[dividinde]

Thank you Frouzback for your warning and your advice that I know is kind. And yet, I have always been like those overly curious children who need to put their hands on the hot plate to really learn that it burns… or maybe I am just a bit simple? 🙂

You are of course right that banks sell these products to make money in their pockets and that the prices are not to the advantage of the customers. But that is the principle of capitalism and it is not very different from what your mechanic or your dentist charges you.

I spent two weeks reading everything I could find on covered call writing. What had always dissuaded me from going further with this strategy is indeed its biggest flaw: limiting potential gains on the upside, while only very partially reducing potential losses. But this time I decided to go a little further in my reasoning and do my own calculations.

I came to the conclusion that this strategy had its advantages and deserved that I give it the benefit of the doubt. On the other hand, I completely agree with you on the fact that this strategy should not be used with all the stocks in your portfolio. For me, it is out of the question to sell calls on quality stocks that I do not want to part with and for which I see great bullish potential in the medium and long term. Why indeed risk losing diamonds such as Nestlé, Geberit or Lindt that have the pleasant tendency to at least double in value every 10 years?

There are, however, other stocks that are certainly solid, but that do nothing but move sideways for decades. Novartis is really the best example: I am happy to have it in my portfolio for its stabilizing side and its generous dividend. On the other hand, the price has gained about 30% in 20 years, which is as flat as Jane Birkin…

Why not treat this stock like a cash cow and try to "milk" a little more passive income from it, while being perfectly prepared to have to part with it and in the process a nice capital gain on the price? With a stock like Novartis, I am convinced that I will not miss out on gains of several hundred % and that, if I wish, I will always be able to buy the stock back at a more or less equivalent price.

Of course, as you write, these soporific stocks are the ones that offer the lowest premiums. But that's where I did my own calculations and came to the conclusion that it was still worth it. Basically, here's what it gives: with buy and hold, Novartis gives you about 3.8% per year thanks to its dividend. But by selling (AFTER receiving the dividend!) every 2 months an option about 5% OTM, you receive a premium of about 1.1-1.2%. Let's say 1% for simplification and to take into account brokerage fees.

Until this option is exercised, you sell a new one and receive a total of about 6% per year. With the dividend, you earned about 10% in one year (instead of 3.8%), which is frankly extraordinary for such a cushy and defensive stock.

If this option is exercised, same balance sheet: 3.8% dividend + 5% capital gain + 1% premium = approximately 10%.

In both scenarios, you earn 10% per year with one of the most defensive stocks on the entire Swiss market. You do much better than with buy and hold and the downside risk is slightly lower (thanks to the option premium) than with just holding the stock. The only real risk is indeed an opportunity risk: if Novartis goes up to the sky like a rocket, you do not benefit from the price increase beyond these 10%. This scenario is so unlikely that I prefer a guaranteed and passive gain of 10% year after year, to a hypothetical exorbitant gain on Novartis.

I think it's important to clarify that my primary goal is to generate as much passive income from my portfolio and live off of it. My primary goal is NOT to see my portfolio increase in value as much as possible.

In summary: sell covered options, yes, but only with some positions in my portfolio. Continue to profit from bull markets, yes, but with other stocks in my portfolio better suited for that.

I will do my experiments and will not fail to share my results with you over the next few months. Thanks again for your explanations and your point of view which is also defensible.

[dividinde]

Oops, I wrote a little too quickly without proofreading: regarding the erosion of the time value (theta) of the premium, I meant to write "logarithmic and non-linear" and not "exponential and non-logarithmic".

[dividinde]

Many thanks for your answers. I thought that the lot size was always 100 for Swiss stocks. This is very good news for stocks like Swisscom, it is still easier to have to hold 10 (4800 fr) rather than 100 (48000 fr)! Too bad however that the size is 100 for Roche.

Regarding the maturity, I have read several times that the ideal is 1 to 2 months (more precisely: 30 to 45 days), because this is where the decrease in the time value of the premium is the most marked (exponential and not logarithmic decrease). This is why, although an option that expires in 2 months yields a higher premium than the one at 1 month, the annualized return is higher with the 1 month maturity than 2 months (in other words: the premium of the 2 month call is not 2x higher than that of the 2 month call).

