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  1. Don’t enter a trade if you are unsure of the trend. Never buck the trend.
  2. When in doubt, get out, and don’t get it when in doubt.
  3. Only trade active markets.
  4. Distribute your risk equally among different markets.
  5. Never limit your orders. Trade at the market.
  6. Don’t close trades without a good reason.
  7. Extra monies from successful trades should be placed in a separate account.
  8. Never trade to scalp a profit.
  9. Never average a loss.
  10. Never get out of the market because you have lost patience or get in because you are anxious from waiting.
  11. Avoid taking small profits and large losses.
  12. Never cancel or stop a loss after you have placed the trade.
  13. Avoid getting in and out of the market too often.
  14. Be willing to make money both sides of the market.
  15. Never buy or sell just because the price is low or high.
  16. Pyramiding should be accomplished once it has crossed resistance levels and broken zones of distribution.
  17. Pyramid issues that have a strong trend.
  18. Never hedge a losing position.
  19. Never change your position without a good reason.
  20. Avoid trading after long periods of success or failure.
  21. Don’t try to guess tops or bottoms.
  22. Don’t follow a blind man’s advice.
  23. Reduce trading after the first loss; never increase.
  24. Avoid in getting in wrong and out wrong; or getting in right and out wrong. This is making a double mistake.

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Not all volatility is created equal. If I mention the words Contango, Backwardation and VIX Curve Structure, your eyes might glaze over.

When we get a volatility spike, not all options are affected equally.

Let’s go back to last year when we saw a pretty decent volatility spike on August 10th, 2017. That day, the S&P 500 dropped 1.45% and VIX rose from 11.11 to 16.04, a gain of 44.37% which was one of the largest one-day gains on record.

However, just because VIX rose by 45%, doesn’t mean that the implied volatility of all options increase by 45%.

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You can see in the chart below, that the near-term options were affected the most rising from below 12 to near 15.

The furthest dated options only rose from about 16 to 16.5%. So long term options were not impacted nearly as much as the short-term options.

This is why I never trade weekly Iron Condors.

In this 3-minute video below I explain a little bit more about this.

https://youtu.be/JpFj-PehmbY

If you want to learn more about volatility you might enjoy these articles:

How Does SVXY Work? 

VXX and VXZ Explained

Gaining a thorough understanding of volatility is crucial if you want to be a successful options trader. I hope you enjoyed this quick lesson.

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If you have any questions on this stuff, please drop me an email or leave a comment below.

Trade safe!
Gav.

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Real estate income trusts have been around since the 1960s.  They were started, and are currently largely originating from, the USA.  Because of these factors, we have a relatively long investment history to look at when we’re examining the historical returns of the sector.

Comparing the performance of REITs to a benchmark is the easiest way to examine the returns of the sector and gives us something to compare them to.

The Russell 3000 Index (Russell 3000) is an index that is weighted by market capitalization.  It acts as a benchmark to the US stock market.  The Standard and Poor’s 500 Index (S&P 500) is a weighted index and is considered a leading indicator of the US stock market.  The FTSE NAREIT All Equity REIT Index (NAREIT All Equity) holds all the US equity REITs, except for Timber REITs and Infrastructure REITs.  It is adjusted for market capitalization as well.  The Dow Jones Wilshire REIT Index measures publicly traded US REITs.

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From December 31, 1978 to March 31, 2016, the Russell 3000 averaged an annual return of 11.64%.  Comparatively, the NAREIT All Equity average annual returns are 12.87% over the same period.

While REIT investment returns consistently compare favorably to stock market returns over the long-term, the short-term returns can be less dependable.  In 17 of the last 25 years, the NAREIT All Equity Index has outperformed the S&P 500.

It’s not an entirely rosy picture though, when REIT performance is bad, it can be really bad.  The Dow Jones Wilshire REIT Index lost half of it’s value between 2007 and 2008.  In 2007 the value of the index dropped by 17.6%.  2008 made 2007 look good.  That year, the index dropped by a further 39.2%.  Over the same two years, the S&P 500 saw gains of 5.5% in 2007 and saw losses of 37% in 2008.

If, on January 1, 2007, an investor had invested $100 in a S&P 500 Index Fund that mirrored the index exactly, they would have $66.45 in their investment account on December 31, 2008.

If, on January 1, 2007, an investor had invested $100 in the NAREIT All REIT Index that mirrored the index exactly, they would have $50.10 in their investment account on December 31, 2008.

