The Misery Portfolio

[kidgas]

Rawr brings up a great point. ROI now is great, but could you have held on when the "misery portfolio" was down $20,000. I suspect most people couldn't. Yes, it's fun to take a look at some of this, but when real money is on the line, people truly act differently. It is nearly impossible to take emotions out of the equation. Besides, once you sell, then what? Where do you put your money? It's nice to talk theory, but the real world can be vastly different.

 

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[MJ DeMarco]

Value March 17th
$124,621.91

 

[unicon]

Getting out is easy - read IBD. A stop loss is always put at a 5% loss.

The question here is when to exit with compounding gains. You can never ignore the math of ROI to your peril.

There is always another investment, and a true "Investment" would roll into a different asset class depreciating your gains and perserving long term cash flow. Real Estate is a perfect example. The returns would magnify and compound - in addition you could leverage the gains producing astronomical returns.

By not understanding the above concept I factually lost out on a million dollar gain from a $20k investment in less than one month time, it was one piece of knowledge that I didn't have at the time, a gap in understanding. See Mark Cuban.

If you dont understand ROI to the nth degree you cannot leverage your gains. This is a fact.

If you do not have the knowledge, you do not have the control, no control = no leverage.

Numbers do precisely what they are supposed to do, take all emotion out of your decision making, that is the objective.

 

[kidgas]

Mark Cuban's use of a collar is legendary.

 

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[MJ DeMarco]

March 19
Value: $125,349.12

 

[hatterasguy]

Value March 17th
$124,621.91

Man I wish I bought those stocks and sold today. Thats just about a new BMW 3 series in profits.

 

[lightning]

Man I wish I bought those stocks and sold today. Thats just about a new BMW 3 series in profits.

You aint kidding. Yet another example to show that a little risk can reap some very significant rewards!

Great thread Mike, this has been interesting to watch.

Now that we've seen a few of these stocks trending updwards, I am curious; where do you guys see them going from here?

I have seen a few threads where guys have speculated on the bargains available in the financial sector right now (Citigroup - C, Bank of America - BAC, etc.), and quite a few of my friends have been buying them for weeks now, SURE that when the market turns around they are going to make a fortune on some of them. (I saw Randall, Kidgas, Edge, MJ, as well as a few others had a couple great posts regarding current moves and buying opportunities in this market).

What is everyones opinions on these giants now? Is C a buy now in the $3.00 range? Is Ford - F a buy in the 2.75 range? LVS? etc.

Just curious what some of the experts on here think.

 

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[MJ DeMarco]

Mike,

I will TRADE this market, not INVEST in it. Until the current admin shows a healthy respect for the private sector and free markets, I will be out of equities indefinitely unless it is to buy commodities or day/swing trade a position.


MARKET VALUE (Mid Day)
$129,089.66

 

[andviv]

I wonder...

how much of this price spike is really a positive indicator of confidence in the system, as opposed to just inflation?

 

[kidgas]

MJ brings up a good point. There is quite a bit of risk involved with what seems like daily changes in the rules of investing. I think having some contingency plans is prudent.

 

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[MJ DeMarco]

March 23: Value
$133,912.80

Getting close to a double-bagger!!!

 

[unicon]

Remember another general rule : As fast as it went up it can and will most likely go down 10 times as fast. In the absense of fundamentals you wont be able to push the button fast enough!!

 

[lightning]

MJ and others,
Thanks for the response! I was actually BS'ing with an older friend of mine last night (a 25-year Advisor with Prudential Financial, and an overall extremely wealthy guy), and he said the EXACT same thing MJ said (regarding this being 100% a "traders market" and not yet an investors market). He advised that people should tread very carefully in this market.

As always, your advice is spot on my friend.

-Mike

 

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[MJ DeMarco]

$130,274.32

 

[MJ DeMarco]

$125,705.05

 

[MJ DeMarco]

Final value:
$109,107.12

 

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[biophase]

hmmmmm

Bye Bye

 

[MJ DeMarco]

$144,324.33 :smx4:

 

[hakrjak]

More proof that nobody can predict what the stock market will do! You picked some of the absolute worst stocks on the planet, and they're now up more than my entire 401k in the same time period.... WTF!?!

ROFL

Cheers,

- Hakrjak

 

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[hatterasguy]

Biggest risks= the biggest gains.

 

[kidgas]

Absolutely nobody can predict short-term movements. These stocks could just have easily lost half their value in March, too. That's where the importance of risk management and money management become important.

