Investing Strategy for Sideways Markets

Most of the time stock prices go up. But when that's not true how can you turn stock volatility into income? This is called a covered call strategy or buy write strategy. In this video we look at how this strategy works, its drawbacks and the kinds of environment where it provides the best outcome. I also go through some covered call funds available in the US and the UK.
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Timestamps
00:00 Introduction
00:45 Sideways Markets
01:14 Covered Call / Buy Write
2:34 When Do Covered Calls Work Best?
6:27 Covered Call Mechanics
8:55 US Covered Call Funds
12:06 UK Covered Call Funds
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DISCLAIMER
All information is given for educational purposes and is not financial advice. Ramin does not provide recommendations and is not responsible for investment actions taken by viewers. Figures that are quoted refer to the past and past performance is not a reliable indicator of future results.

[@george6977]

If only I could time the market perfectly, then it could possibly be worth learning about these covered calls.

[@SpooksMcGoose]

You don't have to time if you place a target. Let's say you buy at $100 and would love to sell at $120 this year. Just keep writing calls against $120 monthly, when you get assigned it forces you to stay disciplined at selling.

[@george6977]

@@SpooksMcGoose But wouldn't I be competing against people like Nasim Taleb? I'll stick to buying and holding MSCI World.

[@muffemod]

Yea but then it's not investing anymore, and just trading.

[@muffemod]

@@David-jn5up 10 years is nothing I have a 50 year horizon.

[@mattlm64]

Why do you promote market timing? Most people will underperform trying to predict a sideways market.

[@musheopeaus4125]

Too risky for me . I’ll just keep cost averaging.

[@bigdawg1353]

Very useful information thank you. Been watching a few videos from your channel and you've now earned a subscriber 😀

[@Pensioncraft]

Thanks and welcome @bigdawg1353

[@swimsmarttoday]

Would love to see a video on selling cash secured puts! Specifically doing it on tqqq, pretty well out of the money, rolling on big down days.

[@johnhaug1747]

I did my MBA-Finance thesis (1988) on the Black-Sholes stock option pricing model, and found markets to be very efficient. One can use it to determine if options are over/under valued and place your covered calls accordingly. Back then US IRS rules were much looser, nowadays one looses the 5% tax rule for qualified dividends if you collect both dividends and option premiums. One may wish to consult their tax barrister before plunging in. It is a great way to garner income though, providing options are kept short duration, and are greater than 0.50USD per share.

[@chrisf1600]

But how can you tell if an option is over- or under-valued ?

[@pistopit7142]

DCA + Patience = Unbeatable strategy of them all

[@me0101001000]

Exactly. The worst thing you can do is panic and do something crazy.

[@SpooksMcGoose]

Yes and no, look at real returns of an index over time, not as sexy.

[@pistopit7142]

@@SpooksMcGoose for the last 30 years S&P500 real (after inflation) return was 7.31% per year on average. Sounds damn sexy to me if you realise this is also compounding 7.31%

[@SpooksMcGoose]

@@pistopit7142 I get 5.16% CAGR after adjusting the S&P 500 for CPI. It's important to realize that from 1980s onward, we are choosing one of the most prosperous times for the market in its history. What if you were to run the same calculation for the end of 1994?

[@pistopit7142]

@@SpooksMcGoose well, equities are the only best bet to preserve wealth in long term. If you accept the fact that you cannot predict/time the market than DCA is your best odds to come out as a winner in a long term. Is it guaranteed? No. But it's your best bet. The most favourable odds.

[@rafaelf6994]

brilliant as always Ramin !!!

[@Pensioncraft]

Thank you! Cheers! @rafaelf6994

[@anindadatta164]

The gain from covered call strategy depends a lot on the excess of implied volatility of the sold CE over realized volatility during the investment period, also on how much of upward delta arising from buying a stock is covered by selling a call option on the same. Do these ETFs operate on delta neutral basis?

[@djayjp]

If you like your ETF's NAV to go down and to the right, then you should definitely invest in the funds mentioned in this video. DIVO isn't bad though.

[@jumpin_kiwi2373]

What did you mean by 'implicit' currency risk on the GBP version please?

[@jmitterii2]

I like to get stocks via CS puts... and dump stocks eventually via covered calls.

[@XitijKumar-nz8xh]

Fantastic content as usual. However generally a Covered Call strategy work better if the Strike Price is chosen above the buying price (4250 in the example). If the Strike Price is 4350 or 4400 you generally get higher winning rate, the downside is less premium.

[@malcolmsmith2083]

JEPI writes "out of the money" call options - so you are giving up only some upside potential - most of the video assumed you were writing "at the money" options. I'd like to be able to buy JEPI - doesn't seem possible as a UK resident.

[@talmiller19]

I would also recommend Ben Felix's new video, debunking this strategy

[@mikehardwicke23]

Interesting.👍

[@Pensioncraft]

Thanks @mikehardwicke23

[@garyrooke9582]

Really interesting stuff, this might be obvious to experienced investors but what happens in a falling market rather than sideways market?

[@chrisf1600]

The value of your investment falls, just as if you owned the index outright. You're selling the upside, but you keep all the downside.

[@Pensioncraft]

That's right @chrisf1600 but you're better off in total return terms with a buy-write in a falling market because of the option premium you earn by selling upside calls. But as you say you're still getting a capital loss. The perfect environment for buy-writes is when volatility is high (high income from selling expensive calls) and moving sideways. Thanks, Ramin.

[@paulturner4419]

Negative skew strategy what could possibly go wrong?

[@stevo728822]

In next weeks video, Ramin explains how to invest in high yield greyhounds. Can we have more down to earth videos relating to pensions. Things like the pros and cons of withdrawing tax free lump sums, annuities, pros and cons of transferring a pension fund between providers. You know, pension stuff rather than market timing stuff.

[@mmabagain]

Covered calls are not market timing. You know, there are people with retirement situations different than yours. Or do you think Ramin should only address issues pertaining to you?

[@audriusurbonavicius5428]

I have noticed that US funds are available through Interactive Brokers UK. I have never bought any but is anyone here who tried buying funds such as TLT or QQQ on IBKR UK?

[@djayjp]

Chap, don't forget the Chapstick ;)

[@beny.5736]

Imagine a 30% withholding tax on the 12% dividend yield 😂

[@smvinay1206]

Am I the only one who agrees but is a bit scared to actually do it .... hahaha

[@stevenkavanagh4347]

Not appropriate content for the general investing community-IMOH

[@jmitterii2]

covered calls and cash secured puts is actually a safer way to utilize options. Longing options is what I would say isn't appropriate for most investors. Unless of course you're collaring a position with puts (locking in profits should stock you own dump hardcore). But writing puts and calls is actually a mitigated risk strategy.

[@mattlm64]

It inconsistently reduces downside risk by cutting upside potential with the added costs of these funds. It's unlikely to be a good choice for any investor and trying to time the market with these strategies is folly for most investors.

[@pistopit7142]

@@mattlm64 "It inconsistently reduces downside risk by cutting upside potential" - sounds lke reducing volotality then. If so then it is reducing risk. Less risk = less profit and better sleep for some.

[@cooper8t]

Pensioncraft/Ramin has definitely changed his direction of his KZbin channel/ business over the years. I think even though Ramin is straying far from his core portfolio teachings (global index and chill), his relatively neutral, easy to understand explanations on more technical aspects of investing which come with clear warnings of why its not appropriate for most people is still welcome imo.

[@UpwardMindset-he5mz]

​@@cooper8t Why

[@Luca-eh5fj]

👊 'promo sm'