Thursday, October 14, 2010



                  "FED UP WITH LOW RATES?" 
                                         by Brent L. Leonard

"FED" up with zero interest rates on CDs, Money Market accounts?

My name is Brent Leonard; I have been a professional and private investor for 25 years, and, having retired recently, was very disadvantaged by the Fed's zero interest rate policy, mostly to help big banks, which greatly impacted my retirement income. Say a person such as myself retires when rates were 6%. If they had $1 Million in savings, they would receive only $10,000 a year at the current CD or T-Bill rate of below 1%; at 6% that amount would have been $60,000.

Over a year ago I happened onto an unconventional and neglected investment strategy that provided me with surprisingly high return while also offering a safety net for the stock market. It is quite simple and requires very little monitoring or investment knowledge.

 This strategy involves finding high quality, dividend paying stocks and writing covered call options BELOW the Buy-in price, combining to produce historic annualized double-digit income, while "pre-selling" the stock around 6 months out. Those of you who are familiar with covered calls understand that the usual procedure is to sell a call option ABOVE the Buy price of the stock, and then hope that the stock rises! After the biggest Bull market in history from 1982 to 2000 and the most recent 80% rally of 2009, I do not feel this can continue, especially when you consider the global economic condition.

If the stock does not rise, you keep the option premium, but can lose money if the stock falls, just as if you had only bought the stock. With the DITM (Deep-In-The-Money) Call plan, you have already sold the top part of the stock months out, so a small loss is not possible.

For example, let us say you buy ABC at $50 and sell a $45-strike Call on it for $6 (1 dollar more than the difference of 50 and the price it will get "called away" from you in 6 months).  I found through extensive testing that this return on an annualized basis was 10% or higher. While 10% is not an impressive number, when made consistently it is slightly above what the 100-year average of Blue Chip stocks has gained - in the first decade of the new millennium the return was actually negative.
There is also the possibility that someone on the other side of the Call (who bought the one you sold) will "exercise" it prematurely just before it goes ex-dividend. While this prevents you from getting that dividend, I've found that the annualized return was closer to 20%, since it compressed the time that you held the stock. Commissions are a factor, but they are much lower now than they have ever been in the past.

What is especially nice about this plan is that it works well in almost all market scenarios. Markets that rise sharply or gradually put an extra cushion of safety above your Loss price! A sideways market lets you buy back the call near expiration and resell another 6 months out without losing the stock, if it still appeals to you.

A market that slowly declines is even better, if your stock does not go down much below your Sell price - because, your stock and others you might like, will get cheaper to buy - the decline causes a spike in volatility, which raises the price of the Call option you are selling, and the dividend percentage goes higher!

So, the only real drawback to this strategy is a full blown Bear market  - by definition, one that falls 20% or more. Over the past 100 years or so, we have seen 1 or 2 of these per decade - we saw 2 in the first decade of the 21st Century. Usually they occur in stages, so one should be able to recognize the danger, and adjust - maybe even "step down" the Calls as the stock descends for no loss.

As a veteran of the stock market who has seen all types, it is especially gratifying to have stocks tank and not have to worry about whether I should hedge it, ride it out every day- or sell it and watch it turn around and run back up without you.

If there is a sudden drop in either the market or an individual stock, such as BP after the oil spill, a diverse group of stocks should be very profitable over time. One can even diversify further by using some ETFs that pay dividends and have liquid options, and even the Spider ETFs, such as the DIA ( one hundredth of the Dow 30).

What was initially a solution to the nearly $9 Trillion of "dead" money that was sitting in 1% Money Market funds for an "extended period", became a defensive answer to a volatile stock market - relying on secure income rather than the "hope" of possible appreciation.

In today's markets where around 70% of daily volume is done by the High Frequency Trading Quants - MIT Ph.Ds with a huge technology advantage, the average investor is like the "patsy" at the World Series of Poker table, which most of the Quants were successful at in Vegas!
The current market environment is optimal for this strategy since we have just come off a good correction which lowered stock prices and more than doubled the Volatility of options to be sold.

Finally, for those wanting to pursue this concept, there is more information available at, including my new book - Zero InTolerance - on Amazon.

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