 

[unicon]

This was a global sector turnaroud in March. Although I have been out of the market I saw this hit bottom when my indicator stock HOG dumped below $9 at about the same time MJ started the misery index.

An investment in HOG would have doubled as it is $18.02 today and would have been a great timing investment with little downside. MJ's stocks would normally have been suicidel without some inside info.

The timing of the bottom was almost perfect. The only question is will the current rally hold. Given the stability of bank stocks including Wells Fargo the current jump may stabalize here. If there is a bull from here it would seem to be on dangerous ground. Although alot of cash is out there.

My own thrust has been on internal infrastructure and will continue to watch from the sidelines as any involvement now would take constant monitoring.

My general position at current timing is that institutions now hold no higher standard and I will not be participating. There is more discipline to be injected to become a true investment and not a gamble.

 

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[kidgas]

I think sitting out is a big mistake although the easy money has already been obtained. The rally may be difficult to sustain, but I see nothing wrong with getting into a few positions and purchasing some protective puts 6-9 months out. That way you can define your level of risk from day 1 of your investment.

 

[MJ DeMarco]

I think sitting out is a big mistake although the easy money has already been obtained. The rally may be difficult to sustain, but I see nothing wrong with getting into a few positions and purchasing some protective puts 6-9 months out. That way you can define your level of risk from day 1 of your investment.

The market rally is due to Congress being out at recess ... as soon as they return and resume to their meddling/bailout/spending ways, you will see the markets resume their decline. The markets like it when government isn't working, or stalemated.

 

[unicon]

Kid

My position is not the same as yours as I have limited time and unlimited amounts of work internally (despite my own lazsiness). I just do not have the time to do the work of heavy monitoring of the market. I generate returns which I control and leverage internally.

My experience in the market was very intense 10 years ago and the best gift I could give here was what I learned about ROI from real experience above. In otherwords MJ picked up on this right away and I could tell he was running with it. Others didnt understand. As much as I like this forum and try to add I am still limited by time. What I learned was culminated in ROI, it was the bottom line. For example because I now know this to the nth degree I am more qualified to play the market than ever, but my returns will still be greater with my internal priorities which involve controlled leverage at this time. Always moving forward, this certainty is in place for another year.

I am fasinated by your energy you put into options trading and I would be excitied if you could summarize what you have learned from all those trades equated to ROI and the system you use that could duplicated. I tested this years ago and my problem was not defining the option as Insurance as a priority, this again cost me but I no longer have any illusion of what options really are. I would prefer short cuts so I didnt have to make so many mistakes. My qualifications are probably greatest to be playing the market but my discipline to stay out is my test of today.

In short their is more to be learned from all your trades in summary. The conclusions you draw, etc. without so much overwelming detail of the actual trade. Again my contribution is and are the consepts of understanding:

1) ROI
2) Insurance

If I knew these two concepts I would have made a million dollars from a minimum investment. The fact that I isolated the mistake means that I have that wealth in knowledge and would have that visibility in a similiar situation in the future. There are other questions I have about options as the mathmatics are fasinating, but the concept priorities are what one looks for. It seems you are in a unique position to come up with some great conclusions about option trading and I am all ears and eyes.

 

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[unicon]

I apologize for the misspelling in the above post as I took my other half out for dinner and did a little celebrating for her birthday!!!

That led to sipping the cooking sherry!

 

[kidgas]

PhxMJ,
I agree the markets prefer stalemate. However, I also feel that money can be made in markets that are increasing, decreasing, or moving sideways. I have not quite perfected this, but I closer than someone sitting on the sidelines.

unicon,
I'm not exactly sure what you might be asking; however, I will do my best to define some of my ideas about options using Bank of America as an example (inspired by the misery portfolio). We can suspect that this stock will go up or down substantially in the next several months. Personally, I do not know which, but I believe that money could be made. I want to open a 1000 share position tomorrow. Here is what I would do and why:

Let's use closing prices from Thursday. I first purchase the Nov 10 options for 3.75 and then get the shares for 9.55. This means that I will not sell the shares for less than 10/share even if it drops to 10 cents (insurance). I have defined my loss on day 1 of the investment. My basis is 13.30. I have 3.30 at risk or 3.3/13.3 = 25%. Seems fairly large so let's mitigate some of that by selling a May 10 call for 1.39 at the same time. Now the basis is 11.91 leaving 1.91 at risk or 1.91/11.91 = 16% which is a little better but not as good as a stop-loss of 8%. Nevertheless, we have some insurance. I would be able to sleep at night.

