Commentary
If It Ain't Broke, Don't Fix It?
Looking at our YTD results, you might say, "Leave well enough alone."
We've increased our NLV Return to an annualized rate of 14.69% while the
benchmark S&P is still in single digit territory, 9.02%. But you can't count
the S&P out. And while we're gratified to achieve a return that's about
three times what a cd pays, and twice the performance of the S&P to date,
I'm still not happy. Therefore, I'm looking to change a few of my basic
parameters to see if I can beat my performance vis a vis the S&P even more
next month.
I'm really treading in unexplored territory here; for me at least. I don't
have the long experience in trading nor do I have staffs at my disposal to
carry out the daily nitty-gritty such as data accumulation, screening,
investigation, programming and other sundry administration. This takes away
from the time I have left to study, analyze and create the environment in
which I want the NLV portfolio to exist. Nevertheless, I still must make
some changes if I want to discover where our approach can be improved.
This can't be done on paper only. The only testing lab we have that means
anything is the market itself. I'm of the belief that while backtesting
ideas on historical data may shed some insights, for the most part, it may
overlook other subtleties such as the effects of commissions, slippage,
taxes, and over-zealous curve-fitting. More importantly, it never can
simulate the subjective emotions a trader undergoes under the stress of
making myriad decisions with insufficient information. So the only place to
really test theories is out there using real money under real pressure.
That's where probabilty theory comes in. It can help us set signals on when
to act and how to act in a high percentage of the trades and with a certain
degree of confidence. There is no one way to use probability theory. I look
at it like a bag of tools. And like a carpenter with his saw, hammer and
screwdriver, depending upon the plans he gets will determine his output.
With the market however, even with our bag of probability tools, the best we
can do is to follow our plan and know that if we do enough trades under it,
we'll probably emerge at the end of the year with the goals we've targeted.
There never is certainty in the stock market, that's for sure.
All this prose is prelude to this. Starting February 1, as I mentioned
before, I'm making significant changes to my approach. In fact you might
almost say that I'm going to be using an entirely new method from selecting
the options at interest, deciding how much to invest in any particular
position, and when to exit the trade. This is not to say that I'm entirely
throwing out the baby with the bath-water. Much of the probability framework
I've been using will still be in place. But I'll be measuring and utilizing
volatility in significantly different ways. Explaining all the differences
is beyond the scope of this report but I will say this. Volatility is the
most important numerical component in investing, short or long-term. All
attempts to price options, stocks, futures, commodities, bonds, etc. must
take into consideration, the key variable, volatility. Fail to consider
volatility in your investment strategies, and you just might as well go down
to one of the friendly casinos in my home town and plunk all you have on red
or black at the roulette wheel. (BTW: that's a sucker bet. Over the long
haul you'll lose $5.26 for every $100 you bet. But with an understanding of
volatility and its application to a particular roulette wheel, you still
might be able to shave a few basis points off your loss)
However I came to this game to win. Not just pare losses. So I predict that
even if my new approach seems to produce better, I still won't be happy. So
I'll bet I'll be blathering more about volatility and probability in the
months to ome. And you can take that bet to the bank! <g>
Net Liquidating Value (NLV) Portfolio
Paper Profits Table
Good News: Yeah, 14.69% looks nice. Money doubles in less than 5 years with
this return. Why a fella could even retire if he were making that kind of
return, consistently. And since we don't know how consistent this return
would with tomorrow, let alone next month, that's why we're back at the
drawing boards as explicated above.
Bad News: Not really bad news again, but while we gained 1.65 points, the
S&P gained 6.96 points kinda narrowed the gap between us to 5.67 points.
Closed Transactions Table
Didn't BTC anything today so...
Good News: None
Bad News: None
Put Trading Activity for Report Date
Generally, we want STO Premiums to be as big as possible and we was BTC
Premiums to be as small as possible. This would give us
optimum profits. In other words, we want to buy low and sell high, but with
put writing its always in reverse order. Note that all Premium, STO, and
Profit/Loss Columns should be multiplied by 100 to get the per contract
numbers and that all positions we enter into will always be for as least two
but probably more contracts per position.
Abbreviations: STO-Sell to Open; BTC-Buy to Close; AROM-Annualized Return on
Margin
Sell to Open (STO)
Symbol Expires Strike Premium BTC Target Sell By Date Stop-Loss
Target
ANF 05/19/07 $60 $0.55 $0.35 02/20/07 $0.85
Buy to Close (BTC)
Symbol Expires Strike STO BTC Profit/Loss
Days Held AROM
None
Administration
I really shouldn't do this except that I still have another (different)
position in UAL Corp. (UAUA) so I peeked. Oil shot upward today so that had
I waited another day to unload my old position, I would have lost even more.
Meanwhile I'm hoping for oil to come back down (it's the arctic weather
forecast for the midwest for the coming week that's got oil and natural gas
bouncing upward) before I have to BTC my other UAUA, soon.
Disclaimer:
This is the fine print and is designed to protect me in these litigious
times, and until I get better wording for this disclaimer, you are under
notice that I am not selling my services nor any other product, nor am I
trying to induce you to trade along or independently, with me. I am merely
offering a journal, so to speak, of my portfolio's transactions and results
with the hope that you will glean information and educate yourselves in the
stock market in general and option trading dynamics in particular. Trading
in the stock market and in options involves substantial risk and much money
may be lost. Beginners, especially those with little or no understanding of
the stock market, lose most, if not all of their capital in a relatively
short time. In other words learn from me and my mistakes and if you want to
risk your money in the markets, that's your business and has nothing to do
with me. I am not your representative, broker, advisor or any other type
agent acting in your interests. As a matter of fact, if you want to invest
your money, I recommend you hire your own advisor other than me.
Copyright (c) 2007 Leonard Mednick, MBA, CPA (Ret); Managing Member LIME
Holdings LLC
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