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First things first: Why am I doing this?
Uh duh. Have you seen the cost of a subscription?
Yeah, there’s that, too.
I’ve been very actively involved in stock investing for a number of years. Very involved, but in a good way.
However, in the past 2 years, we have all seen how devastating a shift in the market can be, especially for some of my similarly aged and even younger friends.
So many Pediatric Dentists that I know have been forced to completely rethink their retirement plans and timeframes due to the large portfolio losses they endured.
I also lost money during that bleak period, but nowhere near the market averages. During up periods, as well as down periods, my portfolios outperformed.
Not because I was a good stock picker, but because I knew how to manage my holdings (more on those details in the FAQ).
I believe that the OTP strategy can add a very meaningful increase to your portfolio’s annual returns. Through the miracle of compounding, even a relatively small boost to earnings can be a highly significant factor in restoring your portfolio to the levels necessary to achieve retirement goals.
In a nutshell. I think I can help.
1. What do you offer?
The special program for AAPD members attempts to maximize income from your existing portfolio by recommending actions related to the sale (and potential re-purchase) of covered call options. OTP does not recommend the purchase or sale of specific stocks, only their related options.
This is particularly well suited for portfolios that have used a buy and hold strategy. Not only is this strategy well suited for equity positions, but it also is applicable to ETF holdings. SOME CAVEATS
See a Summary Sheet of Realized Covered Options Gains from January - July 2009.
This customized program is not offered to any other individuals or groups and is limited in the number of subscribers whose portfolios may be assessed and managed.
Please be aware that the American Academy of Pediatric Dentistry is neither affiliated with OTP, nor endorses its programs and activities.
2. How many clients do you have?
Currently, 6 new OTP-AAPD accounts have been opened in response to the e-mail invitations recently sent. Initially, my plan was to send subscription invitations to 600 Pediatric Dentists along the east coast, in batches of 10 per day. However, thus far, the response has been stronger than envisioned. If it continues at that rate, only 300 (or fewer) invitations will be extended , in an effort to limit the number of subscribers to 50.
The general monthly OTP Program has over 100 subscribers with a very high retention rate. That program requires very little effort on my part.
3. Can I contact any of your subscribers?
Yes and no.
Due to confidentiality issues, I cannot provide the names of any subscribers. However, anyone may download the general OTP-AAPD Toolbar and use the Chat Room function that has been established. That may provide an opportunity, if individuals choose to actually utilize that tool.
However, I doubt it, as Chat Rooms are sort of seedy. I know I wouldn’t step in.
4. Why does this strategy work? How will I make more money?
As long as there is volatility, there is income opportunity.
When most people think about “Stock options”, they think about the possibility of leveraging their investment in the hopes of striking a big hit if the stock price rockets upward. The reality is that the vast number of options purchases expire worthless, because those dreams of riches and price appreciation never materialize.
For everyone that buys a stock option and pays for the right to purchase a stock at a set price for a finite period of time, there must be a seller.
That’s where OTP comes in. We seek to capitalize on human nature and the unwarranted expectation that riches are just one stock option purchase away.
Instead of trying to strike it big on a single options purchase, it is far more likely that you can accumulate wealth in a very steady fashion by selling others the options on your existing stocks.
If you ever sit and stare at the daily fluctuations in stock prices and correlated those to their underlying call options, you will see that in any given day, many stocks go on roller coaster rides. This kind of volatility offers much opportunity, especially for individuals that tend to hold onto stocks for long periods.
If you sell someone a call option, you will receive a payment for the right to purchase your shares at a predetermined price, for a finite period of time.
You can collect such premium payments month after month, or sometimes, during periods of great volatility, several times a day.
This is not, however, “day trading”. Although your specific portfolio may have daily recommendations, they will always be in regard to optimizing income from your existing holdings. We will not recommend the purchase or sale of equities. Only the sale or purchase of the options to those equities that you already own.
If you are accustomed to holding stocks through thick and thin, you can even collect premiums when your stock prices are going downward, thereby lowering your cost basis for those shares.
In essence, the goal is to exploit unwarranted or speculative movements in stocks and to move in the opposite direction. I watch pre-earnings movements in stock prices as well as any large percentage movement, especially in the absence of meaningful news.
It’s time intensive, but well warranted.
In essence, we make money by selling covered options when prices are high and buying them back, when prices are low. Just think counter-intuitively and we’ll get along just fine.
5. Why is my broker not already doing this for me?
If you are using a stock broker, this program is probably not for you, due to the high costs of trading with full service brokerage houses and the potential to incur large trading expenses that greatly diminish profits.
But to answer the question, they don’t do it, because it is much too time consuming and labor intensive, even with trading algorithms and computer modeling. Of course, their high commissions would cause a significant deterioration of your profits, as well.
