Phantasmix Stock Market Blog

This is known as the “Couch Potato” approach, and you can read about my hypothetical portfolio here. I started tracking it in May 2007 and finished a year and a half later.

This “lazy” method seems to be popular in Canada, and is profiled in many financial magazines almost every year. Truly, it’s the land of the extremes – either full-on penny stock speculation, or boring index fund investing

Here’s a look at how that initial $10,000 is doing now. Note:

• I chose not to re-invest the distributions.
• Profit/loss includes paid out distributions.
• Commissions are excluded because they’d be like $5 for the initial buy-in, doesn’t affect anything.

Click to enlarge

Here’s a visual representation of the same. I assume the “amount invested” is going down because of the inflation.

Components

CDN Composite (XIC) – 45%
CDN S&P 500 (XSP) – 25%
CDN MSCI EAFE (XIN) – 30%

Initial Investment

Approximately $10,000 one-time in May 2007.

(GLD: 167.64 0.00%), SPDR Gold Trust ETF

2-year daily chart of GLD, gold ETF.

• Inverse head and shoulders (bullish pattern)
• Also bullish is the symmetrical triangle, really looks a bit like an ascending triangle, which is a continuation pattern

Since these are fairly long-term patterns (not a month or two), I think they are more reliable.

Gold should break out soon.

(SRS: 30.58 0.00%)

In May, I bought 100 shares of SRS at $21.65. Got greedy and waited for a big up day – which never materialized – to sell a call. I got impatient watching SRS tank day after day and finally on June 11th sold a JAN 2010 $18 call for $5.20.

Why so deep in the money? Because it’s a well-known fact that these ETFs decay. I figured there’s a good chance SRS would go below $15 and I could buy back the call at a good price. And maybe wait for a day when SRS goes up again and sell another call.

Since the call was so far out, it didn’t decay fast enough, had lots of time value in it. And since I sold it after the stock dropped, I didn’t get a very good premium for the option.

Ok, so long story short, I bought back the call for $2 and sold SRS @ $12.88, my net P&L on this trade was ($589).

What went wrong?
- bought an inverse double ETF and held
- sold the call on a dip, didn’t get a good premium
- sold a too far out call, so it didn’t decay fast enough

If it wasn’t an inverse Ultra ETF but a stock that tanked 80% (like many banks did last year) it would work out pretty much the same – the call wouldn’t have protected against that big of a loss.

There are other considerations to keep in mind. If you’re writing a call on a volatile stock, you may want to get out in premarket some day but won’t be able to until regular trading hours because you’d have to buy back the call first, before selling the stock.

I must say this was my worst experience ever with a covered call, all previous ones worked out okay. The lesson here is that this seemingly “can’t lose” strategy can yield horrible results if done wrong.