FOREX income strategy combining covered calls and scale trading

DISCLAIMER: I'm not a financial adviser. You can lose more than you invest when trading FOREX. Proceed at your own risk.

1-line summary: Buy USDCAD at 25-pip multiples and sell the nearest-expiring covered call. If call expires worthless, keep selling nearest-expiring covered call until it's exercised.

Strategy:

• Whenever USDCAD is at a multiple of 25 pips (eg, 1.0525, 1.0550, 1.0575, 1.0600, etc), buy $25K of USDCAD and sell $25K of the nearest-expiring FX spot covered call (usually 2-3 business days out) with the same strike price as your purchase price.


• Once you've traded (bought USDCAD and sold the call) at a given multiple, don't trade that multiple again until the call you sold is exercised. Example: if you buy USDCAD at 1.0525 and sell the covered call, and USDCAD goes up and comes back down to 1.0525 before your call is exercised, don't trade again at 1.0525, because the call you sold has not been exercised.


• If your call expires worthless, sell $25K of the next nearest-expiring covered call at the same strike price. Repeat until the call is exercised (which may take days, months, or even years). In this way, you'll always sell USDCAD at the same price you bought it, even though it may take a long time.


• Exception to rule above: if the next nearest-expiring call at the same strike price has bid zero, use the nearest expiration date with non-zero bid. In other words, don't sell a covered call for nothing.


• Once the call you sold is exercised, you can again buy when USDCAD hits the same multiple of 25 pips. Example: you buy USDCAD at 1.0525 and sell the covered call. USDCAD goes up and your call is exercised. Then, USDCAD goes back down to 1.0525. At this point, you would buy USDCAD and sell the call again, since the call you sold previously has been exercised.

Notes:

• This strategy is for $150K. Adjust for other amounts. This strategy scales down to $6K, since you can buy as little as $1K of USDCAD.


• This strategy protects up to a 15% loss in the USDCAD. If USDCAD drops 15% and you've been buying every 25 pips on the way down, you'll have 60 positions with an average loss of 7.5% or $1875. Adding in the 2.5% margin requirement, your total loss will be $150K (the amount you started with) minus what you've received for writing calls. Some brokers have lower margin requirements, which means you can withstand a slightly larger loss.


• Treat this as an income strategy: you're looking to make money by writing calls, and not worry about the gain/loss on USDCAD. This is similar to a stock that pays a constant dividend, regardless of price.


• This strategy combines covered call writing and scale trading, two well-known existing strategies. I don't know if anyone's combined these before


• It's difficult to find FOREX brokers who trade FX spot options (which expire daily). The only two I've found are ikongm.com and saxobank.com. pfgbest.com trades them too, but they use ikongm.com as their back-end. All three offer a free demo account.


• Many brokers trade FX futures options (which expire monthly), but this isn't the same thing. Make sure to confirm your broker trades daily FX spot options


• Of course, you can trade USDCAD with one broker and USDCAD options with another. For example, unlike ikongm.com/saxobank.com/pfgbest.com, forex.com pays 2.5% interest on balances and accepts credit cards for funding. However, if you split brokers, there are additional complications


• If signing up with one of these brokers, please mention kelly.terry.jones@gmail.com sent you. I don't have deals with any of them, so I probably won't get anything, but who knows!


• There are endless variations on this strategy: which currency to trade, how to set your scale, how much to invest at each scale point, etc. As with all scale trading, you want to trade something that won't go down much further. When selling covered calls, you also want something that has a high volatility, so you get a good price for the calls. I chose USDCAD for these criteria, but I'm sure there are other good currency pairs (USDJPY in particular looks quite interesting)


• This strategy is unusual in that it doesn't rely on patterns, technical analysis, back-testing, etc. Instead, it's based on statistical formulas such as the Black-Scholes-Merton formula. This doesn't make it any better or worse than other strategies: it's just an observation

Buy US Mint circulated coins by credit card for fee-free cash advances

The US Mint (http://bit.ly/p5Yya) now lets you buy circulated dollar coins with your credit card, with no shipping or other charges. You can deposit these coins to your bank for a fee-free cash advance.

