Commentary
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Not much stirring in the markets, today. That's fine with me. Unlike
outright stock investments, writing (selling) options makes money in side
trending markets, as well. And a little of the moola was made again
yesterday, both on paper and in outright hard cash in pocket. More soon.
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Effective of NLV Portfolio Results
You'll notice that I've added a new column to the NLV Portfolio table. It's
the fourth column over; the one labeled Effectiveness. Think of it as really
meaning the effectiveness of the NLV Portfolio when measured against the S&P
500 index. Essentially, Effectiveness measures the same thing as the NLV vs
S&P column but gives us the information in a richer, therefore to me in a
more useful, way.
For instance, if NLV has a YTD return of 12% and S&P has a return of 10%,
the difference is 2% (12% - 10%). But what if NLV has a return of 22% and
S&P has a return of 20%, the difference in returns is still only 2% (22% -
20%). There's no weight given for the levels of return between the two
investments. Intuitively, the higher the levels of return the less the
importance we attach to the difference of the returns. 102% vs 100%? 1002%
vs 1000%? Effectiveness, however, spotlights the magnitude between the
levels of returns and that's why it conveys more useful information to me in
this setting.
For instance, using the example, above, with NLV at 12% and the S&P at 10%,
the Effectiveness number is 1.20 (12% / 10%). And at the 22% vs 20% level of
returns, the Effectness number is only 1.10. (22% / 20%). Now let's reverse
the returns in the example. With the NLV at 10% and the S&P at 12%,
Effectiveness is (rounded) 0.83 (10% / 12%). And at the 20% and 22% levels,
Effectiveness is 0.91 (20% / 22%).
Summarizing the four results:
12:10 22:20 10:12
20:22
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Effectiveness 1.20 1.10 0.83
0.91
(Sidebar: Ya know, it strikes me now that "Effectiveness" is a mouthful and
awkward to type so henceforward, I rechristian it Eness. You'll know that
everytime I say Eness I mean Effectiveness.)
Looking at the above table, we see that anytime a number is greater than 1,
the NLV outdid the S&P. Conversely, anytime Eness was less than one, the S&P
outdid the NLV. But here is the additional information that Eness conveys:
at the smaller return levels (12:10 and 10:12), the absolute differences
(12% - 10% = 2%) and 10% - 12% = -2%) made a larger impact percentagewise
than did the absolute differences. Again, conversely, the absolute
differences at the higher levels (22:20 and 20:22) made less of an impact
on the portfolios percentagewise than simply taking only the 2% difference
in all of the return levels.
A bonus to the Eness column is that it is very easy to mentally convert the
Eness number into a percentage. Simply subtract 1 from the number and then
multiply by 100. Voila, you now have the percentage that the NLV is ahead
(more than 100%) or behind (less than 100%) the S&P.
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Net Liquidating Value (NLV) Portfolio
Paper Profits Table
As you can see, both the NLV and the S&P are producing respectable
annualized returns YTD. How respectable? The markets have benchmarks for
just about everything. One of the benchmarks used for interest rates is the
LIBOR (London Interbank Offer Rate) which is the rate (even in America) that
banks charge each other when lending money overnight. Another short-term
benchmark interest rate is the 90-day U.S. Treasury Bill.
Much of the consumer interest rate structure is built on the LIBOR as a
base. I'll leave it at that, if you want to learn more about the LIBOR and
interest rates in general, I suggest you google it.
The LIBOR rate can change from moment to moment depending upon central
banks' policy (the Federal Reserve Bank or FED in America) and the supply
(of banks willing to lend money) and the demand (of banks needing to borrow
money). The changes, if at all, from day to day are usually measured in
basis points. A basis point is one hundredth of 1%! That's .0001 in decimal
terms and it amounts to only about $0.28 per day on $1,000,000.
As of today, the LIBOR was 5.36%. As already mentioned, investors often use
LIBOR as a benchmark; sort of a risk-free interest rate. This is the rate,
that an investor wants to beat in any riskier investment. The riskier the
investment, the more expectation of higher returns, otherwise why take the
risk? The foundation of capitalism is built upon this simple premise.
The Eness of the S&P when measured against the LIBOR is 4.01 (21.48% /
5.36%) while the Eness of the NLV is 4.71 (25.25% / 5.36%)! In percentages
the S&P beats the LIBOR by 301% [(4.01 - 1) * 100] and by the NLV by 371%
[(4.71 - 1) * 100]. Incidently, if we only had the LIBOR comparisons to work
with could get back to our direct NLV:S&P Eness number simply by dividing
the LIBOR comparisons like so: 4.71 / 4.01 = 1.17 which is as close 1.18 as
you can get taking round off errors into consideration.
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Closed Transactions Table
Not to shabby in this department, either. We improved in all the columns,
including the underlying number behind the Rating Column. We're now within
spitting distance from the next level which Deel characterizes as
"Excellent". Now if only the markets will cooperate. But usually, they must
rest (and even retrace a bit) before they continue the secular upward climb
they've exhibited for more than 100 years.
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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.
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Abbreviations: STO-Sell to Open; BTC-Buy to Close; AROM-Annualized Return on
Margin; S/L Tgt-Stop-Loss Target
Sell to Open (STO)
Symbol Expires Strike Premium BTC Tgt S/L Tgt Sell By Date
ATI 04/21/07 $80 $0.66 $0.40 $0.95 03/07/07
GILD 01/19/08 $50 $0.80 $0.45 $1.15 03/07/07
ICE 06/16/07 $90 $0.90 $0.50 $1.30 03/07/07
LM 05/19/07 $90 $0.77 $0.45 $1.15 03/07/07
Buy to Close (BTC)
Symbol Expires Strike STO BTC Profit/Loss
Days Held AROM
SHLD 03/17/08 $0.60 $0.45 $0.15 6
52.9%
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Administration
I've decided, for now, not to try to ascertain and make any more corrections
to past possible errors on the Closed Transactions side of the table. (See
my report of 2/6/2007). The changes would be insignificant and would not
have any effect on the numbers in the future as each day all the statistics
are calculated afresh. Besides, don't you agree with me that my time is more
valuable in creating, monitoring, executing my approach, or even sleeping?
<g>
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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