Turning $10K into $50K by Jan 21st – Week 12 Update (Members Only)
by Phil - September 4th, 2010 9:24 am
What an exciting 10 weeks these trades have had!
The most important thing to take away from these hedged play reviews is how important it is NOT TO TOUCH THEM. We orginated this group on June 11th and the Dow was at 10,200 and it ran up to 10,600 and down to 9,600, back to 10,700, down to 9,800 again and is now back to 10,400. We could have made some good adjustments and we could have made some bad adjustments but the best move is to do nothing with long-term, hedged positions while the market gyrates UNLESS something fundamentally changes in your range outlook.
Rather than panic out of positions like these examples, a simple disaster hedge was used in the July 26th update to ride out the dip, while letting time (theta) decay contine to do it’s work on the premiums we sold…
The VIX was at 30 back on June 11th and that, in part, determines the nature of the trade ideas we decide to use. The higher the VIX, the more we want to sell premium as we simply profit from the declining VIX (now 23.5). The idea of these picks was to find $10,000 worth of small plays that we thought could gain 500% by Jan 21st as part of a larger portfolio. If you can do this with just 10% of a $100K portfolio or 5% of a $200K portfolio, that’s plenty of risk for these uncertain times and it’s a nice 25-50% bonus on the entire portfolio if it works out. Risk can be a component of a conservative portfolio if we wall it off safely.
Our first play was a fundamentals play on YRCW, assuming they wouldn’t go bankrupt. 10,000 shares at .21 was the original entry ($2,100) and I called an audible on this one on 7/7 to add 2x at .11 rather than stop out. That brought the net down to 0.143 on 30,000 or $4,290 so a bit more than a DD overall and we took 1/2 off the table this week at .29 ($5,850), turning this one into a free play ($1,560 profits in pocket) with 15,000 shares to ride out but we lost our nerve at .41 because we couldn’t get .10 for the Jan $1s so we gave up (and rightly so it turns out) and cashed out for another $6,150 in profits for a total profit of $7,710. YRCW is once again…
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9 Fabulous Dow Plays Plus A Chip Shot (Members Only)
by Phil - July 7th, 2010 7:24 am
We were discussing what to invest in in a terrible market this morning in Member Chat.
I thought it would be handy to add this post to our Buy List because 9 of my 10 picks below are Dow components and there are very easy ways to hedge our Dow purchases against disaster so it will be a good opportunity to construct a self-contained portfolio filled with dividend-paying stocks that are suitable for a long-term retirement account that we can buy using our discount strategy.
Let’s say we allocate $5,000 to each of these positions and we intend to buy $2,500 in the first round and hold $2,500 on the side in cash, in case the Dow does fall more than 20% and the majority of our stocks are put to us in a second round. In the below list, XOM and WMT are more expensive but others are less so you can buy 100 of the big boys (price-wise) and see what’s left or allocate a double helping for those two, so you’d be buying 100 shares for about $4,000 a block (after our discount) and hold back $4,000 on those two.
This is acceptable because we do have $50K in cash sitting around and A) We don’t really believe the Dow is falling below 8,000 B) When the stock is put to us our margin requirement will only be about $25K (assuming 50% margin for stocks held) as our short puts will be gone C) We will have a disaster hedge. On all of these plays, the upside is at least 25% so that’s also our built-in cushion, all the way to Dow 7,307 so we really only need our protection to kick in below 8,000.
Aside from our weekend 500% DXD disaster hedge, which is perfect to cover this group, we can do a very simple, margin-free hedge like the DIA 2012 $95/80 bear call spread for $5.50, which pays $15 if the Dow is below 8,000 in Jan 2012. So $5,500 put into this play returns $15,000, offering us an additional 20% downside protection, now down to Dow 5,845. If that seems silly to you (it does to me) then a $2,500 hedge that gives us an additional 10% downside protection would seem to be plenty.
Once we have that hedge in place, we can aim to make it free by selling puts. To make up $2,500 over 18…
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Turning $10,000 into $50,000 by January 21st! (Members Only)
by Phil - June 11th, 2010 7:12 am
Wheee - this is getting to be fun!
I spend most of my time with members preaching LOW-risk strategies so it’s fun to look at a riskier one once in a while. If the market is trending higher then we may have an opportunity to make a nice, fat return and we’ve already locked in a conservative set with a lot of cash on the side so we’re able to consider taking a little gamble now.
While we still have a nice, fat VIX at 30, let’s look UP for a change and think of some small, fun plays we can take that give us great expectations for the end of the year. As I mentioned the other day, putting just 10% of your portfolio into a risky play that makes 500% to the upside can be a real portfolio booster. The trick here is to select trades that either limit our downside or have downsides we don’t mind (like having a stock put to us that we don’t mind owning).