But even in fully managed accounts, where you pay a percentage of your portfolio value for unlimited trades, this kind of hedging service continues to be very resource demanding and not in the interests of the brokerage house.
But not for me. What else do I have to do with my time?
6. What are the requirements for this kind of program to work for me?
- I strongly recommend the use of a discount broker. The commission savings are significant.
- You must have approval to sell covered calls.
- You should have a portfolio of at least 10 stocks
- Your portfolio should be well diversified among the various sectors
- a well diversified portfolio allows the ability to focus on sectors which often rotate in and out of favor with great speed. The more diversified your portfolio, the greater opportunity to take advantage of sector trends.
- Each individual stock holding should have a market value of at least $10,000
- You should have at least 100 shares of each stock, as a very bare minimum. Economy of scale usually requires 300 or more shares per holding.
- Your existing holdings should be in solid companies, with good fundamentals.
- You must communicate with me via the OTP - AAPD Activity Form to inform me of any stock related actions you take, such as sales of positions, newly opened positions and most importantly, whether you wrote options contracts based on our recommendations.
- If you opted for the Discretionary Trading Program, you must complete and submit the authorization
7. How about showing some results?
What’s the matter? Don’t my “Simpsonized features make me look honest enough for you?
You may view OTP strategy trading results for 2009 (Jan - July), 2008 and 2007.
Your results will likely vary, based upon the timeliness of your trades and what portion of your portfolio is well suited for a strategy that employes aggressive covered call trading.
If you look carefully through the results, you will notice that many of the positions traded in 2007 were still being traded in 2009. That is the hallmark of this approach. If you believe in the long term strength of your individual positions you are perfectly suited to take advantage of price fluctuations.
8. I don’t use a discount broker, will this program work for me?
Potentially, but only if you trade in a large volume of options, so as to dilute the impact of relatively high commissions. Additionally, your broker must use “limit” orders, rather than the more costly “market” order mechanism.
For those that do use a full service broker, one strategy is to open a discount brokerage account, such as with E*Trade or Ameritrade, and execute a transfer of specific stock holdings from your full brokerage account into your new discount brokerage. In such situations, careful consideration must be given to determine which positions would offer the greatest opportunity to benefit from options writing, and to then transfer those select positions,
9. What are the limitations or downside to your strategy?
The major risk associated with selling covered call options is that you may not get to fully profit from one of your portfolio holdings if its price suddenly climbs and the option holder decides to exercise his option.
Although you can repurchase the options that you sold, in such a case, you would do so at a loss, and then expose yourself to further losses if your stock retreats in price.
You don’t want that, unless you believe in “Buy high and sell low”..
Additionally, sometimes stocks that pay dividends may have their underlying options exercised before the expiration date, specifically in order to capture the dividend. In such cases, you would not receive your dividend payment.
Does that happen? Yes, but not terribly often, unless the underlying stock is well “in the money”. Most open options contracts, even in the money, go unexercised until the last minutes of trading on expiration day (the third Friday of each month).
One final factor that you must be aware of, is that if you have sold options contracts, you may not sell the underlying stocks until your options positions have been closed out. For people that practice a “Buy and Hold” strategy, this should not be much of an issue.
I do not advocate holding “naked” call options, because there may be considerable risk associated if there is unexpected price appreciation.
10. Do you have any control or access to my personal brokerage account?
No. Absolutely not. You are responsible for all of your own trades, profit and loss calculations, funding your account, tax payments and any and all other activities that may be related to your account.
I do not need or want any information regarding which brokerage you use, your ID or login information. I will put my hands over my ears if you even attempt to tell me.
Basically, trust me, but not that much.
Now, if you are foolish enough to consider entrusting me, click here to find out more information about special services.
11. Is this strategy compatible with a tax deferred retirement account?
Each individual must assess their own tolerance for risk, based on many factors, including years anticipated until retirement. The strategy that is recommended is not inherently risky in nature, however, as we have seen in the past 18 months, on any given day, there may be incredible volatility.
With that said, because all of our trade recommendations are short term in nature, and therefore, subject to a higher capital gains rate, they tend to be well suited for tax deferred accounts.
12. When do I make my trades?
For the AAPD Member program, each subscriber must download their unique OTP Toolbar or have easy access to text messages. All recommendations, timing of purchases and sales, as well as price targets will be made through the “Alert” capabilities of your Toolbar or cellphone.
The trades should be made as soon as notification is transmitted, as prices can and do change. After all, that is the basis of this strategy. It pays to be near your computer or cellphone, or to have a reliable individual be on the lookout for “Alert” messages that will pop-up on your desktop or phone.
