patrick.net

RentingForHalfTheCost says

I've been using the technique of writing covered calls and collecting dividends all through this credit crisis and enjoying much higher than 7% return. Obviously, I am not leverage 10-to-1 like housing lets people, but that is the way I like it.

I don't know what that is. Sounds like I'd get my hat handed to me if I were to attempt doing that. Sounds like you're doing well. Are you recommending that anyone who wants to have a safe decent return do as you do?

Covered calls is just selling your upside potential on a stock: you sell the right to someone else to buy a stock that you own. If the stock moves up above the strike price they can buy it from you, and they will buy it from you and you won't get that price gain. So your risk is limited. If you own a stock that pays a dividend and just stays flat, you get both the dividend and the price of the covered call.

It's a reasonable strategy. I wonder if anyone has done it with houses: "Give me $5,000 now and I'll give you the right to buy my house at $500,000 at any time in the next 7 years."

You keep the $5,000. But if the house value goes to $600K, they are going to buy it from you, resell it, and make $100K profit.

Covered calls is just selling your upside potential on a stock: you sell the right to someone else to buy a stock that you own. If the stock moves up above the price they can buy it from you, then they will buy it from you and you won't get that price gain. So your risk is limited. If you own a stock that pays a dividend and just stays flat, you get both the dividend and the price of the covered call.

It's a reasonable strategy. I wonder if anyone has done it with houses: "Give me $5,000 now and I'll give you the right to buy my house at $500,000 at any time in the next 7 years."

You keep the $5,000. But if the house value goes to $600K, they are going to buy it from you, resell it, and make $100K profit.

You can do this with a individual account, like a fidelity or schwab account?

Yes, as long as you get permission to trade options.

You can totally bankrupt yourself with options pretty easily, so they make you sign something that say you know what you're doing.

burritos says

my realtor thinks there's still a significant shadow inventory that'll be coming down the pike.

You can get actual numbers of shadow inventory by doing a [free] search at foreclosureradar.com. They'll tell you how many homes are REOs, scheduled for auction, and preforeclosures. Of course, there's no way to know how many of those will end up on the MLS (and when), but it can give you a general picture of the area's inventory.

As I mentioned in another thread, in my zip code and an adjacent one (two parts of Oakland where I'd like to buy), there are TWICE as many homes in the shadow inventory as there are active listings. For the city of Oakland as a whole, shadow inventory is 2.5 times the active listings. And a reliable source said that for every house that's received an NOD (i.e., is in 'Preforeclosure' stage), there are two others that have defaulted by against whom the bank has not yet taken action.

Just something you might want to consider in your decision.

Yes, as long as you get permission to trade options.

You can totally bankrupt yourself with options pretty easily, so they make you sign something that say you know what you're doing.

True. The real risky playing of options is when you deal with naked calls. You don't own the underlying stock. That has unlimited downside risk and the source of margin calls. Using the option strategy with a covered call is like Patrick said, selling part of your upside potential in the stock at a price. That price then reduces your cost of ownership of the stock. I set the sell sticker price to a value I am happy to reach. In effect, I am reducing my downside by limiting my upside. On companies like Coke that pay a decent dividend I think it works perfect. The dividend (3%) becomes the back-bone for the stock price. As long as they continue to pay it (they have since 1920), the stock hovers around your purchase price. You basically don't need it to appreciate to get the 7% return.

No one has every committed suicide for taking a profit. :)

burritos says

I don't know what that is. Sounds like I'd get my hat handed to me if I were to attempt doing that. Sounds like you're doing well. Are you recommending that anyone who wants to have a safe decent return do as you do?

I think covered calls are perfect for this market time. American companies are taken advantage of the low interest rates to both reduce the payments on their existing debt, and also to expand their business with pretty much free money. If you have a good product and a global outreach that is a pretty good story. Take Coke for example, the growth rate in China(20%) and India(9%) is very impressive. Any capital expenditures to keep building in these countries is done with free money from the US gov't. So, to me, what is meant to pump up the ailing housing market is creating a frenzy for the Fortune 500 companies. Don't limit your potential growth in cash to fixed interest payment from the gov't. Get on top of the real growth stories. That is my 2cents.

burritos says

There is a somewhat limited supply.

Nah. They're always making more homes. Even in countries like Japan or Hawaii where land is truly limited they're always making more homes.

The awful horrifying truth is that rents have been thrown out of whack just as home prices were by the bubble. Right now there is demand there for the rentals in many areas but that won't last as more people are forced to move back in with Mom n' Pop or take more room mates to make ends meet.

Ultimately rents are subject to wages and employment levels just like houses are.

RentingForHalfTheCost says

Don't limit your potential growth in cash to fixed interest payment from the gov't. Get on top of the real growth stories. That is my 2cents.

Like I've said many times before, my interest in RE isn't so much as an investment as it is as a hedge against inflation. I don't see the government raising taxes to pay for all the things we need/enjoy. So they'll continue to use the same ploy that we've been using since government has been using debt and that's inflation. Now, I'm not a hyperinflation conspiracy theorist, but no one can deny that inflation is an inexorable inevitability. So, while I can fix my payment for 30 years and record low levels, the rent more than likely will continue to track inflation over time. Working on my 5th property. Have already paid off one, so the rent I collect there is basically tax free(or deferred) cause I write it off against the depreciation on the other properties.

Covered Calls :

Everytime you see a 'cant lose' investment ask yourself why isnt everyone doing it ???

Go pull up a 5 year chart of KO - now pretend you pulled this stunt at the beginning of 2008 - things are good, not much to worry about, you buy your stock (at around $65) and sell you matching covered calls.