Over time, the performance of publicly traded REITs has come to mirror the performance of the stock market in general.  When the economy is expanding, rents typically rise.  This leads to higher revenues to the REIT, which leads to higher distributions to investors, which leads to appreciating share prices.  When the economy is contracting, commercial rents tend to fall as spaces come available and stay on the market for a longer period.  This leads to lower revenues to the REIT, which leads to lower distributions to investors.  The lower distributions spur investors into looking for higher rates of return and puts downward pressure on the share price of REITs.

REIT Subsectors

Equity REITs in general in 2016 returned 8.63% in 2016.  The REIT industry can be subdivided into more focused sectors.  Returns in each sector can vary widely from the industry taken as a whole.  The usual breakdown of sectors within the REIT industry are:

Industrial REITs – These REITs focus on industrial facilities such as warehouses, and distribution centers.  They play a significant role in e-commerce as they provide the buildings from which the industry houses and ships their products.  In 2016, the average return of a REIT focused on this sector was 30.72%.

Office REITs – These REITs focus on providing office space.  They can be focused on either a type of market (high rise office buildings, office parks, etc.) or on a class of tenants (government offices, technology based offices, etc.).  In 2016, the average return of a REIT focused on this sector was 13.17%.

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Retail REITs – focus on providing retail space.  Similar to Office REITs, Retail REITs can focus on more specific areas of investment like shopping malls, regional malls, or free-standing stores.  In 2016, Retail REITs returned an average of 0.95%.  Interestingly, there was a wide range of returns based on the area of investment that the REIT focused on.  Shopping malls returned 3.68%, regional malls took a loss of 5.2%, and free-standing stores posted an average gain of 17.02%.  Because regional malls was a larger component of the industry, even though some significant returns could be found in REITs focusing on free-standing stores, the Retail REIT sector in general took a beating.

Residential REITs – focus on providing housing.  This area too, can be further split into areas of investment.  Managing apartments, manufacturing homes, and building single family homes are quite different activities and can have a large variance in return rates.  Residential REITs in general returned 4.45% in 2016.  When we classify the REITs further, REITs focusing on apartments returned 2.86%, manufactured homes had a return of 14.15%, and ones that focused on single family homes gave investors a 26.65% boost to their portfolio.

Diversified REITs – invest in a mix of classes.  In 2016, they returned 10.27%.

Lodging REITs – focus on providing overnight stays for guests.  Think of hotels and resorts in this area of REIT investment.  In 2016, they posted returns of 24.34% on average.

Healthcare REITs – invest in buildings that house healthcare ventures.  These could be things like hospitals, nursing homes, clinics, etc.  In 2016, they returned an average of 6.41% to investors.

Self-storage REITs – provide storage rental units to their customers.  The largest self-storage REIT is Public Storage.  In 2016, self-storage sector produced returns of 8.14%.

Timberland REITs – are focused on wood and wood products.  They can generate revenue from timber operations, the manufacture of wood products, or the valuable parts of land under timberlands (the physical real estate or natural resource found underground).  Average returns in 2016 were 8.28%.

Infrastructure REITs – provide the physical infrastructure for varying industries.  Examples could include the towers for wireless networks, pipelines for energy companies, or fibre cables for technology providers.  2016 returns averaged 10.04%.

Data Center REITs – exist to provide safe data storage to their clients.  They invest in data centers that house servers and the products and services that keep them safe.  In 2016, they posted average returns of 26.41%.

Specialty REITs – is a subsector of the REIT industry that captures any type of REIT investment that isn’t accurately reflected by the above 11 subsectors.  Investments can include farm land, movie theaters, casinos, etc.  The specific specialty REIT will likely be focused on one area of investment.  Average returns for 2016 were 19.95%.

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As you can see, REIT performance can vary widely across subsectors because economic impacts are felt unevenly across subsectors.   An expanding economy typically means that the retail sector will be doing well.  Trends away from bricks and mortar retailing and to e-commerce boost returns in the industrial REIT subsector, and put downward pressure on retail REITs.  As we see regional malls struggling, it would obviously put pressure on revenues generated by REITs focusing on this area.

At other times, and probably in the future as well, economic and lifestyle trends boost the returns of different subsectors at the expense of others.

