Split Strike Conversions
His strategy was to buy large blue chip dividend paying stocks and sell OEX calls on them. Then to insure the portfolio, he would buy OEX index puts at the money.
What kind of return can you expect from this?
Coca Cola pays 3.6%, Walmart pays 2%, General Electric is paying 11%, du Pont 7%, American Express 4.4%, IBM 2%, Pfizer 9%, and McDonalds is paying 3.5%. The average dividend return is 5%.
Selling the OEX calls would net another few percent, say 5%.
Buying Puts as Insurance
In Madoff’s worst month, he lost one half of one percent, so that means he bought at the money puts. If he sold 10% out of the money puts he would have had more losing months and could have lost up to 10% on the drop in stock prices. It costs roughly 8% to buy that much insurance.
So what is the tally?
5% from interest + 5% from selling calls – 8% from buying puts. This strategy makes only 2% and this is with GE paying 11%, a very unusual situation.
Bernie Madoff ‘returned’ an average of 12% to investors over many years. Read the fascinating letter Henry Markopolous wrote to the SEC explaining in detail how Madoff was either front running the order flow to his brokerage or a Ponzi scheme.
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Bernard Madoff deserves to rot in jail. he stole billions of dollars from hardworking people.
These same people “believed” somehow, that Madoff was some sort of a “genius” that would come up with positive returns no matter what. Greed kills, we all know, even the non=sophisticated that there is no such a thing as a consistent free lunch!
Ignorance is expensive, that is why they lost everything, for being concentrated in the so called “guru” without digging further how come he was obtaining such solid returns when all the other “gurus’ in the street were getting creamed.
You are right. They didn’t dig because they wanted to believe. Others didn’t dig because they suspected that he was front running the order flow from his brokerage operation (very illegal).