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7 Steps To 40% Annual Returns

by OptionSage - June 21st, 2009 8:26 am

Just a couple of decades ago it would have been almost unfathomable for the retail investor to consider generating consistent returns above 20% per year.  Indeed, those who competed in arguably the most competitive financial market place, the stock market, were considered gurus when they beat the S&P 500 year in and year out. 

Others, such as Jerome Kohlberg, Henry Kravis and George Roberts made a name for themselves in private equity as did Peter Peterson and Stephen Schwarzman with the Blackstone Group.  Gains in the stock market for Joe Public were subjected to a limiting factor - the inability to leverage substantially.  Joe Public was also limited in participating in private equity investments; they were the domain of the rich - the insiders.  These days, private equity still remains the domain of the rich, but leveraging is possible through the purchase of equity derivatives.  And the sale of those same equity derivatives can be highly profitable too.

Whereas it would have been unthinkable years ago to consider making big profits year in and year out on a stock that doesn’t move much - because the only source of income, dividends, tended to be in the low single digits in percentage terms - these days options afford us the opportunity to sit tight and profit while holding stock positions.  This can easily be achieved through the sale of short call options against stock holdings, otherwise known as the Covered Call strategy.  While the Covered Call strategy may appear straightforward when first encountered, many applications may be employed.  In this article, we will consider the application that Stock and Option Trades labels: 7 Steps to 40% per year!

Step 1:  Wait for a selloff

Ok, so you want to skip this step and move on to Step 2.  Wait! 

One of the great quotes in investing comes from Jesse Livermore and pertains to this concept of patience.  In Reminiscences of a Stock Operator, it is stated: 

"It never was my thinking that made the big money for me. It always was my sitting.  Got that?  My sitting tight!  It is no trick at all to be right on the market.  You always find lots of early bulls in bull markets and early bears in bear markets.  I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit.  And their experience invariably…
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Posted in Appears on main page, Education, Uncategorized | 5 Comments »


Portfolio Margin - Useful and Dangerous Leverage

by OptionSage - February 7th, 2009 9:16 am

 

Give me a lever long enough and a place to stand and I will move the entire Earth

 - Archimedes

 

 Margin Basics

Whether you examine the property portfolio of a real estate tycoon or the portfolio of a successful private equity company, you will find a common thread that magnifies returns for each… leverage!  It is no different in the stock market.  In fact, each of us who trades options takes advantage of the leverage they afford us every day.

Leverage simply means using financial instruments, or borrowed capital, such as margin, to increase the potential return of an investment. 

Since we spend our days on the member’s site discussing leverage through options, the use of margin sometimes gets less attention than it should, so here’s a quick refresher:

 1.You CAN use margin (borrow from your broker) to purchase stock.

2. You CANNOT use margin to purchase options but there are MARGIN REQUIREMENTS for certain spread positions that we like to take.

This is intuitive when you think about the movements of options relative to those of stocks.  Options can move by 20%, 50%, 100% or more on any given day, even if the underlying stocks move just a fraction of those amounts.  In fact, the frequency with which a stock will drop 50% in price in a very short time period is so low that brokers are currently willing to lend you your entire cash reserves to purchase stock.

Example

If you were to deposit $100,000 in your account, you can borrow another $100,000 from your broker to purchase more stock.  This is represented in our account as follows:

Cash:  $100,000

Stock Buying Power:  $200,000

Option Buying Power: $100,000

Let’s assume we purchase 2,000 shares of a $100 stock, costing us $200,000.  If the stock doubles in value to $200, our $200,000 turns into $400,000 and since we borrowed $100,000 from our broker, we can pay that back with interest and keep the remaining $300,000 (minus interest).  So, the stock went up 100% and our account went up 200%%!

The benefit of margin is obvious but it doesn’t come without drawbacks.  Had the stock dropped by 50% from $100 to $50, the $200,000 would have turned into $100,000 and since $100,000 was borrowed, the broker will issue a margin call and take back its $100,000 leaving us with $0!  Hence, both the risks and rewards are magnified if we fully use margin under the current system.