Time periods:

Although around since the 1960’s, the performance of REITs has only been tracked closely since the mid-1970’s.  Long-term returns have been strong relative to the performance of the stock market in general.  From 1975 through 2007 their average annual return was 16.7%.  From 1975 through 2014, it was 14.1%.  Pretty impressive considering that 2007 and 2008 were horrible years for REIT performance.  Recall that the Dow Jones Wilshire REIT Index lost around half of it’s value from 2007 to 2008.  Consistent long-term returns can lead you to believe that they are a stable investment to add to your portfolio.  They are not.  As a sector, REIT returns can have wild short-term fluctuations.

The FTSE Nareit All REIT Index has been tracking the industry since 1972.  It picks up losses, in absolute dollars, in 1973, 1974, 1978, 1987, 1989, 1990, 1998, 1999, 2007, and 2008.  Every other year has gains in absolute dollars.

As a note of caution, the magnitude of gains and losses has a wide swing.  The index shows a loss of 42.23% in 1974.  In 1976, just two years later, the index posted a gain of 48.97%.  That volatility has continued historically.  In 2003 the index showed a gain of 38.47%.  Five years later, in 2008, the index showed a loss of 37.74%.  The largest single year gain since 1972 occurred in 1976.

Comparing that to the performance of the stock market through the S&P 500 Index, the broader market had losses in absolute dollars in 1973, 1974, 1977, 1981, 1990, 2000, 2001, 2002, and 2008.  As you can see, there is a significant degree of correlation between years of losses between REITs and the broader market.

Looking at the magnitude of gains and losses, in 1974, the S&P 500 Index showed a loss of 25.90%.  Two years later, in 1976, the gains were 23.83%.  Looking at 2003 and 2008, the index showed a gain of 28.36% and a loss of 36.55% respectively.  Since 1972, the largest single year gain happened in 1995 at 37.2%.  The largest single year decline, in that time, happened in 2008.  While there is a correlation in performance on a year to year basis, the magnitude of gains and losses is certainly larger when we’re looking at REITs versus the broader market.

Here is the raw annual data comparing the returns of the S&P 500 Index and the Nareit All REIT Index since 1972.

The data shows that REITs in general have a less consistent return than the stock market in general, but that over time, they have outperformed the market.

Factors that drive REIT performance

In general, the same economic factors that propel the broader stock market will impact the performance of REITs.  An expanding economy, job growth, and investment by actors within the economy will lead to growth of both.  A contracting economy, decline in the employment level, and reduced investment will put downward pressure on REIT performance.

Interest rate increases do tend to have a negative impact on REITs because they do finance much of their investment.  Individual REITs can feel that pinch more significantly if they are holding a significant amount of debt.  The effect of an increasing interest rate can be mitigated somewhat by a rise in demand for their products.  If increased rates make home ownership more unaffordable for people, there could be increased demand for units in apartment buildings.  Additionally, economic growth can offset the negative impacts of increased interest rates.  If demand for commercial property is growing, the increased rates can be priced in to rental rates.

Demographic trends can have a significant long-term impact on the performance of REITs.  We live in an ageing society.  As society gets older, the demand for products and services will change.  REITs that invest in property that will increasingly get used by baby boomers as they age and retire (health care, self-storage, lodging, etc.) will have upward pressure on their revenue levels as well as their shar

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How do you evaluate REITs?

Funds from operation (FFO) is an important measure in the REIT world.  Earnings per share or price to earnings measures are less significant to REITs than they would be to traditional shares because they capture depreciation in the ratios.  REITs book a depreciation expense, but, as a practical matter, the physical property usually does not decline in price.  Because they are not investing in a big way in equipment that declines in value over time, a depreciation expense is less significant to a REIT.  Less significant, but not irrelevant.  The REIT will invest in some equipment that will depreciate over time (think of a residential REIT buying a new boiler or air conditioning unit for a building).  For that reason, an adjusted funds from operation (AFFO) measure is used.  Effectively, it takes net operating profit, adds back in depreciation (less the depreciation of assets that will get used up).

Like stocks, the value of a REIT is based on both the current situation as well as the expected performance of the investment.  All things being equal, a stock that takes a smaller loss per share than the market expects will rise in price.  Similarly, a stock that has lower earnings per share than the market expects can decline in price.

REITs are a total return vehicle.  An investor that has capital tied up in REITs will hope to see both a solid dividend stream and capital appreciation.  AFFO will help an investor determine a likely dividend payout.  Additionally, it can be used to look at yield (AFFO/price) to compare the REIT to other ones.

