Glad We Didn’t “Sell in May and Go Away”

Major Averages: Mixed        

Market Shadows’ Value Mix: New Record

By Dr. Paul Price of Market Shadows

The DJIA and SPY posted fractional losses this week while the Nasdaq Composite rose by almost 0.7%. The three indices are all in the black year to date with profits running from 1.66% to 6.09%. The Dow is now the laggard after the tech-heavy Nasdaq rebounded strongly in recent weeks.

Major Indices  As of Jun. 27, 2014

Our own Virtual Value Portfolio had a better week than the broad market, gaining 0.82% since last Friday. Boardwalk Pipelines (BWP) was especially strong. We beat Murphy’s Law as both lots, of what is now our largest position, are up more than 50% since our March 2014, acquisition dates. BWP’s move helped our portfolio set a new closing record.

Our unlevered, plain vanilla value blend is now ahead by 8.56% YTD and + 52.74% since our Oct. 26, 2012, inception date.

VVP as of Jun. 27, 2014

We happily added the cast-off shares of Bed, Bath & Beyond (BBBY) to our list on Thursday after the shares got down to a three-year low. Unlike most of TV’s talking heads, we welcomed the chance to buy low. By Friday’s close BBBY had rebounded 3.3% from our purchase price only one day earlier.

See results on all our completed trades and currently held stocks by clicking on the following link…

Virtual Value Portfolio.

Check the status of all our put writing activities by using this link…

Market Shadows’ Put Writing Portfolio.


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  1. Trent H. says:


    Paul says that, in each trade, no money is invested because there is no cash outlay. I understand what he means, but this is not the way I can be comfortable with investing. I am at risk of having to put out a large amount of capital–an actual and permanent cash outlay–if things go awry. If that risk exists, I believe I should base my return on that risk. I call it, “Return on Risk.”

    So, to answer you question, the formula I would use (and did use above in my original comment) was to calculate the total potential cash outlays (capital that would be required if put the stock) less the premiums received (yes, Paul, I accounted for that in my above comment) as my “I” in “ROI.” Therefore, “ROI” becomes “ROR,” or Return on Risk. The return for this virtual portfolio is the total premiums received from both open and closed positions.

    Thank you both for answering my first question regarding starting account value.

    So Paul, it sounds like to me the answer to my second question is as I suspected…this strategy isn’t a good one if you have to put up 100% of capital at risk, as you would in an IRA. Thank you for clarifying that.

    And if I were to paraphrase what I believe is your response to my third question regarding being concerned about capital obligations, it would go like this: You do care about the amount of capital you are putting at risk, but because of your lengthy experience, you’re more comfortable incurring a higher level of obligations than you would recommend a beginner ever consider. In other words, to do this kind of trading–that is, the number of positions you have open and the capital obligations you currently have–you either need to be really ignorant the the level of capital obligations you are incurring or have a multi-million dollar account and a strong stomach reinforced by years of experience.

    I would recommend you start publishing the total amount of capital obligation you have with all open positions and summing up the total capital obligation the portfolio has incurred, including closed positions. The statement, “Market Shadows’ put writing activites have earned a net profit of $22,940 in less than 18-months on a $0 net cash outlay since inception,” is misleading in general and to new investors. While I understand what you are intending to say, for the sake of clarity, you have received $33,180 in premiums with $10,240 in cash outlays according to your portfolio spreadsheet, not $0, netting you $22,940. Also, investors could easily fail to understand that to earn that $33,180, you would have required over $310,000 in capital to cover the obligations should the worst have happened while those positions were open. Since it took you 18 months to achieve those results, your annualized return on that ‘investment’ is just over 7%. Sure, if you look at it on a strictly cash-in versus cash-out basis, you’ve returned $33,180 on a $10,240 investment, or 216% annually…but that’s misleading in my mind.

    By the way, yes, I realize you could probably close all of your trades in a market crash scenario for less than the total obligation for buying the shares, but that’s not my point. My qualm is not with your method as you practice it with the amount of capital you clearly have, virtual or real; it’s with the way you are presenting it here. No doubt bringing in over $22,000 in 18 months sounds great…until you realize just how much money you had to put at risk to do it, even though you didn’t actually “spend” (that is, permanently hand over money in exchange for something) any actual cash. My point in general is this: I think a more cautious tone and clarity/transparency in capital requirements would be wise.

    One final point: You said, “If you add 5% to 20% to your annual returns through the sale of options it makes for much higher account balances in the end. That is all that matters- not arguing about how to calculate ROI.” That statement stumbles over itself. You say that getting an extra 5% to 20% in annual returns is all that matters but then say we shouldn’t be arguing over how to calculate that 5% to 20%. That’s like gloating to a friend that you won THE lottery but fail to mention that it was only the the company lottery and your jackpot is a $50 gift card to Chili’s. That’s nice, but not quite THE lottery you tried to convince your friend (and possibly yourself?) you had won. So again, on what basis are you calculating those 5-to-20% additional returns? It’s not all that matters…any wise investor will realize that what really matters is how much cash do they have to put at risk to get a given potential return. They’ll realize that no, they don’t have to actually exchange cash now, but there’s a possibility that they’ll have to exchange that cash later, so that possibility must be factored into their risk assessment and be a part of the equation when calculating their return.



    • Dr. Paul Price says:


      Every second Monday evening I give a 90-minute webinar which details 100% of my real money trades (buys, sells and options) in one of my margin accounts and my main traditional IRA account. This is a subsription-only service through Rule#1 Investing (

      This has been available since August of 2013 and takes place from 8:00 PM to 9:30 PM EDT. On demand replays are available at anytime for two months after each class.