I thought it would be fun to set up a small, virtual portfolio with a few selections we think can provide big returns by January expirations. Keep in mind that these are, of course, high-risk positions and should not be more than 1/10th of a portfolio so if you have $10,000, just $1,000 should go into risky posiitons like this. If all goes well, you still make 50% on the whole $10,000 so DON’T BE GREEDY! We’ll track this set of picks going forward and make adjustments, if needed along the way.
Let’s start with a stock. As you know, I am NO fan of penny stocks. I pretty much avoid them like the plague but there’s a stock that costs just 21 pennies I’ve decided I like and that’s YRCW. YRCW is an unintentional penny stock and they do have many, many issues that may cause them to go BK BUT – they also have $5.2Bn in revenues against a $214M market cap and, if they don’t go bankrupt, then someone may decide to buy them, probably for more than $1.
Freight volume for truckers was up 0.9% in April after being up 0.4% in March and the Freight Index is now at 110.2, the highest level since Sept of 2008, when YRCW as stilll a $10 stock (but on the way down). YRCW says they broke even in April and should MAKE MONEY in…
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Buy List – Q2 2010 – My Top 20 (Members Only)
by Phil - June 7th, 2010 12:01 am
OK, now I’m putting pressure on myself.
I hate saying top 20 because the top 20 could change next week if the market conditions change but, for now, I did a lot of reading and thinking over the weekend and that led to me writing "The Worst-Case Scenario: Getting Real With Global GDP!" in which the short story is: Things are just simply not bad enough to sit on our hands with a big pile of cash.
PLEASE keep that in mind at all times - our buying premise is that we have cash (with a target of staying at least 75% cash right now) and we ALREADY have our disaster hedges, which are already in the money. If we have a 5% hedge in place that pays 25% on a market drop of no more than 20% below where we are now, then we can expect to have 25% of our money from that hedge to pay for any stocks that are put to us and, if we are only allocating 20-25% of our cash to buy round 1 here, then logically, that extra 5% we’re putting up as insurance will pay for the rest.
That means, if we spent $25,000 to buy round 1 of stocks and $5,000 of insurance that pays 500% if we hit our assignment area (down 20%) and we are assigned a basked to stocks, which force us to double down, then the $25,000 we need to double down with will come from our insurance hedge and that means we’ll be in 2x the stock for $30,000 with $75,000 more cash on the side (assuming it was a $100K Portfolio).
Let’s keep this example dead simple and say we buy the SPY for $106.82 and let’s say we buy 300 shares for $32,000. Now we cover that with the sale of the March $103 calls for $12 and the $95 puts for $7 and that nets out to $87.82 ($26,346) and our upside at $103 is $15.18 ($4,554 or 17%). We are committed to owning 600 shares of SPY at the $87.82 we paid for 300 plus another 300 at $95 for an average of $91.41 on 600 or $54,846.
Now comes the hedge. In order for us to lose money on this SPY trade, SPY has to go down below $87.82, which is our break-even point. We don’t NEED insurance above that spot as we already have it from the puts…
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Smart Portfolio Management III – The $1,000,000 Portfolio (Members Only)
by Phil - May 15th, 2010 6:35 am
You can’t lose what you don’t have.
The reverse is true for people with Millions in a stock portfolio. Phil points out that the reson you don’t run a large hedge fund trying to make 100% gains is that the people who invest in those funds are more interested in what we call "preservation of capital" rather than generating wealth. Generally, the people who have $1M of investable cash to play the markets have already achieved a great deal of success, often by taking their own risks along the way. For most of us, $1M is hard to come by and, while we want to put that money to work – we certainly don’t want it wondering off and joining the circus.
As a high net-worth investor, you need to decide how to diversify your assets to suit your long-term goals. We’re not going to get into that here – let’s just say that if you want to gamble and go for some of our "more exciting" plays, perhaps allocate a portion of the portfolio to those. Whether that’s 5% or 10% or 30% is up to you but it is good to fence off your risk to a sensible, manageable amount that you really can afford to lose while keeping the bulk of your market allocation well diversified and well-hedged.
I have my own 5% Rule. Phil’s famous 5% Rule deals with the predictable movement of stocks in their trading ranges but my 5% Rule, which Phil also agrees with is simply "Do not put more than 5% of your portfolio in the stock of any one company!” This is so much easier said than done for many reasons!!
[1] Transition to Large Numbers
Moving from a 5 or 6 figure account to a 7 figure account has a profound impact on many traders. In fact, our friend Dr. Brett refers to the effect “performance anxiety” can have on a portfolio and notes that one of the causes is the responsibility felt by traders as larger dollar amounts are traded. Phil advocates a system of "purging" Short-Term Portfolio gains when they gets too large and shifting money into safer investments in a Long-Term Portfolio – it is good to have a strategy for balancing out your holdings, not just target goals.
While it might be acceptable to put 15% of your $10,000 portfolio on that long call you just KNOW will make money, it would be a big…
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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...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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