Trade safe!
Gav.

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

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A lot of financial planning models say that you should have 5% of your portfolio in Real Estate Income Trusts.  Recent thoughts are to increase it to between 15 and 20% of your investment portfolio.  Why?  Well, REITs have a history of out performing the stock market in general.  The FTST Nareit All REIT Index has beaten the S&P 500 in 17 of 25 years.  Additionally, real estate holdings tend to do well when the economy is expanding, so there is a fairly strong correlation between an increasing stock market and increasing REIT prices.

Intuitively, it would make sense to split some of your portfolio exposure between a number of sectors.  Investing in real estate, beyond your personal residence, can be a capital intensive, illiquid endeavour.  By investing in shares of REITs, you can have investments in commercial real estate without having to go out and buy an apartment building.  As an added bonus, the duty of fielding the midnight calls from tenants falls to someone else.

Let’s compare the liquidity of a traditional rental property to that of a REIT.

Buying and selling commercial property is similar to, but more expensive than, buying and selling real estate as a principal residence.

Commissions

All real estate commissions are negotiable, but the seller can expect to pay the real estate broker between 4 and 6% of the sale price.

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Costs

There are fewer state and federal protections when selling a commercial property compared to selling a residential property.  Because of this, the cost of due diligence is much higher in buying and selling a commercial property.

Assessing the value of the property is relatively straight forward in a residential property sale.  There is likely a history of sales of comparable homes in the area in which an assessor can compare purchase prices.

With commercial real estate, there likely aren’t going to be as many comparable property sales to judge value.  Additionally, because much of the value of a commercial property comes from the profit that one is likely to derive from it, the cost of the property will be based, in large part, on the income producing potential of it.  Determining the income of a property for the purposes of a sale, from unaudited financial statements becomes an exercise in verification of the information.  Going through leases with a fine-toothed comb is vitally important to the sale of a commercial building.  Clauses found within leases with commercial tenants can have a material impact on the new buyer.  Determining the payment history of current tenants will help the buyer create their cash flow projections and give an idea of the risk that they will be subjecting themselves to.  Doing this research will take time, and can have a considerable cost to both the buyer and seller of the property.

Physical due diligence is another area in which a residential property is typically more straightforward than a commercial property.  If you’re buying a house, you can hire a home inspector at a cost of a few hundred dollars.  They’ll inspect the property and produce a report that will highlight some of the potential concerns that the new owner may have to deal with.  In a commercial property, there could be hundreds of units to inspect.  There will be a cost to inspecting each unit as well as the physical infrastructure of the building.  An environmental assessment will be required to ensure that the new buyer will be limiting their exposure to risk to liabilities due to changes in construction standards (lead paint, asbestos, wetlands impacts, etc.) or previous uses of the property (underground tanks, soil contamination, etc.).  Limiting liability and getting an accurate as possible picture of the property is not a simple endeavour and will increase the time that it will take to close the property and increase the costs associated with it.

Taxes

The sale of a commercial property is subject to capital gains taxes based on the adjust cost basis of the building (simplified, it’s the cost of purchase less the amount that the owner has depreciated the building) and the newly agreed upon sale price.  The capital gains rate changes based on your income (or the income of your household).  Additionally, the length of time that you hold an asset can have an impact on the capital gains that are due.  If you’re selling a commercial building and buying one of the same asset class, you may not have to pay capital gains taxes.  Practically, this means that engaging the services of a good accountant is an important step in the sale of a commercial property.

Real estate transfer taxes vary by state, but can be upwards of 1.5% of the sale price of the property.

Depending on the complexity of the property sale, closing costs vary, but can be as high as 10% of the sale price of the property.  Added to realtor fees, the cost of closing the sale could reach 15%.

The costs associated with selling a commercial property, as well as the potential difficulty in finding a qualified purchaser, mean that it can be a tremendously illiquid asset.

As a comparison, buying shares in a REIT takes much less time and costs are reduced enormously.  Buying shares in a publicly traded REIT will incur you broker fees.  Discount brokerages can charge as low as $5 per trade with account maintenance fees of 0.5%.  With an average daily sales volume of $7.5 billion in September 2017, finding a willing purchaser of shares in a REIT will likely be a fairly smooth process.

The cost of buying and selling shares in a REIT, and the share sales volume in the industry, mean that it is comparatively an extremely liquid investment.