Since options trading may be thin, thereby making it more difficult to match willing buyers with willing sellers, we recommend seeking to sell your options at the current bid price, rather than the ask price. This is because you do not want to have equities without the insurance hedge provided by the options, in the event that the stock price declines. Holding out for a higher premium may endanger your ability to execute the options trade in a timely fashion.
In the event your options are assigned, that is, the buyer of the call options decides to purchase them from you at the agreed upon price, you do not have to do anything further.
13. What kind of trades will I be making?
You must sell covered calls on your existing holdings This is also referred to as “Sell to Open”. Each options contract represents 100 shares of the underlying stock.
When you “Sell to Open”, you essentially are creating a “short position”. Your short position is covered in potentially one of 3 different ways.
- The covered options that you sold expire worthless on the 3rd Friday of the month. You pocket the entire premium, keep your stocks and incur no closing transaction fees;
- You repurchase the covered option by executing a “Buy to close” transaction. This is something that may be done to take an options premium profit prior to expiration. You keep your stock, pocket the difference in premiums and pay opening and closing transaction fees; or
- Your covered call position is “Assigned”, that is, the owner of the option hat you sold had decided to exercise his option to buy your stock at the specified strike price. You keep the entire premium, but must sell your stock at the agreed upon “Strike Price”. You are also required to pay a closing trade commission.
14. Are there any recommended rules to this kind of trading?
Please remember the important tenets of making these trades successfully.
 Don’t be greedy
 Use “limit” orders. Do not overpay
 In order to make certain that you are able to sell the options in what may be a thin market, offer to sell your call options at the current bid price, not the ask price.
 In order to be certain that you are able to buy back your call options in order to close your position and take profits, buy your closing positions at the ask price and not the bid price.
Rules 3 and 4 may sound counterintuitive, but they are corollaries of the most important rule: Rule #1
 Be timely in executing your trades. Recommendations are based in real time conditions. Once you are ready to act on a recommendation, check to see where the most current prices are, sometimes even a few minutes can make a difference.
 Oh yeah, you must wish for some luck, as well.
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15. Do I have to be tethered to my cellphone or computer to benefit?
You mean, you’re not already tethered to both of those?
The need for “timeliness” is to truly take optimal advantage of intra-day price volatility, which may occur for any number of reasons. However, for most people, the majority of open covered positions will expire at the end of the options period. In those cases, you typically sit back and wait.
However, for those with the trading tools offered by the leading discount brokers, you can easily enter buy or sell orders with specific target prices in mind. Enter those in the morning and then just walk away from the tether and the brokerage software will execute the trades if the conditions were met.
Personally, I like the tether. You may not, but the noose will be tighter around my appendages or neck, than yours.
If you really can’t be available to execute trades, yet you still think that this strategy may be right for you, there still may be one more option available, but it requires a tremendous leap of faith.
16. How do I get my portfolio information and holdings to you?
Once your subscription payment has been made, you will automatically be directed to a payment confirmation page.
On that page will be a download for an Excel spreadsheet, which you must complete and e-mail back to me.
The spreadsheet is initially used to communicate your baseline holdings to me.
Additionally, the spreadsheet offers you an opportunity to track performance of our recommendations, in order to ensure that the service is cost-effective for you.
Just as importantly, you must communicate any changes in your holdings, particularly options contracts that you sold or repurchased, based on our recommendations. If I am not aware of your options contract sales, I cannot make appropriate recommendations regarding closing positions and taking profits.
Regardless of which Alert subscription service you use, activity is reported using the OTP - AAPD Activity Form, which can be accessed through the OTP Navigation bar, or through any of the OTP Toolbars, by just clicking on the “Activity” button..
17. Why do you need all of the information on the spreadsheet?
In addition to knowing what stocks you hold and in what quantities, it is important to know the following
- Cost basis - this will provide information regarding your capital position. Are you holding losses or gains on your position. Additionally, the percentage loss or gain tells much about the psychology of the individual investor. For example, individuals holding large long term capital losses on a particular equity position are often in a state of altered reality, mistakenly believing that their “perfect stock” will regain all of its huge losses. That kind of investor would be very unhappy if his losing position was assigned to the option holder, regardless of how often options premiums were received.
- Date purchased - although it is generally felt that tax considerations should not play in role in buy/sell decisions, the reality is that there are times when it is worth accelerating a sale and other times when there is significant value to deferring a sale. I do take those factors into consideration, as the tax consequences can be sizable.
18. How do I get the Alerts?
Also on your payment confirmation page will be a small form for you to complete, providing basic identifying information.
It typically takes me 12-24 hours to create a Toolbar for an individual’s personal use. Once it has been made, I will e-mail you the download site and directions will appear on the download site. As you are downloading the OTP Toolbar, please make certain that you select the option to allow “Alerts”. You should download the Toolbar onto any computer that you are likely to use during the course of the day.