The more I learn about the subject, the more I understand that the choice of strike is really the deciding element. As written above, the choice of expiry is much simpler and more logical.

What determines the choice of strike, in my opinion, is above all the question of whether one wishes to try to keep the underlying asset or sell it at a profit.

I will take the example of Novartis with these two cases to illustrate my reasoning:

——————

Situation 1:

I buy today (12.03) Novartis at 78 fr. I am willing to keep the stock in my portfolio for a long time, but selling it as soon as possible with a gain of a few % also suits me very well.

I choose to sell a call that expires on 16.04 (in about 1 month) with an OTM strike at 80 fr. I immediately receive a premium of 0.80 (80 fr for each lot of 100 shares), i.e. a return of about 1% (12% annualized).

If at maturity Novartis is trading at less than 80 francs, I keep my shares (and of course the premium collected). I can then sell a new call, and so on until my shares have been assigned.

If Novartis is worth more than 80 francs at maturity, my shares are assigned and sold at 80 francs. I have earned about 3.5% (2.5% on the share + 1% premium).

——————

Situation 2:

I bought Novartis some time ago at 75 fr. The stock is now worth 78 fr and I am currently earning 4%. I think the stock no longer has much upside potential and I am ready to part with it at this price, but would like to increase this gain thanks to the premium.

I sell a call with the same expiration but choose an ATM strike price of 78 in order to maximize the premium received. I immediately receive the premium of 1.68 (168 fr per lot of 100 shares).

If Novartis costs less than 78 francs at maturity, I keep my shares and I have gained around 2.2% thanks to the premium (around 26% annualized).

Otherwise, my shares are sold and I have earned the same premium in addition to the 4% gain on the stock.

——————

Can you follow my reasoning or do you see things completely differently?

Another question: have you read a book on the subject? I heard that Alan Ellman's books are often recommended, but maybe you know of others?

[dividinde]

<p style=" »text-align:" center; »>Fantastic, thanks jm4275 for this information.</p>
I have been studying the subject thoroughly for about 2 weeks in order to form my own opinion, but I must say that the more I learn about this strategy, the more I see very positive elements in it.

Despite some reservations about spreads and volatility described by Frouzback, I am currently doing simulations (paper trading) with low-volatility blue chips and my calculations are showing very interesting results so far. With Novartis, for example, I can get spreads of 7 cents depending on the volatility and the time of day.

Could you please give me more details on the following points:

1. Expiry: Do you favor 1 or 2 month expirations?

2. Strike: you are talking about strikes above the price (out of money OTM): in general how many % OTM do you work at?

3. Premium of about 1%: I guess this is what you are aiming for for a 30 day maturity?

4. Do you wait until you are winning on the underlying (the stock) before selling a covered call, or do you also do it on slightly losing positions?

5. Do you take into account the delta when choosing the option, such as 0.3 or 0.1?

6. Do you place market or limit orders?

Thanks in advance!

[dividinde]

Thank you Frouzback for this very clear feedback. Your experience in the field is valuable and reminds us that derivative products are created above all to enrich banks and not their customers.

I understand what you are saying and that the biggest problem with options is the spread between the bid and ask price is too high, which means that the call is sold at too low a price, corresponding to an underestimated volatility.

I am no longer interested in buying options (I lost enough feathers there about fifteen years ago). Selling covered options is, on the contrary, a very defensive strategy and which seems to me to allow you to receive passive income in addition to dividends. The main risk is having to sell your shares, but it is not dramatic since you can always buy them back later, or other shares offering a higher dividend.

Even though this strategy is not without its flaws and the spreads reduce the premium received, don't you think that it still allows you to do slightly better than simply holding shares, while reducing the volatility of the portfolio?

[dividinde]

Thanks bro for the tip. I found a brief but fairly clear article from Celtinvest on the subject: https://celtinvest.com/vendre-option-call/

I will try to dig a little deeper into the subject. For now I understand the general mechanism but not all the subtleties yet. I also tried to place a fictitious sell order on PostFinance with calls on Nestlé, but it does not work, even though I own more than 100 shares. I do not see what I am doing wrong...