Notes:

% Many coins aren't available yet, but the George Washington ones (bottom of page) are.

% The shopping cart sometimes shows a shipping fee of ~$5, but this goes away when you checkout.

% Avoid buying more than $1000 worth of coins per day. I tried buying $10000 once and they cancelled my order.

% I got my coins UPS Next Day Air (no shipping charge!). They require a signature, so make sure someone's there so sign for them.

% Some credit card companies may treat this as a cash advance, so you may want to doublecheck first.

UPDATE: On 20 Jul 2011, the Mint canceled this program and send me (and others) this harshly worded email:

 
 
The United States Mint has eliminated the credit and debit card 
purchase of $1 Coins through its Direct Ship Program effective 
July 20, 2011. Customers who wish to purchase $1 coins through 
the Direct Ship Program can still do so by using a wire 
transfer, money order or check. Customers who wish to purchase 
the coins by wire transfer may fax their order to 
(202)756-6585. 
 
[...] 
 
If you currently have an open $1 coin Direct Ship order placed 
with the United States Mint, that order will be 
cancelled. Please resubmit your order by wire transfer, check 
or money order using the order form.  The Mint has determined 
that this policy change is prudent due to ongoing activity by 
individuals purchasing $1 coins with credit cards, accumulating 
frequent flyer miles, and then returning coins to local banks. 
Local banks, in turn, return coins to the Federal 
Reserve. While not illegal, this activity is a clear abuse and 
misuse of the program which was intended to facilitate the use 
of $1 coins in cash transactions. 
 
The Mint has undertaken several aggressive internal and 
external actions to mitigate this issue, including restricting 
chronic and repeated use of credit cards, contacting customers 
who frequently placed large numbers of orders to ensure they 
were using the coins for legitimate business purchases, and 
other measures.  While these efforts eliminated a significant 
amount of misuse in the program, we believe some abuse still 
exists.  Eliminating the credit and debit card purchase of the 
$1 coin is the next step in our efforts to root out abuse in 
this program and ensure it is better targeted toward fulfilling 
its intended purpose ? which is to get the $1 coin into greater 
circulation. 
 

Dark Chocolate Snickers

If Snickers ever comes out with a dark chocolate version, they can name it just by removing the first letter.

Licking Douglas Adams Addiction

The current US first class postage rate is 41c, which means the next rate increase will probably put it at 45c, or maybe 44c. Let's petition the Post Office to raise rates to 42c RIGHT NOW, just so they can issue a Douglas Adams stamp.

Crank Up Your Thermostat

For many years now, scammers have been telling us not to set our thermostats too high, because "Setting your thermostat higher doesn't make it get warmer any faster". Of course, we all (including the scammers) know this is a lie. Here's why: thermostats are often located in drafty hallways. When the heat turns on, these hallways get warm quickly (convection heating), and the thermostat turns off EVEN THOUGH THE REST OF THE HOUSE REMAINS COLD. Of course, the overheated hallway's heat eventually passes (via much slower conduction) to the rest of the house, at which point the heat finally turns on again. This process repeats, but the house is heated much slower than if you'd just cranked the thermostat to begin with. This winter, crank your thermostat to keep your house warm. And maybe crank it just a couple of extra degrees just to show the scammers that their stupid little lie never worked.

Hugh Laurie: American Folk Singer?

On the British comedy series "A Bit of Fry and Laurie" (you have to use the quotation marks as Steven Fry often points out), Hugh Laurie often pretends to be an American folk singer, with ludicrous and humorous folk songs. Although this is always played for laughs, his 4th series tribute to Steffi Graf is really quite amazing. After hearing it, I think Hugh Laurie would make a better American folk singer than most REAL American folk singers. Of course, most Americans hear Hugh Laurie's American accent from that House show, but I think he missed his calling.

Why Blogging Sucks, Part II

A good card for people who blog (including me) would be: NO ONE GIVES A RAT'S ASS WHAT YOU THINK!!!