For Text Message subscribers, Alerts will go directly to your cellphone.
19. How much can I expect to make?
With you, it’s always about money, isn’t it?
No one can make promises, or guarantees of performance. My personal experiences over the years has me expecting an additional 1-2% return each month, depending on market volatility. During the tumultuous downturn of the past year, those additional returns greatly cushioned my losses in the underlying equities.
That kind of additional return from options premiums is reasonable, if the underlying securities themselves are those of high quality companies. There may, however, be some securities in your portfolio that may not be well suited to our covered option strategy, either because they are thinly traded or have very low price volatility. Additionally, selling call options on some positions may not be well matched to an individual’s “psychological investing profile” (See FAQ #13)
Finally, mutual fund shares do not have options contracts associated with them, and are, therefore, unable to benefit from hedging.
20. Is a subscription to your service tax deductible?
As you may be aware, not all investment expenses are tax deductible. For example, portfolio management services are not deductible, whereas individual commission costs are part of your cost basis.
However, as with other expenses related to maintaining your portfolios, such as advice, subscriptions and other services, the costs of this subscription may be tax deductible, if you have net capital gains to report. The extent of that deduction may, however, further be limited by your AMT liability, if any, and any limits on miscellaneous deductions.
Besides, do I look like an accountant? For the final word, check with your tax expert.
21. Why can’t I just do what you do?
Who said that you couldn’t? You can.
In fact, if you pay some attention to the recommendations, you will likely see a pattern and overriding philosophy and approach to securing profits from options premiums.
You just need the time and commitment.
And who knows? If you get good enough, I may need an “associate”, with a clear path to partnership.
Yeah, right.
22. Is this safe?
I see 2 different questions in this one.
As an investment vehicle, covered call writing is a very safe and conservative adjunct to an overall investment philosophy.
The second component to this question, in my eyes, is the entire question of “affinity marketing”.
Affinity marketing is when a specific group is focused upon or targeted for any kind of campaign, by an individual or corporation that shares something significant in common with that group. Affinity groups can include professional groups, religious groups, friend or family.
I am a member of the AAPD. You are a member of the AAPD. That is the affinity.
Historically, when it comes to investment programs, there is an unusually high degree of fraud when affinity groups are targeted. Principally, the fraud is committed by taking advantage of the trust that is given specifically related to being part of the affinity group.
After all, a relative or friend would never take advantage of you. Right?
Unfortunately, the answer is “No. Not right.”
The OTP-AAPD program is different because we only offer advice. We do not recommend any stocks, we do not sell anything (other than advice) that is to our benefit. Additionally, we only offer advice related to the equity positions that you have already established.
What is to our advantage is to demonstrate value and to allow you to quantitatively assess performance versus cost.
As a past President once said “Trust, but verify”.
Whether you also believe in “Trickle down economics”, the “Trust, but verify” advice is sound.
23. OK. You’ve convinced me. What do I need to do next?
You ask good questions.
First, you subscribe, either through a PayPal or AlertPay account.
The monthly subscription rate is $200 for 2009-2010 for Desktop Alerts or $250 for Text Message Alerts.
Desktop Alert Subscribers may receive up to 3 Alerts per day. There is no such limitation for Text Message subscribers.
You will be billed monthly, although you may cancel your subscription at any time.
Yes, I do charge for the service. And no, you can’t bill it to your insurance.
24. Do you have a discounted annual rate?
No.
If you are a good student and observant, and just make a little extra time for yourself, my expectation is that you will be able to find the appropriate covered call opportunities on your own.
If you use the OTP-AAPD program regularly, you really should be able to make your own decisions after a few months.
For those who really can’t make the time, sorry, no discount for you.
25. Will you charge me a higher subscription fee if I have a large portfolio, or if you make lots of recommendations for my account?
No, at least not for the first 12 months of your subscription. It is, however, possible that the resources necessary to maintain an individual’s subscriber’s account may outweigh the subscription fee. In such an instance, there may be some individual fee re-configuration.
Additionally, if the number of subscribers exceeds my ability to make meaningful recommendations in quality and quantity, I may consider raising the monthly fee to encourage some subscribers to cancel their subscriptions.
Finally, those subscribers that do utilize the Discretionary Trading Program are charged additional fees that are based upon realized profits.
Desktop Alert Option ($200/month - maximum 3 Alerts per trading day)
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Text Message Alert Option ($250/month - no limitation on Alerts)
You certainly do ask a lot of questions. It’s a good thing that I don’t mind writing. But, if you do have further questions I will try to answer them for you either directly, or by posting your question and its answer in the AAPD FAQ section.
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