The continuing question for investors still remains where to go for alternatives to ZIRP (Zero Interest Rate Predicament), without succumbing to the giant Risk that the Federal Reserve is pushing prudent investors and retirees into. As a veteran investor, there are two that fit the bill, if one has at least a limited knowledge of stocks and options- both involving the more conservative strategy of covered call options:
DITM, or Deep-In-The-Money, covered calls lets one purchase a quality stock with at least a 3% dividend, at the same time selling a "safety-net" call BELOW the buy price, enhancing the return for @ a six month period - possibly repeating the process. In my book - Zero (IN)Tolerance- I explain this simple process:
After four years of applying this in several accounts, including a pure microcosm of DITM - my small IRA which rose 11% a year - starting with the current cyclical Bull market in March of 2009. In this huge rally of over 4 years ( historically, near the average run for a Bull market) the S&P 500 has climbed a steady 84% from April 1 '09 to the same date of '13; the DJIA 30 up 82% (not including dividends). During this time my IRA rose only 46%, but with a 5 to 10% safety net which could become invaluable in corrections - or even a Bear market. Since April of this year, DITM has gone into Stall Speed (mostly due to my poor Sector selection, plus a volatile summer).
For that reason, I have allocated a portion of my assets to a second strategy, also covered calls, that a former client used in the '90s when I was a senior option broker for a major firm's option group. It involves investing in a Leap (Longterm Equity AnticiPation) call options expiring in January of 2015 in a Buy/Write - buy stock, sell a covered call. Simultaneously, one sells a cash covered Put option, which can - if the stock drops below the sale price- force one to buy more of this stock. Anyone who understands covered calls knows that "capping" the stock with the option produces immediate cash from its sale, but limits upside appreciation. Although my DITM plan was simultaneous with the Bull market (designed for sideways to slightly down markets) it did benefit from the rise by affording a cushion against corrections, as well as producing premature takeaways - raising the % by shortening the timeframe (freeing up the cash via the early stock sale!).
Now to the second covered call strategy for alternatives to "extended" Zero rates: LEAPS. In this plan the call is sold the old-fashioned way - above the Buy price of the stock, but many months out - in this case January 2015. At the same time a put is sold below the Buy price, exposing the investor to having to buy more stock in the distant future, if the stock drops - and settles- below the put strike price. Combining the two sales of options, along with a possible dividend array, one can bring in up to half the price of buying the stock - a huge cushion against loss.
I have already put on 13 LEAP trades with varying estimates of returns of 20% to 60%! If the stock goes nowhere by January 2015, returns range from 20% to 50%; if called away due to stocks rising (the normal market upward translation due to Inflation, etc.), returns are estimated from 25% to 60%. If annualized ( over 12 months), returns are 20% to 45% for the 13 stocks.
Full disclosure: if trades are done in IRAs or tax-deferred accounts, percentages will be slightly less since cash-secured put margins must be factored into the cost basis, until released or spent. I do not pretend that these 13 stocks are any way the best available, but the only real danger in 2015 is if one goes bankrupts - similar to DITM's only serious threat of a 20% or more Bear market which does not rally back immediately.
To name a few of my picks, between $3 and $13 (my recommended price range) - these are by no means recommendations, only illustrations!
BAC, F, ACI, IAG, AMD, and NOK - which rallied nicely today on MSFT's bid.
My most recent trade in August was TSL - example:
Stock (500 shares) bought at $8.97 - $4494 incl. commission;
the sales of the 7-strike put of 2015 and the 10-strike call combined to bring in $2148 - almost half of my initial outlay returned immediately for other uses. TSL pays no dividends.
If TSL is unchanged by January 2015, estimated return is 47.80% (33.7% annualized);
if called away at the 10-strike: 60%, or 42% annualized. All this for just initiating the trade and sitting on one's hands for 17 months- no monitoring, tweaking, extra commissions or hedging.
Finally, here is the best part - if the stock does fall below the put strike price of 7, and stays there until 2015, one can roll down the next LEAP of 2017 on both the put and call, with no charge for buying the stock (one already owns it!), and do the same with the new shares.
What can possibly go wrong????? We shall see in the fullness of time!