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Diversification

Creating a portfolio that is properly diversified will help to mitigate risks and ensure that your portfolio has a proper asset allocation.  It is important on the macro level, making sure that your portfolio isn’t weighted too heavily towards any sector or class of investments.  It is equally important on the micro level, making sure that each class of investments isn’t too heavily weighted in any one sector towards any one investment.

The three main classes of assets are stocks, bonds, and cash.  Consider an investor with a high-risk tolerance, and a longer time horizon.  Their most appropriate portfolio would be more heavily weighted towards stocks (or equities).  They would have some exposure in bonds (or fixed income) and cash as well.  An aggressive investor would aim for holding 65-70% of their portfolio in equities, 20 – 25% in fixed income, and 5 – 10% in cash or cash equivalents.

Conversely, an investor that has a lower risk tolerance, with a shorter time horizon will want to be more conservative in their investments.  A conservative investor would have different asset allocation goals.  They would aim for holding 65-70% of their portfolio in fixed income, 15-20% in equities, and the remainder, 5-10% in cash or cash equivalents.

Monitoring the portfolio is an important job because there is a natural tendency for equity investments to grow more quickly than fixed income or cash.  Without rebalancing a portfolio, or selling some investments in an investment class to buy investments in another class, a conservative asset allocation will become more exposed to equity than is optimal.

The challenge that an investor who holds most of their equity investments in physical properties has is that rebalancing a portfolio means selling buildings.  Because of the illiquidity of the investment, there can be a significant lag, and a significant cost, in selling assets to maintain your ideal asset allocation.

REITs share characteristics with both equity and fixed income investments.  Because of the requirement to pay out 90% of their earnings, they create an income stream.  Because they can be traded on the stock market, they can have swings in value that affect the capital that you hold in them.

On a micro level, a savvy investor will not want to hold all their investments in one investment class in a few investments.  Holding all their equity investments in one company has more risk exposure than holding all their equity investments in a number of stocks, in a number of industries, across a number of different geographical areas.  Similarly, holding all of their fixed income investments in one bond would be less ideal than spreading the risk across many different fixed income instruments.

An investor can conclude that some of their holdings should be found in real estate.  In order to ensure that their real estate holdings are diversified, optimally, they would be looking to have holdings in real estate in a number of different sectors, in a number of different areas, that are used in a number of different industries.  Ensuring that an investor’s real estate holdings are properly diversified is an expensive and illiquid endeavour.  The average investor simply does not have enough capital to have a properly diversified real estate sub-sector in their portfolio.  The cost of commercial properties, especially blue-chip ones, means that owing enough individual properties to spread risk will crowd other sub-sectors of their portfolio out.

Mutual funds became an average investor’s answer to diversifying their portfolio without a large capital stock.  Comparably, REITs have become an average investor’s answer to having commercial real estate holdings that can be spread across many physical buildings, across many industries, and across many geographical areas.

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Tax Benefits

REITs are tax advantaged in several ways.

Their distributions are spread between ordinary income, long term capital gains, and return of capital.  Ordinary income is taxed at an investor’s marginal tax rate.  Long term capital gains are taxed at a lower rate than ordinary income.  Return of capital isn’t taxed at all.  It’s important to note that the return of capital portion of a REIT’s distribution doesn’t mean that your investment is dwindling.  Rather, it comes largely from the depreciation of the assets held in the REIT.  As a practical matter, it’s an accounting measure rather than an actual decline in the value of the property.

The fluctuation in the value of the investments can lead to capital gains and losses.  If an investor holds an investment for more than a year, appreciation becomes a long-term capital gain and is taxed at a lower rate than ordinary income.  Conversely, if the value of the shares in the REIT drop, selling them will lead to a capital loss.  Those capital losses can be used to offset other gains.  A strategy of tax loss harvesting can help reduce the taxes that an investor owes the government.

REITs are an eligible investment in Roth IRAs.  It means that the investor is purchasing shares in the REIT out of after tax dollars, but by holding REIT investments in a Roth IRA, the income that is derived from the investment, and the capital gains, would flow to the investor tax free.

At the REIT level, generally speaking, as long as they distribute over 90% of the income that is generated to shareholders, they are not taxed.  As far as the IRS is concerned, the only taxes that are due come from the investors that hold shares in the REIT.  A traditional company that issues a dividend leads to taxes being applied twice.  The corporation pays taxes on their earnings and then the investor pays taxes on the dividends that they receive from those already taxed earnings.