      Students learn my reasoning for each trade as well as my rationale for buying to close, increased or decreased position sizes or initiating new equity or option trades. Every trade is accounted for from inception through completion and includes commissions. Subscribers have the chance to chat with me live and get questions answered on these live broadcasts.

      I know of no other service that offers this comprehensive real-money peek into the workings of actual trading accounts. If there is enough interest from Market Shadows readers I may consider setting up a similar plan here. Students sign in with passwords. They are then able to share my screen and hear my live commentary along with customized visuals which describe each and every trade plus results of older positions. Contact Rule#1 Investing to arrange for a trial if you want to sample that service. The next scheduled class will be at 8 PM on Monday, July 7, 2014.

      Are any Market Shadows readers interested in my starting a similar service here on Market Shadows? What day or evening would suit your needs? Please reply here in the comments section or e-mail me privately at


    • Hi Trent and Paul, Thank you for this interesting discussing on this topic which I’ve been thinking about too. I will write a longer response soon. This is to say I haven’t forgotten but haven’t had a chance to write out my thoughts yet. ~ Ilene

  2. Garrett says:

    Great Q&A! Thank you for taking the time to share!

  3. Hi Trent,

    Those are great questions for an important discussion. Somewhere, there’s an article by Paul on trying to quantify returns for a put-selling portfolio. When selling puts, because premium is collected (money taken in), it is not clear how to determine the return, and people disagree on the best method. There’s no straight forward, widely accepted method as far as I know. (I haven’t looked yet, but the article would be under “Options” and/or “Education.”)

    I can only address part of your questions and Paul may correct me. I believe that we didn’t start with a specific amount of “virtual” capital (the put selling portfolio is a virtual portfolio although Paul makes many of these trades in his own and managed accounts). Because we didn’t start with a set sum from which to add premium sold to, we don’t have a baseline figure upon which to say we gained a certain percentage. It wouldn’t be too meaningful to have a set sum because we could manipulate our “returns” by lowering the value of our “pretend” initial starting point.

    Your statement, “If the worst case scenario is that we are forced to buy x number of shares, then we should account for that in calculating our return, don’t you think?” makes sense to me as being a very reasonable way in which to gage risk. What is the formula you would use to incorporate the premise that buying the shares is the “risk” into determining the actual return?

    Thanks for your thoughts on this topic.


  4. Trent H. says:


    I like your method of identifying potentially oversold stocks. However, the put selling strategy leaves me scratching my head a bit. I understand options thoroughly, but what I don’t understand is how you can rationally justify the rate of return versus your money at risk if you are put the shares.

    I’ve gone over your current and closed positions, and cumulatively, you’ve put right about $1.05 million at risk while taking in just over $132,000 in premium and confirmed profits. The above and the following assume you freeze the portfolio (make no changes) and assume all positions currently open expire out of the money. This will be done over 1101 days (from your first trade on January 9th, 2013 to January 15th, 2016). That’s roughly 4% annualized return on capital at risk.

    Don’t misunderstand me; I’m not arguing that all of your positions would be put to you simultaneously (though, theoretically, they could be). What I’m trying to understand is how you justify your annualized return on capital *at risk.* If the worst case scenario is that we are forced to buy x number of shares, then we should account for that in calculating our return, don’t you think?

    So, please respond and provide some clarification these three points:

    1. What amount of capital did the put selling portfolio start with? Maybe I’m blind, but I don’t see that number stated.
    2. Clearly the amount of capital put at risk makes this strategy unsuitable for an IRA since you’d be required to put up the full amount of capital at risk. Only portfolio-margin accounts would due (where you have 15 times leverage, or so); but that only changes the amount of buying power you have, not the actual capital at risk. Or am I missing something? Is there a way that this strategy is practical in an IRA?
    3. Are you or are you not concerned with the cash value of the obligations you are incurring by selling these puts? If not, why?



    • Dr. Paul Price says:

      I have never recommended selling cash-secured puts in IRA accounts.

      Put writing is most effective when done in margin accounts that have extensive unused buying power available. In that circumstance there is no cash outlay at all unless you are actally exercised.

      Our put selling portfolio is not limited to any certain amount of capital but we are keeping track of every position in terms of profit and loss. There is no advanatge or disadvantage to a larger or smaller put selling portfolio. Each trade stands or falls on its ultimate result when closed or upon expiration date. Out track record has been outstanding and we have not been ‘put’ on any shares since this portfolio was started in January, 2013.

      Figuring ROIC for short put writing can be done in many ways. There is no one correct method. You chose to calculate it based on 100% of the cash value of all options being exercised (and I suspect, without taking into account the premiums received). Others count the ‘investment’ amount using the SEC’s 20% Reg-T maintanence requirement. The only thing that really matters is how much profit or loss you see in your account when the trade is done. That is what Market Shadows shows on 100% of the closed-out option trades.

      Market Shadows’ put writing activites have earned a net profit of $22,940 in less than 18-months on a $0 net cash outlay since inception.

      Open option positions can be followed as to where the underlying shares sit in relation to their ‘if put’ prices. The vast majority are quite profitable at today’s quotes.

      I have been selling options, both puts and calls, for more than 32 years. You learn from experience how much exposure is safe based on the unemcumbered buying power in that particular account. Beginners should error to the over-cautious side in holding reserves against short puts.

      The biggest gains are typically made from owning shares outright. Option selling is an adjuct to my value investing, not the primary technique. If you add 5% to 20% to your annual returns through the sale of options it makes for much higher account balances in the end. That is all that matters- not arguing about how to calculate ROI.

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