabian

There is another problem with bond funds; the dilution. All the new money that comes in must be invested at today's prevailing interest rates and unrealized capital gains are diluted by the new money. You don't really profit of a successful timing decision.

oldprof

Andrew -- My selection method is geared to identifying stocks with reasonable dividends and payout ratios, at least somewhat undervalued, and with some reason to think there is a base.

I am not projecting or promising any return from price improvement in the underlying stock. So far the double-digit return has come from dividends and call sales, with the stocks breaking even.

There are many ways to pursue this strategy. I understand that others have greater emphasis on the stock or the call sale.

I hope this answers your question, and I wish you luck with your variation of the approach.

Jeff

Andrew

Thanks for your great post.
I checked out quite a few of your other posts and am impressed your analysis.

Question:
Is the sweet spot for covered call stock selection buying solid balance sheet/good cash flow companies with a history of paying a growing dividend (and a payout ration say less than 70%) during times when implied volatility may be higher (such as now) - so valuations for the stocks you are writing calls on are lower - despite being solid companies.
The sweet spot for the calls themselves is about where you can earn 1-2% a month on top of the dividend and such that there is 2-4% of upside potential?

Steve

Jeff,

Looking forward to learning more about the "tricks and traps" of buying bonds. Thanks

oldprof

woolybear1 -- I do not want to make specific recommendations about funds.

Having said this, Jeffrey Gundlach has a great record and is always worth listening to. He has done well at avoiding some bond market pitfalls. If and when we get a rising interest rate environment, it will be a new challenge.

Implicit in your question is that if you are not going to take my advice and learn to buy your own bonds, you might at least look for the best manager:)

Good point!

Jeff

woolybear1

Jeff, what is your take on Grundlach's Total Return Bond Fund? thanks

oldprof

scm0330 -- Selling puts in the way you describe is a perfectly acceptable strategy when you are willing to own the stock and you choose the appropriate size.

It got a bad name in 1987 when many people sold puts in excessive size. The size was chosen based upon how much income people wanted rather than how much stock they could afford to buy! So many were burned that the rules were tightened up.

The strategies also differ a little in what stocks you choose. I go for a different group in this program than in my more aggressive long-term growth program.

This is fine for a sophisticated and agile investor.

Jeff

oldprof

Jonathan -- Yes, I have looked at the BulletShares. Since you still do not have control, I do not like that strategy as much, but I agree that it is a middle ground.

It could be a good alternative for some.

Jeff

oldprof

Thanks, Lou.

As you can see, I think it is important. More later.

Jeff

oldprof

Proteus -- You need to buy bonds at a $1000 minimum, so if you want three bonds per rung you are starting at $15,000. You also will pay accrued interest since the last coupon payment (which you will get back at the next payment) so the price is a bit higher. Probably $20,000 is the practical minimum. You could go with fewer bonds per rung, but you lose diversification.

Jeff

scm0330

Jeff,

I toggled over to your post on covered calls. Question: have you considered using cash-secured puts as part of an income strategy? Using the same pre-existing criteria as in your calls program [e.g., high-grade stocks, dividend payers, names you're comfortable owning long-term], why not sell puts against your cash position.

I target 2-4 months to expiration, and a 10% annualized income return.

The obvious risk is a stock and/or market break that results in owning a stock below the strike level. But to take CAT as an example, I'd rather own it by getting assigned an Aug $77.50, regardless of where it's trading at assignment, as opposed to riding down the next 10 points on my long holding from current levels.

If I get assigned, I can revert to selling calls similar to your program.

What's more, I can be more flexible in where to deploy my free cash as positions expire without assignment, seeking opportunities for the money [i.e., where there's been volatility, and premiums are juicy].

Curious as to your thoughts.

Proteus

Jeff, what's a reasonable minimum to implement this strategy? For a hypothetical $5000 stock portfolio, I could buy $1000 worth of 5 issues and probably do OK, and not even raise too many eyebrows. How would one do this with individual bonds?

Jonathan

Hey Jeff - Have you looked at using ETF's with maturity dates as a middle ground? Guggenheim BulletShares corporates as an example?

lou

Jeff, you have offered world class investment advice in this piece! All should take notice.

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