Originally Posted by
Wasatch Phantom
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.
Don't forget that you're buying a certain number of shares of this stock each month (up to a predetermined max number of shares). You have cash allocated to support this position. So as the price of the stock goes down, you are dollar cost averaging and your average cost goes down as well. So let's say it takes three years before your stock's price rises enough that you can sell all your shares and close out the position at or above your average cost. And let's also say that during most of that time, you continue to earn option income. When you finally close out that position (sell all the stock), you recoup your investment in the stock and all the option premium you earned during that time is yours to keep. When it's all said and done, why is it relevant what the stock's price did while you owned it? You predetermined that you weren't going to sell it at a loss. The stock generated a cash flow yield that met your cash flow objectives. And when you finally close out the position, you have made real money, met your cash flow objective, and not lost a real penny in the process? (Disclaimer: there are no guarantees with any investment method, including this one.)
Again, I'm not trying to change your view or tell you how you should view your investments. That is totally up to you. I'm just trying to explain why I do not think Snider's math is "fuzzy." I think it is appropriate for the type of investment it is. The Snider Method is a cash flow investment. That is the objective. IMO, trying to measure it with a measurement intended for capital appreciation just doesn't provide any useful or relevant information. Or put more simply, I only care about the actual end result, which is what Snider's yield calculation measures. I hope we're not boring everyone with this, as it has nothing to do with the "latest and greatest about Delta." My apologies.
