This country is running headlong into full-scale riots and the market could not be more complacent about it. Once again we are jacked up in the Futures and I already put out a note to our Members with new shorting lines and I have to run to the Nasdaq this morning for an interview so I'm just going to post a link HERE.
That's right, we're very busy in the mornings at PSW and that's because being a good investor is a JOB, not a hobby and it requires a surprising amount of work if you want to get it right. Yesterday morning we also shorted the low-volume move up in the Futures and my call in the Morning Report was:
Meanwhile, talk of trade war is strengthening the Dollar, which may even break back over 94 today and that unintended consequence of sabre-rattling is not good for the markets so we took advantage this morning and put in those short orders on the Futures in our Live Member Chat Room at Dow (/YM) 22,000, S&P (/ES) 2,470, Nasdaq (/NQ) 5,925 and Russell (/TF) 1,400. As usual, we wait for two of them to cross under than then short one of the laggards with VERY TIGHT STOPS – because this market be CRAZY!
The Dollar hit 94.04 and is holding 93.90 at the moment, consolidating for a move higher (long /DX) and we got some nice drops on our indexs but, as we thought they were shallow: Dow fell 50 points to gain $250 per contract, S&P fell 10 points to gain $500 per contract, Nasdaq fell 25 points to gain $500 per contract and Russell fell 20 points to gain $2,000 per contract, which is good because, as I said to our Members in the Live Chat Room at 9:37:
I've got 5 short /TF, always my favorite. 1,395.30 is my avg. Other than that, just seeing how things shake out.
See, this is not complicated: Have a premise, make a bet, collect the cash. Wash, rinse and repeat and, before you know it, you have some money. The hard part is all the research it takes to arrive at the premise – the trading part is fairly simple. By the way, we only trade Futures for fun at PSW – we are actually long-term fundamental investors who use options to hedge and leverage our positions. It's just that, when we're doing things right – our trades are BORING! – so we make some Futures trades to pass the time while we wait for our real trades to mature.
In fact, one of the reasons I started an investment blog was to give myself something to do because, if I'm not otherwise engaged, I have a tendency to over-trade – as most people do. Our primary trade style is "set and forget," using long-term "leap" options to discount our stock entries (or create artificial ownership) with the goal of making 20-40% returns each year (see "The Secret to Consistent 20-40% Annual Returns on Stocks").
In that video, from way back in 2013, we mentioned OptionsXpress as a good value and Schwab (SCHW) bought them out from under us for $1Bn. Our sample trade for a covered call strategy was Barrick Gold (ABX) which was $19.15 at the time. Today ABX is at $16.55, so not much action in 4 years but our strategy of using the position to collect $1 in premium each quarter was a great success and, 16+ quarters later, the stock is net free and the $16.55 is all profit and we can now sell Oct $16 calls for $1.20. The very low VIX has lowered our returns slightly.
While it may seem like a dull way to make money (and it is, we do more complex plays, usually), consider the mechanics of the trade:
- Start with $20,000 in Sept 2013 (when we made the video) and buy 1,000 shares of ABX ($19,150) and sell 10 Oct $19 calls for $1.30 ($1,300). That's net $17,850 and you have $2,150 in cash.
- At October expirations, ABX is at $18.50 and we sell the Jan $19 calls for $1 ($1,000), driving cash up to $3,150.
- A dividend of $50 is paid on 11/27 ($3,200)
- Jan ABX is at $19.28 so we pay $280 to buy back the short calls and sell April (2014) $19s for $1.50 ($1,500) so now $4,700 in cash.
- A dividend of $50 is paid on 2/26 ($4,750)
- At April expirations, ABX is at $17.89 and we sell July $18 calls for $1.50 ($1,500) and cash is now $6,250
- A dividend of $50 is paid on 5/28 ($6,300)
- At July expirations, ABX is at $18.11 and we pay back $110 and sell Sept $18 calls for $1.50 ($1,500) and cash is now $7,690.
- A dividend of $50 is paid on 8/27 ($7,740).
So, here we are, at the end of year one, with the stock back at $16.72 ($16,720) and $7,740 in cash for a total of $24,460 and a profit of $4,460 (22.3%) DESPITE the fact that ABX is $2.43 (12.7%) LOWER than where we entered the trade.
That's because, using our nice, boring system, the odds are so much in your favor that even a declining stock can make you money on the way down. ABX had it's ups and downs for the next 3 years but now we're right back where we started and with another 3 x $4,460 (ish) in our pocket. In reality, once the trade is up 25% or so, we can safely use our margin to initiate the next trade in our portfolio (because we are using only 50% of $40,000 in margin and then we have $48,000, so we start another trade and then we collect $8,000 more and margin rises to $56,000 with $35,000 in positions, etc.) and then we have two working at once and a year later we have 3 and then 4 – so the returns compound rapidly over time.
This is what we've been doing with our Member Portfolios for the past few years, simply working our system and making our returns. They aren't all winners but, when you have this much of a house advantage, you don't need them all to be to make a very nice overall return.
And that leaves you with plenty of free time to do your research and make the occasional short-term stock, option or Futures trades – a litttle fun in the sun while we wait for our planted trees to turn into forests of CASH!!!
