Geoff Considine

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    • Mon Dec 1st 12:05 PM
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      Profiting from Risk Aversion
      AlexR:

      Selling options that are not covered is, in general, riskier than selling covered positions. If you keep enough cash handy in your account, you can avoid margin calls as you say, but that has a cost too. Perhaps I misunderstood your point?
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    • Fri Nov 28th 18:30 PM
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      Profiting from Risk Aversion
      To Greg Harris:

      Yes, being net long the call (whether you are long the stock or just the call) allows you to grow when the broader economy makes money. You don't need to believe that there are no trends--i.e. that the market is a pure random walk to make my case here. BUT, when market volatility becomes irrationally high, I will believe that the call value exceeds the true growth potential for certain stocks---THAT is my whole point. This does not detract or even bear on put-call parity. The long-term expected return for the S&P500 is positive over the long-term---but the implied vol is SO high on some stocks that this is priced in.
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    • Fri Nov 28th 18:25 PM
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      Profiting from Risk Aversion
      To "You're Kidding":

      On a number of points, we agree. A long view makes most people better investors. On the other hand, there is considerable evidence that a long view of investing can be enhanced with fundamentals. Investing at low P/E ratios leads to higher long-term returns. Why? Reversion to The Mean (RTM). You sound like you would subscribe to a lot of Bogle's tenets--and RTM is a core theme of his. Selling select covered calls as I discuss in this article is simply another form of RTM--betting that extreme volatility will settle back towards the mean. The math can get a bit esoteric, but thats really all thats going on. Similarly, I wrote for years before 2008 that volatility was likely to revert upwards--again RTM. RTM is one of the most conservative things to bet on in the long-term--whether you are looking at the equity risk premium, P/E ratios, or volatility.
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    • Wed Nov 26th 11:15 AM
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      The Risk Premium Puzzle, or Dividend Investing for Math Nerds
      While the issue of non-dividend paying companies poses a major problem for the the dividend-based model of the equity risk premium, I think that these stats still show what people must realize to be true. The market is cheap! I (for one) appreciate this level of analysis--thank you.
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    • Wed Nov 26th 11:12 AM
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      Profiting from Risk Aversion
      Augustus:

      Your approach to this strategy would be a more aggressive way to play this, but it could certainly work...the challenge is managing your margin. Bigger players can easily do risk netting..and that makes inst. approaches to this much more efficient.
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    • Wed Nov 26th 11:10 AM
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      Profiting from Risk Aversion
      Glenn:

      First off, the implied vol is sort of a beast unto itself--a reference point. QPP and other tools use different models but by any measure, the price of call options on a range of stocks already captures much of the upside potential. If you expect 8% return on a stock like PG and you can "monetize" 12% and still keep another 10% of potential gain, that is pretty amazing when you think about it. You may be right that there is more upside, but my approach is to be like the house and your approach is to be the gambler---I am betting the odds across a bunch of positions. If I can monetize 12% on a stock with an expected return of 85 and lower risk, I am going to do this--it may not be exciting, but it all depends on your risk tolerance. The market is certainly betting on a lot of upside potential--thats why the options are so expensive--and that is why it is a good time to let the market take its bets.

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    • Tue Nov 25th 13:51 PM
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      Profiting from Risk Aversion
      BTW: I just found a nice follow-up stat that I would have liked to include in this article:

      seekingalpha.com/artic...

      This post shows volatility over the history of the S&P500 and shows that short-term volatility has never been this high. When things hit extremes like this, it is most often a good time to bet Reversion to th Mean (RTM). My point goes even further. Even if you accept that this level of vol is rational for the S&P500, it still seems too high for some low correlation sectors...
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    • Tue Nov 25th 13:01 PM
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      Commented on:
      September Case-Shiller Housing Analysis
      Thanks for the updates guys. always useful.
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    • Tue Nov 25th 11:25 AM
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      Rating: +1 0
      Commented on:
      Profiting from Risk Aversion
      To "You're Kidding"

      Your comments suggest that you have not understood my core premise. I am not one of those people who believes that simply buying stocks and selling covered calls will generate a higher risk adjusted return. To the contrary--in most market conditions, all selling covered calls will acheive is to lower the return of the portfolio, as well as lowering the downside due to premium received. In this market--an extremely risk averse market--it can make sense. Think of it this way. Lets say I ask you to sell me a call option on your holdings. At some price, you would be willing to consider it--not matter how aggressive an investor you are--because I will be offering more than the upside on your stocks is worth. When market volatility is really high and investors become indiscriminately risk averse, they may offer a lot for that upside.

