Originally Posted by
DAL 88 Driver
LOL
I feel your pain, orvil. I've been around the block a few times on this discussion too.
Everybody else:
The disconnect seems to occur with the proper way to measure a cash flow investment versus the way to measure a capital appreciation investment. Following the rules of the Snider Method, there are no "realized losses" unless one of your positions goes bankrupt and the stock becomes worthless. So assuming none of your positions ever go bankrupt, you will never realize any losses. The only relevant market price is the one for which you finally sold it. And you predetermined that you would not sell it below your cost.
DAL 88 and Orvil,
It's been eons since I took a finance or accounting class, but I do appreciate your efforts to explain things...
The Snider Method rules (if I understand them correctly) strike me as "fuzzy math".
Here's an example. Suppose you purchase 100 shares of XYZ company for $100.00 per share (cost basis $10,000.)
You then write covered calls for the next year. One contract (100 shares) every month and let's say the option premium is $2.00 per share, so your cash flow would be $200 per month. Over 12 months you've realized $2,400 in options premium cash flow.
As I understand Snider's rules you've made a 24% return. Well let's suppose during the year XYZ's stock price has gone from $100.00 per share to $10.00 per share. Again, you've "made" a 24% return because you don't sell XYZ and "realize the loss". But the stock position is down $9,000!
By avoiding the reality of mark to market accounting principles you are not accurately measuring your investment performance.
Call me "old fashioned" but the market price of my investments is what they're worth.
At the end of the year if the value of the total portfolio is greater than at the beginning (including interest, dividends and option premiums) than I made money. If it's less, I lost money.