Strategy: Short Expensive Near-term OOM Puts

Next plan: sell near-term Puts that are way out of the money, yet expensive.

Filter for finding candidate Puts:

1. Underlying is on a long-term uptrend (or at least steady). Wouldn't mind owning underlying at a fundamental level.
2. Underlying price, between 20-80.
3. Near-term put, 1-2 months out and comfortably out of the money, priced > $1.00
4. Ideally strike price is below significant support level.
5. Check for announcement dates of financial results.
6. Reduce collateral requirements by buying Puts that are further OOM (buy extra).

Results: Long LEAP Calls to anticipate Market turnaround

The experiment to go long on LEAP Calls for good stocks in anticipation of an overall market turnaround, has failed.

Bought 1-yr and 2-yr LEAP Calls at the beginning of 2010, assuming that the overall market was bound to turn around. Only one did really well (SLE), the others (BSX, INTC, MOT, YHOO, C) all lost money.

The case for long LEAP calls

The case for going long on LEAP Calls

• Massive downturn over the past year
• Should lead to a broad rally within the next couple of years
• Lots of company stock prices are sure to rise

• Identify sectors that have been beaten down and are likely to rise due to mega-trends
• Find good names in each that have been beaten down but will be in demand
• Find ones with cheap LEAP Calls
• Go long: 2012 Calls, < $1
• e.g. HomeBuilders, Financial companies, Healthcare (esp. related to epidemics which are likely to rise), autos?

Punished sectors likely to rise again: XLF,ITB
- Find the recovery leaders of each sector

Other sectors, stocks likely to rise:
Technology: MOT (handheld computers), YHOO (new CEO), XRX (new CEO)
Disease mgmt/Epidemics
Energy storage/Battery
Transportation

Trend-Following Strategy

Strategy for capitalizing on a major stock uptrend:

Screening

• Find a serious uptrend starting in the last 3-6 months, supported by high volume
• The increase must be sustained or must be explained by a good reason; preferably new product or service coming in from below
• Stock price between 10 and 50
  

Activity

• Find a good entry and exit point
• Use tight Money Mgmt; Cut short losses and let profits run
• Use contingent orders to sell on downturns

With this activity, it then comes down to a question of good screening approaches for trending stocks.

Focus aka non-Diversification

Updates on the previous short-put/long-LEAP-call strategy.

New thoughts:

• Reduce the number of positions; concentrate on a handful where there is a high level of confidence
• Forget the short Puts idea; it only adds distractions
• Focus on a few, specific underlying stocks
• Each of the underlying must have some special advantage, that's not widely known: new device, new technology, or new leadership
  
• The underlying must also be in an industry that has a global growth trend; e.g. for now, mobile-web, healthcare (e-Prescribing, e-Records)
  

Strategy: It's critical to have an Exit Plan

For every position entered, there must be a clearly-defined, preferably automated exit strategy for both profit-taking and stop-loss. These two exits must be defined when the position is entered, and contingency orders created where possible.

Exits for different strategies are given below.

Short Put
- P: Close out when cost of buy-back is down to 10% of initial premium.
- SL: If the stock hits the strike price, roll down and out if necessary.

Long LEAP Call
- P: ?
- SL: ?

Long Stock
Establish a core position, say x blocks, and a max position.
- Up: sell a block each time the stock goes up by 10%.
- Down: Buy a block each time the stock goes down by 10%, up to max number of shares.

Strategy: Stock up on LEAP Calls for the recovery

Main idea:
Buy undervalued assets

Strategy:
- Use account as collateral for selling near-term, expensive OTM PUTs for good underlying stocks
- Use the premium obtained to buy, over time, cheap 2012 OTM LEAP CALLs
- Underlying for LEAP calls must be a solid company (e.g. GE, INTC, HON, C) and consistent with an underlying mega-trend
- Use Stop-loss strategy to dump losing positions at minimal loss
- How to select: highest confidence level that it will rise + largest 3-month gain

Mega-trends:
- Secular economic recovery
- Mobile web / smartphone
- Health information, wellness, fitness, weight loss, chronic conditions
- Large-scale epidemics
- Declining dollar