Margin Calls

Despite its potential rewards, buying on margin can be very risky. For example, the value…
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Posted in Appears on main page, Education, Immediately available to public | 1 Comment »


The Dawn Breaks…

by OptionSage - January 19th, 2009 11:47 pm

The hammer dropped Thursday.  The market held firm Friday.  And this next week will be seen in retrospect as the week the market bottomed out and started to rise again - at least for quarter 1 2009. 

Detractors might argue that Circuit City is laying off thousands and Bank of America might be closing locations and commercial real estate is dead and shopping malls are vacant and….

And it may all be true.  But the beauty of integrating fundamental and economic analysis with technical and sentimental analysis is that the big picture appears.  The fundamentals of many stocks are certainly impaired.  Even Kudlow will find it hard to argue in favor of a bullish economy.  But the sentiment is changing.  Watch the VIX over the next few months.  I anticipate it will be lower by March than where it is now even if not within the next few days.  And the technical charts tell stories once you know how to read them.  The news is reflected in the charts and the story the charts tell is bullish.  The markets should go higher in the next few months. 

Can I be certain?  With 100% probability, no!  But actions speak louder than words.  And as the dawn breaks on the coming week I plan on backing the rhetoric with purchases and those purchases shall be on the SSO to amplify the expected gains.  And what of Gold…Gold goes higher too.  Time to get on board the train to $1,000/oz.

To confidently predict direction is not enough.  I need to know I can figure out how to protect myself if I am wrong.  That’s how I made money in 2008 when most lost their shirts.  All you need is a system that works.  And the system I use I also teach.  If you’re interested you too can thrive and prosper.



Posted in Education, Uncategorized | No Comments »


Bankster Quotations

by OptionSage - January 17th, 2009 1:47 am

"If the American people ever allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered."  Thomas Jefferson
 
"I sincerely believe that banking institutions are more dangerous to our liberties than standing armies.  The issuing power should be taken from the banks and restored to the people to whom it properly belongs"  Thomas Jefferson
 
"History records that the money changers have used every form of abuse, intrigue, deceit and violent means possible to maintain their control over governments by controlling money and its issuance" James Madison
  
"Most americans have no real understanding of the operation of the international moneylenders…the accounts of the Federal Reserve System have never been audited.  It operates outside the control of congress and manipulates the credit of the United States." Sen Barry Goldwater
 
"Neither a borrower nor a lender be" (Shakespeare)
 
"The Federal Reserve definitely caused the Great Depression by contracting the amount of currency in circulation by one third from 1929 to 1933"  Milton Friedman
 
"If our nation can issue a dollar bond it can issue a dollar bill.  The element that makes the bond good make the bill good also.  The difference between the bond and the bill is the bond lets money brokers collect twice the amount of the bond and an additional 20% whereas the currency pays nobody but those who contribute directly in some useful way"  Thomas Edison
 
"It is absurd to say that our country can issue $30m in bonds and not $30m in currency.  Both are promises to pay, but one promise fattens the usurers and the other helps the people"  Thomas Edison
 
"We have come to be one of the worst ruled, one of the most completely controlled governments in the civilized world - no longer a government of free opinion, no longer a government..by a vote of majority, but a government by the opinion and duress of a small group of dominant men" President Woodrow Wilson
 
"The Federal Reserve Board has pumped so many billions of dollars into Germany that they dare not name the total"  Senator Louis McFadden prior to WWII
 
"The powers of financial capitalism had (a) far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of…
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Danger + Opportunity

by OptionSage - December 20th, 2008 2:19 pm

 