Trade Safe!
Gav.

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

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The Dogs of the Dow strategy is something I’ve written about in the past here on the blog. As we roll into 2018, lest take a look at how the strategy worked out in 2017 and also see who is on the list for 2018.

As a reminder:

“The Dogs of the Dow is an investing strategy that consists of buying the 10 DJIA stocks with the highest dividend yield at the beginning of the year. The portfolio should be adjusted at the beginning of each year to include the 10 highest yielding stocks.” – Investopedia

The Dogs of the Dow theory was created in 1972 and has proven to be successful more often than not over the years. Sometimes the simple things work the best and this strategy is simplicity to the core. Purely stated, the Dogs of the Dow theory involves buying the 10 highest yielding stocks of the 30 companies in the Dow Jones Industrial Average at the start of each year. The portfolio is then rebalanced at the start of the following year.

The thesis of the trade is that these 10 stocks are quality companies with stable business and healthy, consistent dividend payment. They are temporarily unloved or have experience short-term declines due to various market factors but are likely to bounce back at some point soon.

Companies in the Dow have historically been very stable companies that have been able to weather economic storms. It is unlikely they are going to go out of business any time soon.

Does It Work?

As with any investment strategy, you cannot say in advance that this will work 100% of the time. However, over the long run, the strategy has proven to be a good one. According to Investopedia, between 1957 and 2003, the Dogs outperformed the Dow Industrials by about 3% returning 14.3% annually versus the Dow’s 11%. From 1973 to 1996, the outperformance was even more impressive returning 20.3% annually versus 15.8%.

The following returns were reported by www.dogsofthedow.com

2017 Dogs of the Dow performance

The 2017 Dogs of the Dow strategy performed very well with BA and CAT achieving phenomenal returns of 89.43% and 69.92% respectively.

IBM, XOM and MRK had slightly negative returns, although factoring in the dividend, brings the return close to even for the year. VZ was down on the year in terms of price but positive overall when including dividends.

An equal weighed portfolio of the 2017 Dogs of the Dow would have produced a before tax return of 28.03% compared to a 23.83% return for the Dow.

Dogs of the Dow for 2018

Going into 2018, VZ again tops the list with its juicy 4.46% dividend. In terms of price, the stock has gone almost nowhere for the last 5 years.

IBM, XOM and MRK make the list after lackluster 2017 returns.

GE had a stinker in 2017 and despite a dividend cut, it scrapes onto the list.

Dow Under Dogs for 2018

Another strategy that goes along with the same idea s the Dogs of the Dow is to buy the 10 worst performing Dow stocks over the last 12 months. Here’s what that list currently looks like:

Using Options To Trade The Dogs Of The Dow

A different method of trading the Dogs of the Dow would be using options. The typical strategy would be to buy all 10 stocks using 10% of your portfolio for each. Rather than do that, you could start selling some cash secured puts on some of the stocks. If you end up being assigned your purchase price will be even lower than the current stock price which make the effective dividend yield even higher.

GE, IBM, XOM and MRK all seem likely candidates for 2018.

Let’s take XOM as an example. The stock was trading at $83.64 at the end of December and had a dividend yield of 3.68%.

Instead of buying shares outright, investors could enter a covered call trade and buy 100 shares of the stock while simultaneously selling a March 16th $87.50 call for $0.55.

Selling the out-of-the-money call, increases the yield by 3.19% per annum.

If the stock rises above $87.50 at expiry the shares will get called away for a $500 profit (note that a dividend of $0.75 will be paid during the life of the trade) for a roughly 6% return or 29.23% annualized.

Selling covered calls over the Dogs of the Dow stocks is a great strategy for building a long term exposure to high quality, high yielding stocks.

It will be interesting to see how these strategies play out over the next 12 months. I’ll be sure to keep you updated.

Trade safe!

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At the end of each year, it’s always interesting to take a look at some of the best and worst performing industries and sectors for the previous year. By the end of 2016, renewable energy stocks had been absolutely smoked for nearly two years.

The rest as they say, is history. $TAN has gone from $16 to $25 in 2017 and $FSLR went from $32 to over $60!

Despite this being one of the most amazing bull runs in history, with historic lows in volatility and not a single negative month on the S&P 500, small pockets of this market have really struggled.

