The stock market is full of volatility and this causes a deception of returns to retail investors. For example, lets say that you put $1,000 into the stock market last year and your investment declined 10%, you now have $900 in your investment account. Now, this year your investment increased 10%, most investors would think that they are at break even, but because of compounded returns, they are now left with $990, or a loss of $10. If you were to go back a few years to the end of the bubble this is what the returns looked like:
2000 -9.95%
2001 -13.11%
2002 -23.36%
Taking into account compounding that is 40% loss from the highs. So in other words for every $1 invested at the beginning of 2000 in 2002 would now be worth $.60. In order for the investment to get back to break even from that fall, the market would need to return 66.7%.
Using the Put Option Dividend (POD) strategy and the Covered Call POD strategy, the investor using the original POD strategy, that original decline of 40% would be around an even 0% return over the three years. So the $1 that a POD investor might have had at the beginning of 2000, would still be worth $1 in 2002. In the years following 2002 the returns looked as such:
2003: 26.39%
2004: 9.00%
2005: 3.01%
The POD strategy would have returned 41% over that three year period. In total, the strategy would have provided returns of an about 7% return per year when the broad stock indexes showed an overall loss during that 6 year period. This means that for every $1 invested in 2000 in the POD strategy, a POD investor would now have $1.41. The broader indexes would now be $.85 and still not at the break even point.
The investor employing the Covered Call POD strategy would have returned about 4.5% a year or a 14.1% in three years because of the additional income received from selling covered calls against the long stock positions. So during the three years that the stock indexes declined 40%, this strategy would have shown a positive return. The following three years would have shown a return of 41% total return. The total compounded return for the strategy over the 6 years was 62.0% or a 10.33% per year return. The flexibility of the Covered Call POD provides a positive return in any market condition that compares to a bank money market account in a down market and meets the index returns in an up market.
While a positive or break even return is expected, there are fundamental risks associated with investing in individual securities. Should a company stop paying dividends, then the ability to realize a break even or positive return may be hindered.