As 2007 drew to a close, Phil predicted ‘Asian-style’ moves in US indexes and I wrote an article projecting 2008 would be a very difficult year to trade due to ‘unprecedented volatility’. As 2008 draws to a close it looks like both predictions were realized but pleasure does not necessarily accompany vindication. As John Maynard Keynes wrote: 
“It is usually better to be conventionally wrong than unconventionally right”
In short, when you are right about bad news, little benefit is experienced because so many will have suffered whereas being wrong with the crowd means comfort in numbers.
As I watched CNBC’s Year in Review last night I was struck by how many times the commentators noted that nobody could have foreseen the carnage. In fact, many were anticipating a recovery in the middle of the year including Hank Paulson! When history judges such projections unfavorably, credibility quickly diminishes. And in the financial industry, credibility is more important than almost any other criterion. With the credibility of so many in tatters, the onus is on you the individual to acquire the financial knowledge necessary to protect your own portfolio and to anticipate the future based on facts rather than on opinions.
For example, if we were to evaluate the current economic situation with that of the 1930s we might find interesting comparisons that would lead us to be concerned about the future. For example, the 1930s manufacturing based economy has largely been replaced by a services economy, home owners have been replaced by home borrowers, a national surplus has been replaced by a national deficit, and a reliance on saving has been replaced by a reliance on credit. Counter arguments could be made such as the US, unlike many countries which have experienced economic turmoil, has a substantial capability to be self-sufficient, university education is world class, and an indomitable spirit of optimism pervades the culture.
This same spirit can be the catalyst to success in spite of the perils that may lie ahead. It is well known that in Chinese the word crisis is written as a composition of symbols representing ‘danger’ and ‘opportunity’. But preparation is a pre-requisite to taking advantage of opportunity. So, although the danger may be high, opportunities will present for those who are prepared. And to truly be prepared one must have the knowledge necessary to succeed. The entire faculty of traders at Stock and Options Training are still in the black in ’08. And frankly we’re feeling a little guilty that we’re in…
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Danger + Opportunity

by OptionSage - December 20th, 2008 2:16 pm

 As 2007 drew to a close, Phil predicted ‘Asian-style’ moves in US indexes and I wrote an article projecting 2008 would be a very difficult year to trade due to ‘unprecedented volatility’. As 2008 draws to a close it looks like both predictions were realized but pleasure does not necessarily accompany vindication. As John Maynard Keynes wrote: 

“It is usually better to be conventionally wrong than unconventionally right”
In short, when you are right about bad news, little benefit is experienced because so many will have suffered whereas being wrong with the crowd means comfort in numbers.
As I watched CNBC’s Year in Review last night I was struck by how many times the commentators noted that nobody could have foreseen the carnage. In fact, many were anticipating a recovery in the middle of the year including Hank Paulson! When history judges such projections unfavorably, credibility quickly diminishes. And in the financial industry, credibility is more important than almost any other criterion. With the credibility of so many in tatters, the onus is on you the individual to acquire the financial knowledge necessary to protect your own portfolio and to anticipate the future based on facts rather than on opinions.
For example, if we were to evaluate the current economic situation with that of the 1930s we might find interesting comparisons that would lead us to be concerned about the future. For example, the 1930s manufacturing based economy has largely been replaced by a services economy, home owners have been replaced by home borrowers, a national surplus has been replaced by a national deficit, and a reliance on saving has been replaced by a reliance on credit. Counter arguments could be made such as the US, unlike many countries which have experienced economic turmoil, has a substantial capability to be self-sufficient, university education is world class, and an indomitable spirit of optimism pervades the culture.
This same spirit can be the catalyst to success in spite of the perils that may lie ahead. It is well known that in Chinese the word crisis is written as a composition of symbols representing ‘danger’ and ‘opportunity’. But preparation is a pre-requisite to taking advantage of opportunity. So, although the danger may be high, opportunities will present for those who are prepared. And to truly be prepared one must have the knowledge necessary to succeed. The entire faculty of traders at Stock and Options Training are still in the black in ’08. And frankly we’re feeling a little guilty that we’re in the…
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A MUST Read!

by OptionSage - October 3rd, 2008 11:06 pm

"Life will teach you the lessons, it’s up to you to learn them"  

Don’t read any further if you are happy with your trading results this year.

If you know in your heart you could have done better trading this year then you MUST learn a lesson from your trading performance.  You MUST or are you are destined to repeat it again.  And if it feels painful the first time, it will feel much more painful next time around!  The lesson you MUST learn is simple but immensely powerful; it is truly a paradigm shift in trading. 