I would like you to notice that we purchased 7 months worth of put protection for 3.75, but we sold 5 weeks worth of call for 1.39. The time premium relative to time remaining is higher for nearer term options. We can use this to our advantage. Let's assume that each month we are able to sell a 10 strike call for 1/share average. So, in June, July, August, September, October, and November we bring in 1/share in revenue to offset our basis. That is 6/share revenue which lowers our basis to 5.91. We know that we will at least sell at 10/share in November giving a profit of 4.09 on a total basis of 5.91 or total ROI of 4.09/5.91 = 69% for 7 months. However, I will point out that on day 1, you needed 11.91 invested so a conservative ROI figure would be 4.09/11.91 = 34%.

Now, let's question our assumptions. First, I will point out that estimating revenue in this fashion should be considered no different than estimating how much rent you might get, how many customers you might have, etc. I think the variables for future revenue exist in any investment. So, now we have to look at what would happen if the stock went way down. We would have to depend on our ability to identify trends and not just short term fluctuations. If the stock utterly collapses overnight, we just need to minimize the damage. We would buy back the May 10 call and sell the May 7 or 6 or 5 depending on our assessment of the damage. Our goal would be to chip away at the 1.91 we have at risk.

An unchanged stock would be fine. We would sell 10 calls monthly. The volatility would decrease meaning option premiums would decrease as well. I tried to take some of that into account when I made my 1/share estimate. If you want to be conservative in calculating ROI decrease that estimate to 0.75/share.

If the stock is trending upward, then toward expiration each month you have to buy back the outstanding call and sell the next month call either at the same strike which would yield a credit, or at a higher strike which might be done for a slight credit or a slight debit. When it costs a slight debit, that is OK with me because I consider it purchasing "X" amount of equity at a discount. I get less gain than if holding the stock outright. However, my main goal is not to gain the maximum but lose the minimal amount. I have come to believe that the best offense is a great defense, and I don't want to give up the big play.

 

[unicon]

To summarize:

1) Pick and buy a volitile stock
2) Buy long term put option @ slightly higher strike'
3) Sell short term call options @ same strike (sideways trend)
4) Buy back call options with any volitility and resell to lower risk (2 trends only up
and down)


Issues

- Estimate Revenue and Trends
- Aware of Big Play

Is this your standard system?

Would each Play to expiration produce the approximate 50% ROI over 6 months?

Have you done this consistently?

If you have this would multiply a 10k investment to a million dollars in 6 years, very powerful?

What to you consider a Big Play?

You - buy -buy - sell - then - buy - sell - if market goes up or down?

Does your system always start with a put purchase?

You would have exact numbers on the success of each play, over 3 years your hard dollars would multiply 10 times, over 6 years your hard dollars would have multiplied 100 times?

Are these your results?

 

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[kidgas]

Unicon,
To answer and address some of your post:

Yes, I think you have summarized it well. It is not my "standard system" as I am still in the development process. I have been trading options since 1999. I have been using collars since Jan of 2007. To address some of the short comings in that system, I have been making some modifications. I suspect it will take a few more years to figure out if things will work on a consistent basis.

When I refer to the "big play", I am using an analogy from American football. The idea on defense is you don't want to give up a lot of yardage on a "big play". When I think about investing, I have come to the conclusion that it is better to NOT LOSE a lot, as opposed to making a lot at one time. I would rather gain slow and steady, than lose a lot and gain a lot. I think the last year confirms that.

I lost 18% in my retirement account last year using collars and was up 9% in 2007. That is better than the market in general. I made some mistakes and am learning from them. Here are the results (annualized return) of my closed trades from my retirement account since Jan 2007 (my losses are mainly due to my open positions which can be followed on the stock collar thread):

YHOO up 7.1%
HAL up 12.6%
KG up 22.7%
STX up 6.4%
GG up 15.4%
CHK up 9%
WDC up 39.4%
BTU up 22.9%
PAAS up 24.4%
VCLK down 32.5%
YHOO up 0.6%
IMCL up 793%
GG up 17.1%
CY up 11.3%
BTU up 47.2%

The percentage return seems fairly favorable as does the likelihood of gains. However, I am sitting on some unrealized losses (see stock collar thread) that I am having to correct. I know the mistakes that I made regarding those losses and am seeing what my modifications will do for the overall consistency of my trading style. I will just have to see what transpires.

 

[MJ DeMarco]

$188,903.71



$118,000 in a few months? Not a bad days work.