I haven't read that article in CMS but it is included as a chapter in Money for Nothing. I don't think Derek understands the options strategy very well at all. He gives the impression that he can always win with selling puts, which is non-sense, of course. I'm not an expert in options but I'd take the bet that the market guess on options pricing is better than an average investors. I hope investors don't buy into this hare-brained "strategy".
Any Moneysaver readers out there?
Canadian Moneysaver is monthly investment advice magazine. It's not easy to find and does not have well know appeal. Yesterday, I picked up a few back issues from the library to browse through, and the first article I read shocked me in it irresponsibility.
It was the October 2008 issue and Derek Foster (he of the retire at 30 fame) penned an article on how you can earn more than 10% from your bank account. To summarize, Derek took $28k of his money and deposited into a savings account earning 3.85%. He then sold two put options on Bank of America with strike prices of $35 and $30 expiring in January 2010 for 500 shares each (no mention if it is American or European). Now, this was done before last year's market turmoil when BoA was selling in the $40-45 range.
Derek's theory was that buy selling the options he would pocket $4k from the sale of the options and added to his saving account, would earn over 10% on his deposit. His feeling was that even if the stock fell down to below $30 he would be buying BoA at "a very cheap price".
He ends off the article with "lowering risk, while increasing returns, will allow anyone to ammulate wealth more quickly". Well, I don't see how this strategy lowers risk at all. In fact, this is a risky strategy, and looking at BoA's stock price today, it is worth under $10. If they were American options, the buyers could trigger them today, with Derek losing $22k from his $28 investment, a -80% return for a "low risk" strategy.
I have not gone through any of the other articles since I am still in shock at this one. This is a dangerous strategy, and I hope the rest of the advice this magazine offers is not in the same vein.
It was the October 2008 issue and Derek Foster (he of the retire at 30 fame) penned an article on how you can earn more than 10% from your bank account. To summarize, Derek took $28k of his money and deposited into a savings account earning 3.85%. He then sold two put options on Bank of America with strike prices of $35 and $30 expiring in January 2010 for 500 shares each (no mention if it is American or European). Now, this was done before last year's market turmoil when BoA was selling in the $40-45 range.
Derek's theory was that buy selling the options he would pocket $4k from the sale of the options and added to his saving account, would earn over 10% on his deposit. His feeling was that even if the stock fell down to below $30 he would be buying BoA at "a very cheap price".
He ends off the article with "lowering risk, while increasing returns, will allow anyone to ammulate wealth more quickly". Well, I don't see how this strategy lowers risk at all. In fact, this is a risky strategy, and looking at BoA's stock price today, it is worth under $10. If they were American options, the buyers could trigger them today, with Derek losing $22k from his $28 investment, a -80% return for a "low risk" strategy.
I have not gone through any of the other articles since I am still in shock at this one. This is a dangerous strategy, and I hope the rest of the advice this magazine offers is not in the same vein.
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I had a one-year subscription to Canadian Moneysaver a ways back, and as my memory serves, I would say generally that the Derek Foster article you came across may be a bit of an outlier. Most of the content was more on the beaten path and the advice less risque, although I seem to remember reading Derek in there more than once.
I have subscribed for quite a few years and I really like the mag. You will get a wide variety of opinions etc, often conflicting. The thing I like is often you will find articles in the same, or adjacent issues that offer conflicting views on things. I like the debate.I have not gone through any of the other articles since I am still in shock at this one. This is a dangerous strategy, and I hope the rest of the advice this magazine offers is not in the same vein.
I currently have a Moneysense subscription too, but sometimes it seems like they are not as critical as they could/should be. Maybe they don't want to offend their advertizers.
I have been subscriber for years, since 2000, they have many articles some good some not as much, or terrible....in some cases the facts or basis of an article could even be questioned.
still believe get 10 issues for around 26.20, and two years 49.78.
in the feb/march issue they have issue on DRIP investing by David Stanlely also does a dog of the tSX, preferreds, an article on the bailout and tax information.
overall a good magazine, look if you find one or two articles then it is worth it....they have a good writer who is very bearish which I followed his advice in feb, when read the article....also pick the tech melt down, though early...
as for David Foster he writes in there to, he should stress a stop loss, as if an option trade goes the wrong way you have to sell!!!...
thanks
shepherd
still believe get 10 issues for around 26.20, and two years 49.78.
in the feb/march issue they have issue on DRIP investing by David Stanlely also does a dog of the tSX, preferreds, an article on the bailout and tax information.
overall a good magazine, look if you find one or two articles then it is worth it....they have a good writer who is very bearish which I followed his advice in feb, when read the article....also pick the tech melt down, though early...
as for David Foster he writes in there to, he should stress a stop loss, as if an option trade goes the wrong way you have to sell!!!...
thanks
shepherd
1 - 5 of 5 Posts
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