You MUST learn to adjust your trades to the market trend.  That’s it.  If you understand what that means and how to successfully execute, read no further.

What does this ‘adjusting’ really mean?  It means no longer buying and hoping, it means no longer is a binary trading system appropriate; binary meaning no longer will you win if you are right and lose if you are wrong.  What if you could screw up on picking the direction and still win??  Well, you can when you know how to ‘adjust’  to the market trend. 

The power of knowing how to successfully and competently adjust is immeasurable.  At the very least what it accomplishes is ZERO fear and ZERO greed.  When you pre-define your risk and reward levels prior to every trade AND know exactly what Contingency Exit Plan you should execute EVEN if you are wrong, you reach a trading level few will ever conceive of - let alone reach. 

You can learn how to do this from the masters but the knowledge is guarded by most and the cost to learn is usually very expensive because you will rarely be told everything at first (and will be charged more to learn the rest!).

So, why am I telling you all this?  Because I paid the price.  I learned a most powerful trading system of adjustments which I am confident is truly the last trading system anybody needs to know.  I learned it so well, I was invited to start hedge funds and teach around the world.  But as the days went by this past year and I realized how tough trading was for many friends and how they were losing their shirts I decided I had to get the knowledge to everyone without them paying crazy fees. 

And then BAM!  Like lightning the idea came to me and I started Stock and Options Training, a company  where real traders like you can learn…
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Posted in Education | 11 Comments »


Trivia Time!

by OptionSage - August 18th, 2008 11:37 pm

Let’s say you decide to deposit $100,000 into a brokerage account.  You decide you will check your portfolio on a weekly basis.  Now let’s further assume that the first week has passed and you are about to log in to your account.  But before you do, you are told that one of two things has happened in the past week.

[1]  Your portfolio went up $10,000 and then dropped $10,000

[2]  Your portfolio went up 10% and then dropped 10%.

So, the trivia question is:  In case [1], what should you expect your account value to be and is that the same figure as in case [2]?

If you answered $100,000 in case [1], you would be absolutely correct!  If you answered that this is the same as in case [2] you would be absolutely incorrect!  Why?  Well let’s take a look at what happens when the portfolio rises 10% first; it goes from $100,000 to $110,000.  But then we’re told it drops 10%.  10% of $110,000 is $11,000.  So the portfolio drops from $110,000 to $99,000. 

Now how can this help us in our trading decisions?  In its simplest form, this tells us that if we were to simply buy stocks that over the long run had a tendency to rise up substantially and fall down substantially ie starting at 0% and rising up and ultimately falling back to 0%, the volatility is impacting long-term returns.  In statistics, that percentage swing would denote variance, which in turn is often equated with risk.  Another term for risk is beta.  High beta stocks tend to move more than the market and tend to have greater variance.

So, if you are in the market for the long-term, you should certainly pay close attention to the impact of variance.   Over time the impact to the $100,000 portfolio is not just a drop of $1,000 as in the period shown above, but that portfolio erosion continues over time to the detriment of overall wealth.  Unless….

Unless, you know how to take advantage of such volatility.  Buying and holding stocks is about as advanced a trading technique in this day and age as owning a cell phone that simply operates as a phone.  Why accept bare functionality when you can combine the basics with so much more.  In the stock market, this means using options.  (In cell phones we already know they come with email, calculators, personal organizers, GPS etc).

Phil, Opt, fellow PSW…
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Vacation Proofing Your Portfolio

by OptionSage - July 25th, 2008 6:43 am

 

NEW INFORMATION = TAKE ACTION

Save it.  Post-it.  Record it.  Use it.

When driving a car and some object appears on the road ahead do you usually run right over it or do your best to avoid it?  Don’t we all take action in real-life based on the new information we receive that changes the old paradigm?  Take the first two guys in this video:  Who would you rather be, the first or the second guy?  While the second gentleman reacts and looks ridiculous in so doing, he’s the guy that is more likely to survive when real disaster hits because he’s reacting to new information.  In fact he doesn’t even know what’s making everyone else react, he just knows that when 99% are moving one way in panic, it’s best not to fight the crowd or he will be trampled.  It’s no different in the market.  Pride, ego and old theses have no place when new information directly contradicts an existing trade.