      Option valuation can be theretically complex, but it is ultimately just a matter or valuing the probability distribution in returns beyond the strike price. Even with a fat tailed distribution, you can model that upside somehow.
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    • Mon Nov 24th 16:29 PM
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      Watching the New York Times Struggle
      Seth Godin writing for SeekingAlpha.com. That reinforces the whole point of this article doesn't it? The idea of "semi pro" writers--10,000 of them vying for eyeballs---hmm. Sounds a lot like SeekingAlpha.

      Welcome to SA Seth. I look forward to seeing more of your writing on SeekingAlpha.
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    • Thu Nov 20th 18:50 PM
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      Default Risk at New Highs - Scary but Not Surprising
      There is an interesting factor here. CDS's are related to VIX levels---implied volatility levels are highly correlated to CDS spreads. As much as anything, the CDS spreads are simply following VIX levels--which may or may not be very rational in the current market. JNJ has annualized implied volatility for Jan 2010 options of mid 30's--vs. mid 40's for the S&P500 (this was before today--not fresh quotes). Does this make any sense? implied vol at this level corresponds to implied default risk that is quite high--what would have corresponded to junk earlier this year. There are many more examples. Implied vol is simply way out of whack for the longer-term--the implied default risk shows irrational fear. Am I willing to bet that JNJ does not have this level of default risk? You bet I am. The market implied vol levels suggest that many historically stable companies which are weathering the downturn just fine have substantial default risks. This is irrational panic.
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    • Fri Nov 14th 15:31 PM
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      Should We Really Bail Out the Big Three Automakers with $73.20 Per Hour Labor?
      Wow--what a dialog. Its a pity people can't keep it more civil. Anyway, the point that everyone seems to be missing is this. The taxpayer is going to bail out GM and Ford because they are going to go bankrupt otherwise. I own a small business. If I don't make a product people want at a price they can pay, I will go out of business. This is the way of the world. If a company cannot make a product that makes them economically viable, they should fail. Period. If GM and Ford could pay their workers $300K a year and still stay in business, more power to them! This is not about "fairness" of wages--its about the way that a business can survive. If GM and Ford can't survive the way they do business, they need to change how they do business or fail. I hate the idea that we are going to tax waitresses, and teachers, and nurses, and construction workers, and everyone else more in order to subsidize GM and Ford. That just seems wrong to me. I have worked my butt off in starting my small business but I would not expect a government handout to stay in business---these auto companies are essentially saying they deserve to be on welfare. If a company is failing, they need to do many things--perhaps one thing is to lower salaries and bonuses to workers and management. This is basic common sense.

      We, as taxpayers, should not debate whether the auto workers are "worth" their salaries. This is the whole problem with the government bailout. Workers justify their salaries by helping a company turn a profit. That should be the basis for salaries. If the companies cannot turn a profit, they need to work it out themselves or fail.
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    • Wed Nov 5th 12:41 PM
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      The Shallowest Generation
      This is a great article and it clearly resonates with a lot of SA readers. What is so shocking is simply that so many people--the largest generation in American history--threw responsibility out the window, partied like rock stars for decades, and are apparently prepared to visit the costs of their decisions on the children and grand children.

      There are many responsible Boomers, but the generation as a whole has been profligate.

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    • Fri Oct 24th 11:34 AM
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      Testing Forward Looking Asset Allocation
      Flav:

      Allowing the model to short would be a good addition to the analysis--perhaps a follow up. Frankly, this study is a starting point for more. Validation is a long-term process and there are so many ways to stress test. Pete Manhardt, my co-author who did the analysis, has created a platform for doing a wide variety of interesting studies.

      Geoff
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    • Thu Oct 23rd 17:27 PM
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      Testing Forward Looking Asset Allocation
      SmartETF:

      When I ask for evidence, what I am interested in is some kind of documented record. You said

      "If you want proof that Extreme Value Theory works check out my fund Aston Smart Portfolios Allocation Fund 'ASENX'. "


      You suggested ASENX as evidence of your better approach and it has not out-performed a generic benchmark so far--it tracks perfectly in fact with a target date fund with the same FI allocation (STLBX). But ASENX has like 400% annual turnover which means that you would need to dramatically out-perform if this were a taxable account, too.Your mutual fund using your approach certainly counts--and we can keep an eye on that.

      Just saying that your method is superior or mentioning things like GARCH or EVT does not provide any concrete support---its just jargon until you demonstrate something. This is where publications are really useful--you can publish examples from your models on a forum like SA and then see how they have done. You could also have an objective / standard model that other people can test--as I have discussed in my article here.

      View article »