9 months later your calls expire worthless (yahoo !) and you make your $350. And your stock is now selling for $41.

Congrats you just lost about $21 per share on a $65 (+ commissions) investment.

All investing carries with it a loss of principal, even cash carries such a risk, thanks to the Fed.

There is someone here who kept on pumping the 7% you get from one of the gov bond funds instead of being a landlord. Unfortunately when you pull up a chart the NAV has fluctuated greatly over the last few years.

And we're not even considering things like your broker's clearing firm 's Obama fundraiser CEO stealing all the funds in your supposedly segregated account.

As for being a lanlord right now - no thanks. It's a shitty business to begin with, and right now with the rental bubble (and yes, it is yet another fucking unsustainable bubble just like all the other ones) you see lots of newbies piling in based on the idea that rents are only going to go up from here and will never go down.

Now, where have I heard that before ?

RentingForHalfTheCost says

n companies like Coke that pay a decent dividend I think it works perfect. The dividend (3%) becomes the back-bone for the stock price. As long as they continue to pay it (they have since 1920), the stock hovers around your purchase price. You basically don't need it to appreciate to get the 7% return.

Performing a covered call on a dividend stock that is level pays very little. So you essentially have to sell the call at very near the actual stock price to get any kind of meaningful income. Which means you will likely have the option executed.

Performing a covered call on a volatile tech stock, would pay hansomely even at a strike price far beyond the current price of the stock.

There's advantages and disadvantages to covered calls. The biggest disadvantage is you are giving up a lot of your upside on the stock. (which is where most of your gains come in sudden spurts, like the last 3-5 months) If you are a longterm investor, this is utter nonsense to get involved in. If you are an active trader who knows what you're doing, then it might have a place in your strategies.

Options are scary as hell. Remember, the guy on the other end of that trade is someone 10X smarter than you.

Rent4Ever says

Performing a covered call on a dividend stock that is level pays very little.

True if you think 7-10%/yr is little. I tend to think that is all I need. Slow and steady.

RentingForHalfTheCost says

Rent4Ever says

Performing a covered call on a dividend stock that is level pays very little.

True if you think 7-10%/yr is little. I tend to think that is all I need. Slow and steady.

No that's a good return and if you can get that with covered calls, then you're doing something right. They are one of the least risky options positions you can have.

Have you ever had a covered call on a dividend stock called away from you, so you didn't own it over the period of time you had to be holding the stock to collect the dividend?

RentingForHalfTheCost says

Rent4Ever says

Performing a covered call on a dividend stock that is level pays very little.

True if you think 7-10%/yr is little. I tend to think that is all I need. Slow and steady.

7-10% is a good return if that's your whole portfolio. Your whole kit and kabooldle is in covered calls?

kochevnik says

Everytime you see a 'cant lose' investment ask yourself why isnt everyone doing it

I never said such a thing. I said low-risk, which is not "can't lose". I think housing is much higher risk than buying dividend stocks and selling covered calls to generate income in today's market.

Rent4Ever says

Have you ever had a covered call on a dividend stock called away from you, so you didn't own it over the period of time you had to be holding the stock to collect the dividend?

Yes I have and I am glad when it gets called away. It means I already made the 10%. I can dwell on the fact I lost another 10% run-up, but I don't. I just move on and look for other opportunities. The dwelling on missing the 20-40% runup is what gets you in trouble. I shy away from greed at all costs, it comes with too much risk many times.

kochevnik says

Go pull up a 5 year chart of KO - now pretend you pulled this stunt at the beginning of 2008 - things are good, not much to worry about, you buy your stock (at around $65) and sell you matching covered calls.

9 months later your calls expire worthless (yahoo !) and you make your $350. And your stock is now selling for $41.

Congrats you just lost about $21 per share on a $65 (+ commissions) investment.

All investing carries with it a loss of principal, even cash carries such a risk, thanks to the Fed.

KO is just one example. The mistake you are making is just looking at the current stock price rather than the dividend. During the time you mentioned KO paid a handsome dividend. If my goal is to make the 3-4% of the covered call and the 3% of the dividend, then why do I care about the price action. If it goes down the dividend payment just bought me some shares on sale, and it also means I didn't get them called away. I think it is a mistake to make your share purchase decisions based on what others value the stock at on that day. Your own view the of the fundamentals of the company should mean more. Beating inflation with dividends and covered calls is fine with me. The issue is if the company is sound, and I don't think anyone has questioned companies like KO, PG, COP, WMT, JNJ, etc. There is no shortage of 3-5% dividend paying companies that are not depreciating like housing.

E-man says

Burritos,

So instead of $1,050, now your obligation is $1,080/month. Your return is about $5k on about $60k investment. It's an 8.3% vs. 9% cash on cash return. You're borrowing at 4.5%, which is positive leverage. When inflation kicks in, you're essentially borrowing at 0%.

Well, unless you think deflation will kick in first then it's a different story.

Learn from your victory. Prosper from your failure.

Yeah. I know. I'll play the waiting game.

Property went pending yesterday. Guess I wasn't in the driver seat.

robertoaribas says

First off, if you aren't completely familiar with the Black-Sholes pricing of option formula, and the put-call parity law, you are out of your depth.

Is so GREEKS, lol.

burritos says

Property went pending yesterday. Guess I wasn't in the driver seat.

Don't you worry. You have not missed the boat. :)

bubblesitter says

burritos says

Property went pending yesterday. Guess I wasn't in the driver seat.

Don't you worry. You have not missed the boat. :)

DO YOUR MATH

The asking price got me a CAP rate of 10%. I was greedy shooting for 11%