When the market is up, we use DIA puts and calls to "react" to quick changes in the market while we wait for better information before making more permanent changes in our positions.  This gave us the benefit of the quick reaction of gentleman #2, the one who went unquestioningly with the crowd, while also giving us the "wisdom" of gentleman #1, who was confident (or oblivious) enough to soldier onward, despite the fact that the world seemed briefly to be against him.

When new information does arrive, one of the first things I look to do is minimize risk - hedging the existing position.  The next step for me is to become more aggressive in reacting to the new information and shifting the bias of the trade in the opposite direction.  In this article, I will outline our basic strategy for protecting your portfolio from a major dip, which can then be used to adjust your risk profile, based on changes in outlook arising from new information. 

The strategy outlined can be applied also when you know that you will be unable to monitor your positions.  Many of you will likely be taking vacations this summer and, with them, a break from actively monitoring your positions.  With that in mind, it’s always prudent to protect your positions from the “just in case” events that can derail your positions in a flash when you are not attending to them.  Those “just in case” events are a…
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The Trading Virus

by OptionSage - July 23rd, 2008 10:22 am

This article is best read after a substantial rise has occurred in the market following a period of sustained bearishness.  Why?  Because it is precisely the time when many will have seen the direction of the portfolios turn.  Some may even have caught the bottom in stocks like Bank of America, up 50% in less than 10 days!  When wealth is attained so rapidly, a tendency towards confidence or more particularly over-confidence is natural.  Short-term results vindicate decision-making at the bottom to ‘bet heavily’ or ‘go all in’.  And they solidify a belief that the next bottom can be called successfully also.  This may indeed occur.  But a danger exists, which I call the Trading Virus.
 
The Trading Virus affects almost every trader.  The victim is affected soon after a successful outcome in the stock market.  The virus manifests as excessive confidence and belief in one’s ability to time the market.  For most the virus is a lifelong condition.  Bulls and bears are equally affected.  As stock markets rise, bulls are infected and ride the glorious waves higher and higher until the inevitable crash cycles around again.  And bears rarely hold out long enough in sustained bull markets to enjoy those crashing sounds. 
 
For both bulls and bears, the virus implants a disease called ‘Results-Focus’.  Each is a keen market observer driven to action or inaction by the latest direction of streaming quotes, media hype, account value or some other short-term mechanism.  And a dependency is soon created; a dependency that demands information in the short-term that produces adrenalin rushes that lead to action that further lead to hopeful and expected results.  This is not to say that, in the short-term, talented traders cannot profit. Of course, they can.  But for most, the disease is a lifelong incurable condition because something very important is overlooked - the process of wealth accumulation.
 
Those successful shorter-term traders succeed not because they are results-oriented but because they are process-oriented.  And those victims who cure themselves do so precisely because they transition from the trap of attempting to time the market perfectly all the time to creating a process that succeeds at all times.  You will quickly see at PhilStockWorld that Phil and Optrader are both highly successful traders.  Both use options to take advantage, albeit in slightly different manners.  And that’s the key.  Each has his own approach and process.  They do not focus so much on trying…
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Posted in Education | 2 Comments »


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Phil's Favorites

The Gold Bubble

March 10th, 2010 10:50 am

The Gold Bubble

Courtesy of RICK BOOKSTABER

This represents my personal opinion, not the views of the SEC or its staff.

I am not going to spend time here talking about how the price of gold is off-the-wall, that it is not just a bubble in the making, but a bubble waiting to burst. I don’t want to waste your time on that point.We all know it is a bubble. 

George Soros has said “The ultimate asset bubble is gold”. Many of the top asset managers, such as Tudor and Paulson, are piling on; Paul Tudor Jones recently said gold “has its time and place, and now is that time.” The banks are echoing this view with their research. Goldman has a research piece that looks f...