Retail has been particularly hard hit this year thanks to the never ending Amazon juggernaut, however it does not even make the top 10 worst performing industries according to FINVIZ.

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Below you will find the top 10 worst performing industry segments for 2017.

I took a quick look through these to find some individual stocks of note and three jumped out at me.

Dicks Sporting Good – DKS

It’s been a tough year for DKS with the stock down 45% for the year. Looking purely at the technicals, the stock appears to be trying to base and is holding above the 50 day moving average. The 50 day is rising, so if the stock can stay above that level, who knows, maybe it could test the 200 day moving average in 2018.

Guggenheim Shipping ETF – SEA

The Guggenheim Shipping ETF is only down around 1% for the year, but there a couple of really constructive items on the chart below. Firstly the ETF has reclaimed both the 50 and 200 day moving averages. Secondly, it has put in a successful double bottom pattern which could see the ETF test $11.80 very quickly.

Dean Foods, Inc. – DF

This dairy products manufacturer has had a rough year with the stock down 46%. However, like DKS, the stock appears to be trying to put in a base. The stock has broken above the 50 day moving average and that average is now rising. Could we see a test of the 200 day in early 2018?

Free Covered Call Course

Trade safe!
Gav.

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

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Good news for you. The good people at Amazon allow me to give away my Kindle books for free every few months. So, if you’ve been waiting for an opportunity to pick these up for free, now is your chance.

With almost 100 5-star reviews on Amazon, my books are one of my proudest achievements. At one stage My Butterfly book was the #2 rated book on Amazon in the options trading niche. It currently has a total rating of 4.7 out of 5 and BS Free Guide to Covered Calls has a rating of 4.8 out of 5.

My book on Iron Condors has received more reviews, perhaps because it is a more sought after topic and I also have books on Volatility and 37 Quick Tips for Option Traders.

You will be able to pick up the books for free on these dates:

Bullsh*t Free Guide to Option Volatility – January 1 – 5

Bullsh*t Free x 3 – January 8 – 12

Bullsh*t Free Guide to Iron Condors – January 15 – 19

37 Quickfire Lessons in Trading Options – January 22 – 26

Bullsh*t Free Guide to Covered Calls – January 29 – February 2

Bullsh*t Free Guide to Butterfly Spreads – February 5 – 9

Just to let you know, you don’t need a Kindle to read these. You can read them on any Apple device with the Kindle app and even on your desktop PC or laptop using a kindle reader.

I hope you enjoy the books! If you do, please remember to leave a review on Amazon and hopefully I can reclaim that #2 ranking!

Thanks!
Gav.

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Options trading IQ by Gavin - 1M ago
Stuff I’ve Been Reading Lately That’s Worthy of Your Attention:

Are There Any Stock Bears Left in America? – Bloomberg Markets

Trump’s Singular Accomplishment – The Reformed Broker

THE TOP TECH BOOKS OF 2017: PART I – Wired

Q3 GDP Revised to 3.2% – Crossing Wall Street

What To Expect From Equities In 2018 – The Fat Pitch

Register For 10x Your Options Trading

What Happened to Inflation? And What Happens If It Comes Back? – GMO Quarterly Letter

Winter is coming! How to prepare for the next recession BEFORE it arrives – Get Rich Slowly

HOW THE BLOCKCHAIN IS REDEFINING TRUST – Wired

Will 2000 Tech Bubble Highs Slow This Popular ETF (XLK)? – See It Market

Quantum Computers Pose Imminent Threat to Bitcoin Security – MIT Technology Review

2017: Stocks Experience Record Little Adversity – The Lyons Share

ENERGY AND OIL: VALUE & MOMENTUM COULD OFFER SIGNIFICANT UPSIDE IN 2018 – Trends Trading Signals

Access 5 FREE Options Books

Trade Safe!
Gav.

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

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There are many great books out there on financial markets these days, some better than others. Here is a list of the top 11 books every would be trader should read:

Market Wizards: Interviews With Top Traders

A great collection of interviews from Jack Schwager and my personal favorite from this list. So many great insights to be gained from the numerous interview with famous traders. The book was so popular that Jack wrote a further four: The New Market Wizards (1994), Stock Market Wizards (2003), Hedge Fund Wizards (2012) and a summary of essential lessons from nearly 50 interviews – The Little Book of Market Wizards (2014)

Reminiscences of a Stock Operator

I like this book as it’s a fast paced, well written and very interesting read. This book continues to be one of the most useful and most-loved book ever written on the subject of trading and speculation even though it was written in the 1920’s. It tells of the life and times of the book’s protagonist, Larry Livingston, a pseudonym for Jesse Livermore, one of history’s most famous traders. Some of his rules to live by that I like are:

-The trend is your friend.
-History repeats itself.
-No stock is too high to buy or too low to sell.
-Let your winners run and cut your losses quickly

This book is true to the real wall street and a must for anyone’s book shelves.