[dividinde]

Thank you Jérôme for this feedback. For my part, I am still waiting to see what the Swissquote – PostFinance alliance will propose before making up my mind.

[dividinde]

"So, if you have informed your partner where you have the accounts and you have given her access, she will have time to repatriate the money to your Swiss account."

Thanks, that seems more or less clear to me, except for one thing: in my case it would not be cash, but 100% shares. My wife would therefore have to sell all the shares before being able to repatriate the money, which is not my goal.

In my opinion, the simplest solution would be to give power of attorney to my wife, so that she has the same rights/access to my account as I do and can use it as she wishes (without having to sell the securities to repatriate the cash to Switzerland).

[dividinde]

A bit of a dark question, but do you know what would happen in the event of the death of the account holder? Wouldn't the task be much more complicated for the heirs than with a broker whose headquarters are in Switzerland?

[dividinde]

Thanks for this first feedback Jérôme. I am also looking forward to hearing about your experiences with Swiss stocks as well as your first dividends.

[dividinde]

Thank you Mystik for these very clear details. These Dutch people seem very serious and trustworthy to me.

[dividinde]

Thank you Jerome for these details. I still have two questions regarding the purchase of Swiss shares via Degiro:

1. How does it work with the withholding tax on dividends? Do you receive 100% from the dividend and then have to declare it in your tax return? Or is there also a withholding of 35%?

2. According to the article I linked to, you can't have a CHF account? Does that mean you have a EUR account and the exchange to CHF is done when you buy Swiss stocks?

Quote from the article: "A big disadvantage of DEGIRO is that they do not offer support for foreign currency exchange. It is not possible to keep foreign currencies in your account. On the other hand, your money can be converted automatically when you make purchases of securities in foreign currency. But these automatic conversions are very expensive."

[dividinde]

You are right, foreign brokers are much more competitive than Swiss brokers. However, I am (at least for the moment) still one of those investors who are not inclined to invest their money outside our borders.

Why? Because the security of my capital comes first for me, well before saving a few dozen or hundreds of francs. One day, I will live solely on the income from my capital, so preserving it is my top priority. I simply trust a Swiss bank more than a foreign institution that is not subject to Swiss regulation (Finma) and does not have a Swiss banking license.

What would happen if a foreign broker went bankrupt? What if Switzerland changed its tax agreements with the foreign country where the broker is located? What about exchange rate risks? What if there were a tax problem? If my money disappeared from my foreign account (hacking, etc.), do I really want to have to hire a lawyer to fight with other regulations and legislation that I don't know?

Furthermore, it is true that brokerage fees are high in Switzerland compared to abroad (free trading even exists there!), but I find that these fees are not huge in themselves. I still remember my first stock market purchases in 1998 by phone where I paid 100 francs! Today I am around 20-25 francs depending on my broker and the size of the transaction. It is not nothing, but it is still reasonable. With generally less than 20 transactions per year, I usually get by on less than 500 francs per year. And that is at the moment when I am building my portfolio, in a few years I hope to practically no longer have to make transactions.

Another calculation: if I buy 5000 francs of Nestlé and pay 20-25 francs in transaction fees, we are talking about 0.4 to 0.5% of the purchase amount (I was at 2% in 1998!). If I keep these shares for life, I never pay anything else. Over 25 years for example, these 25 francs annualized represent only one franc…

For someone who mainly buys and holds Swiss stocks like me, I find that brokerage fees are more of a secondary argument.

But hey, even an old crouton like me might end up changing his mind! I'm thinking about it a lot at the moment...

I am very pleased to hear your feedback on Degiro, Jerome. Is this really how you avoid stamp duty entirely with a foreign broker?

An article that I find interesting and which supports the foreign brokers: https://thepoorswiss.com/fr/meilleur-courtier-en-suisse/

[dividinde]

Today I also bought myself a Christmas present: a new TV, because the old one that was 10 years old just gave up the ghost. I hesitated between a 950 fr model and another one at 1050 fr. So in the end I opted for a 449 fr model! It's hard to change your nature when you're a real frugal person! 😉

[dividinde]

So good as a Christmas present 🙂

I look forward to hearing your feedback.

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