Cashflow Heaven Options Trading

I am wary of all advisory services, more wary of those with "cashflow" in their name, and extremely wary of those with "heaven" in their name. There *is* some academic and investment bank research supporting the use of option-selling strategies by investors, and you can find some of the former by searching "volatility risk premium" at SSRN

If you becomeconvinced that you should be selling volatility, I'd recommendinvesting in a closed end fund that does so, which you can find byGoogling "covered call closed end fund".

The heaven web site offers letters endorsing the company which hint that they are doing more than suggesting covered calls. "A nice 50% profit in

7 days" for instance. I'd be wary as well, as wary as I'd be of any trading strategies that imply more than the market return.

I view the covered call strategy like this: Let's assume the market return is a bell curve (which we know it's not, but it's my hypothetical). One can sell the return above a certain level to shift the curve a bit higher. Example - with SPY trading tonight at

147.68, a 10% move in one year puts SPY at 162.45. The 160 call sells for $8.65 or 5.85%. Now, if you are thinking of a return curve centered around a 10% annual return, with a 16% or so standard deviation, you'll see that this covered call will change that curve so that your risk of of negative year has dropped quite a bit, S&P down 6% but you are breaking even. But in return, you are giving up the piece of the curve where your return is over 16% or so.

Of course a 30% down year will still burn you, and a 30% up year will leave you wishing that you were just long, no calls at all. It's the years where the market is moderately up that this strategy worked best. It's interesting to note that Zvi ('Mr TIPS') Bodie suggests that if one wants some market participation they should do it through calls, with the bulk of one's portfolio in Gov Instruments.

Disclaimer - I do not recommend this. I am just making an observation. JOE

Joe has it right. Options are a way of enhancing your stock market income or reducing risk.

You don't need any advice to do that. Buy stocks that are undervalued and sell calls against those stocks. If the stock goes up in price to above the strike, either let the call be exercised or buy the call back. After the call expires sell a new call again.

-- Ron