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Zero Hedge

Dear FINRA: Pick The "Natural" IOI Out

November 17th, 2009 10:53 am

Courtesy of Tyler Durden

Dear FINRA,

We know you are busy, we also know you are hell bent on intercepting IOI manipulation as per Mr. Jon Kroeper's recent media appearances. Which is why we kindly request that you get back to us at your earliest convenience with information on how many of the IOIs disclosed below are, in fact, "natural." We will make this a recurring topic on Zero Hedge until such time as you respond to our information request. You can contact us at outsourcefinra@zerohedge.com

We appreciate your prompt attention to the matter

Zero Hedge staff.

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Chart School

New Highs For Techs

March 11th, 2010 10:49 am

Stock Market Commentary: New Highs for Tech and Small Caps

Courtesy of Fallond Stock Picks 

Small Caps and Tech continued their good form. Technicals continue to support the move higher for Small Caps (Russell 2000) with new highs for the MACD and +DI line. The Russell 2000 would have to give up 25 points (or 4%) just to test breakout support at 650.

The prior underperformance of the semiconductors was undone with today's 2% gain. 

 

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Trading Goddess

Options and My Patience Expire Today

March 19th, 2010 9:29am

Well now we're officially cashed out!


As I always do before options expiration I reviewed our Buy List, which, this quarter, is a list of 37 stocks we've been playing since late December and, sadly, after reviewing 37 of our favorite investments very carefully this week - I could only conclude that cashing them out was the only decision I could be comfortable with this week. Of 66 trades we had on our 37 stocks, 64 are winners with an average return since 2/8 of 28% - since most of the trades were designed to make 40% for the year - it just seems silly not to take the money and run now, on March 19th.


You are not supposed to have 64 out of 66 winners in 6 weeks, you are not supposed to make 3/4 of what you anticipate for the year in 6 weeks - that is NOT how the markets are supposed to work! When the ma...



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Oxen Group Trades

The Oxen Report: The Tech Money Making Pick You Didn't Know

September 16th, 2009 8:19 am

Tuesday was good and bad for the Oxen Report. Our short sale of the day worked very well for us. I chose Ultrashort Proshares Oil and Gas for our short sale of the day due to my expectation...



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The Options Report

By Andrew Wilkinson


Popular Bank Shares Surge as Option Player Stakes a Claim

September 16th, 2009 9:25 pm

Today’s tickers: BPOP, LNCR, EEM, XLK, XL, PALM, LIZ & MI

BPOP - The ‘popular’ bank popped up on our screens this afternoon after a large-volume risk reversal was established on the stock. The massive trade was likely the work of an investor with knowledge of commercial banks as approximately 60,000 contracts were exchanged on BPOP amid a more than 12% rally in shares of the underlying to $2.60. It appears the trader purchased 30,000 now in-the-money October 2.5 strike calls for an average premium of 33 cents apiece. He funded the purchase of the calls by selling 30,000 puts at the January 2.5 strike for 43 cents each. The investor received a net credit on the transaction of 10 pennies per contract. The motivation is perhaps that this individual is swimming with the rising tide of financial names today and expects a far larger...



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Insider Zone


March to Exit

March 16th, 2010 9:28 am

By Ilene

Let's take a look at Insider Buying and Selling over the last week or so. These are screen shots from Finviz - the significant buys against a green background first and significant sells against the pink background second.  All the buys fit into my screen shot but the sells did not.  Click here to see all the sells.  

Note that the largest buy in the group, for KITD was at a price of 9.73 (KITD is currently at 11.54). The buy was part of an Equity Offering rather than an open market purchase. Tuzman Kaleil Isaza's (KITD's Chairman and Chief Exec. Officer) history of buys is http://www.insidercow.com/ more from Insider

OpTrader


Swing trading portfolio - Week of September 14 th 2009

September 13th, 2009 11:08 pm

This post is for live trades and daily comments. 

To learn more about the swing trading portfolio (strategy, membership etc.), please click here

- Optrader

...

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About Phil:

Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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About Ilene:

Ilene is editor and affiliate program coordinator for PSW. She manages the Favorites backup site (blogroll, archives, more). Contact Ilene to learn about our affiliate and content sharing programs.

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