Thursday, October 13, 2011

Trester, Understanding ETF Options

Remember the student (of course it wasn’t you) who, faced with an assignment for a ten-page paper and with nothing much to say, resorted to wide margins, triple spacing, and—if he had a computer—a large font size? Kenneth R. Trester goes even further in Understanding ETF Options: Profitable Strategies for Diversified, Low-Risk Investing (McGraw-Hill, 2012). He pads his 233-page book with lots of readily available lists. For instance, he spends about 50 pages listing ETFs, MLPs, and REITs. Another 40 pages is devoted to normal (fair) value listed call and put tables. That leaves 143 pages for large-print text.

Trester describes option basics and recommends computer simulation to “tell you what your true odds of profiting are.” (p. 106) Not surprisingly, Trester touts his own simulation programs and, later, his newsletter.

What secrets does Trester impart? If you’re buying options (either calls or puts) you “should avoid buying options on ETFs, as most ETFs neutralize volatility.” Instead, “bet on explosive, unstable, small stocks” and “go for the home run.” (pp. 110, 113)

But the “hidden path to profits” is option writing. If you want to buy stocks and ETFs at lower prices and sell them at higher prices, “write naked puts and covered calls. This strategy forces you to buy stocks and ETFs at lower prices and sell stocks and ETFs at higher prices. This is the investor’s ideal.” (p. 134)

“In order to buy stocks and ETFs at low prices, you should write put options that will expire 80 percent of the time worthless without needing to buy the stock. Then you will get the stock at low enough prices and, of course, earn a lot of income as you wait to try to buy the stock. … Of course, the question is how do you know if your written puts will expire as worthless 80 percent of the time? The answer is computer simulation.” (p. 138)

To sum it up, and ratchet up the numbers, “The financial regulators do not believe you can win 90 percent of the time, but you can when you write puts (using a simulator to make sure you have a 90 percent chance of winning). You can win 90 percent of the time, and the remaining 10 percent will get you the underlying stock or ETF at an attractive price. This is the Holy Grail of investing. This is the secret weapon. Add diversification, and you have the perfect game plan.” (p. 177)

Would that life were so simple.

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