Trade Your Way to Financial Freedom

There is something for everyone in this book that focuses on investor psychology and trading system construction.

Trading in the Zone

A great book for those traders that need to make the necessary mental shift to become a successful trader.

The New Market Wizards: Conversations with America’s Top Traders

The follow up to Jack Schwager’s classic Market Wizards, the second title in the series includes interviews with William Ekhardt, Stanley Druckenmiller, Gil Blake and Linda Braford Raschke.

Liar’s Poker

Another brilliant read is Liars Poker. This book is highly entertaining and a thoroughly enjoyable read. Liar’s poker is a game played in on the side by workers on Wall Street, the objective of which is to reward trickery and deceit. We see the story told by Lewis of his four years with the Wall Street firm Salomon Brothers, from his bizarre hiring through the training program to his years as a successful bond trader. There are many strange and bizarre stories he tells from 1984 through the crash of October 1987.

Technical Analysis of the Financial Markets

An excellent reference book for beginners and experienced traders alike. The book focussing mostly on swing trading rather than intraday trading and some traders have said it is a better reference than most of the books recommended for the CMT exam.

Options as a Strategic Investment

I call this “The Bible” and is a book I recommend for anyone that is serious about options trading. The only downside is that the content is pretty heavy and while it does cover just about everything, beginners may be a little overwhelmed. Still, if you’re a beginner and you’re serious about options, you need to have this book on your shelf.

Way of the Turtle: The Secret Methods that Turned Ordinary People into Legendary Traders

Similar to the Market Wizards book, this epic read follows the Turtle Traders who were a group of students brought together by legendary trader Richard Dennis (featured in Market Wizards) as part of an experiment to see if successful trading could be taught. Dennis and his partner William Eckhardt (featured in The New Market Wizards) selected two groups and taught them their trend following methodology, then provided each with trading capital and set them loose on the markets. Some of the turtles went on to become incredibly successful.

High Probability Trading

This book is primarily about mindset and the psychological requirements for successful trading.  In High Probability Trading, Link reveals the steps he took to become a consistent, patient, and winning trader–by learning what to watch for, what to watch out for, and what to do to make each trade a high probability trade.

When Genius Failed

A fantastic story that follows the collapse of Long-Term Capital Management, a hedge fund filled with the brightest minds in the business who could do no wrong…. or so they thought. A timely reminder that there is no such thing as a mathematical certainty when it comes to financial markets!

Trade safe!
Gav.

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

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Options trading IQ by Gavin - 2M ago
Stuff I’ve Been Reading Lately That’s Worthy of Your Attention:

It’s Time To Get Real With Your Investment Portfolio – The Felder Report

Everyone In The (Stock Market) Pool? – Dana Lyon’s Tumbler

Must-Reads of 2017: From Finance to Extinction – Bloomberg

How Does Something Like Bitcoin Happen? – A Wealth of Common Sense

Investing & Economic Outlook Into 2018: Key Themes To Watch – See It Market

Register For 10x Your Options Trading

Two Sides of the Same Coin – The Irrelevant Investor

In investing, more artificial intelligence need not mean less of the human kind – The Economist

December Macro Update: Housing and Manufacturing Growth At Multi-Year Highs – The Fat Pitch

The Market Shock No One is Ready For – The Former Broker

Access 5 FREE Options Books

Outlook 2018: The Bull Market’s Next Act – Barron’s Asia

How to give bitcoin as a gift this holiday season – CNBC

Has Global Stock Market Volatility Bottomed? – See It Market

Bitcoin Futures Aren’t a Big Hit, and That’s Good – Bloomberg View

Precious Metals Continue Their Downtrends – All Start Charts

The Most Valuable Companies of All-Time – Visual Capitalist

The Double-Edged Sword – Of Dollars and Data

Holiday Deals – Save $30 on Fire HD 8 – was $79.99 – now $49.99. Limited-time offer

Trade Safe!
Gav.

Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.

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