scratch-mark

June Report Card

Profits of $29,645; a 27% return on cash.

As I reported last month, I felt these monthly report cards might be coming to an end, as I thought they had served my purposes. They have, and this will probably be it — at least for a while.

In summary, I’ve gathered a lot of cash, but because of the market’s significant drop last month, I’m still tied up protecting some troubled positions, which, at this point, look as though they’ll require additional adjustments and protection going into July expiration on 7/20. But I have a plan. If the market goes down, I make a killing. If it goes up, I make less, but still good money. If it goes sideways (very unlikely at this point as it’s coiling for a significant move) I’ll be able to generate some good additional profits and gradually take risk out of the equation. As usual with credit-spread trading: win, win big, or win huge — provided you know what you’re doing and have the balls to stare down a $100,000 loss while you adjust a few things.

It’s analogous to this: you buy a house and get a $0 down, 100% financing deal, which, regardless of what all those financial Neanderthals tell you, is a perfectly smart move provided you can handle the cash flow constraints. In fact, it’s the very best way to buy a property if you can comfortably swing it. Just realize that most financial "experts" are just getting paid to sound like your stereotypical, hand-wringing grandmother who went through the Depression with multiple mouths to feed — and they possess about as much sophisticated financial prowess. Advising "caution" is the easiest thing in the world to do. Accordingly, most people will never make big money in their lives, even though they are perfectly capable of doing so. Why? Fear. Plain and simple. The various lotteries, now worldwide, are perhaps the best illustration. Very nearly no risk, huge win. Sucker’s game. And who are promoting these stupidest of bets? The same parasitic Apparatchiks howling about "consumer protection" while they steal you blind. They, to a man, are your financial enemies in every respect imaginable. Never forget that. You’re only hope is to be smart enough about money to render their thievery as monetarily (but never morally) irrelevant as possible.

Just be smart about your risk management. Getting back to the analogy, that’s why real-estate is so great. Money is easy, and R/E is virtually a no-brainer. Remember Nike: "Just Do It." But when you get that house at zero down and 100% financing (oh, God, maybe even with one of those "stupid" negative amortization loans!), you are upside down, and you’re likely to be in that position for some time, even a year or two or three. If you had to sell quickly, depending on your market and the sales season, you might have to write a check for $25,000, $50,000, even $100,000 just to sell and cover all the commissions, closing costs and other expenses. So, there is risk, but if you can swing it, what’s your ultimate return on investment as the property appreciates? Well, you put zero down, so it’s only those net, after-theft ("taxes": I don’t do euphemism) expenses over and above what it would cost you to rent, or in excess of your rental income if it’s a rental property.

Do the math. The return, even at an average 5% annual appreciation rate, is fabulous.

So to tie it back to what I do in the markets, rather than buying the house and waiting for it to appreciate, I’m selling an option on the house, either to buy or sell, depending on how I think the market will move. Or, get this: I sell both, because that makes one an automatic winner and then I just have to figure out how to adjust my way out of the losing position — unless there’s no significant move in the market, in which case both are winners. So, I sell the option, the contract, which gives other people certain rights they can exercise against me if the conditions are favorable for them to do so. I get paid for selling, sometimes big money, and if the conditions are never favorable to the buyers within the allotted time, I walk away. But if they are favorable, then I stand to lose big. Really big: like 10 or 15 times more than what I received for the sale of the contract.

So, when you do this and the market moves against you, your choice is to lose big or win big, because there is always something you can do to cover yourself. But it takes guts. It’s fun getting $20,000 for selling an option, but what are you gonna do when the market moves against you and your potential loss is $100,000? Timing is critical. In the case of an upside-down real-estate purchase, followed by a correcting market, you make your payments and wait. No brainer. And if you do buy at "the wrong time," what that means is that you add the 3-5 year down cycle to what you otherwise might have had and your return is a bit less. Not a loss. Less return. Always remember that.

Same for me. In order to protect against that $100k loss, I’ve either got to commit more capital to protect the position, or I have to use my existing capital to protect the position while foregoing profits I would have otherwise enjoyed. So my return is less.

The way that you keep from getting wiped out is simply to not allow yourself to get wiped out. Sounds simple. It is and it isn’t, depending on your aptitude, which is easily corrected: study and learn. What’s not so easy to overcome is your core character. Your attitude. Your confidence and ability to stare a big loss in the face and steamroll right over it. There is a balancing act. I’m not talking about being reckless. You need to know and understand what you’re going to do in all three possible scenarios: the market moves up, down, or sideways. What will you do in each. If you can profit under any of those scenarios and you know how to do it, then be confident about it, forget about the interim "projections," and execute.

OK, so here are my trades for the month:

Jun_results

Richard Nikoley

I'm Richard Nikoley. Free The Animal began in 2003 and as of 2021, contains 5,000 posts. I blog what I wish...from health, diet, and food to travel and lifestyle; to politics, social antagonism, expat-living location and time independent—while you sleep—income. I celebrate the audacity and hubris to live by your own exclusive authority and take your own chances. Read More

3 Comments

  1. Richard Nikoley on July 3, 2006 at 06:19

    Hans:

    I use optionsXpress for trading and some analysis, and also InvesTools and Prophet.net.

    RN

  2. Hans Simon on July 3, 2006 at 04:13

    Hey Rich, I have enjoyed your monthly reports. I was wondering what software you use to analyze the trades before and after putting them on. I have been trying to find a good one for some time. Thanks, Hans

  3. Hans Simon on July 3, 2006 at 10:28

    Hey Rich, thanks. I am actually very familiar with the optionsxpress (OX) tools and prophet. However, I find that the OX analysis features are somewhat limited. For instance, you can't do "what-if" position scenarios together with current positions to assess, say, the possible P/L after a new position is initiated. From your report card, you open and close multiple positions for the month as conditions warrant, so I was thinking you might have been using more sophisticated tools (to make it a bit easier to make the "what-if" assessments).

    Thanks again Rich..

    Keep the great reports coming,
    Hans

Leave a Comment

You must be logged in to post a comment.

YouTube1k
YouTube
Pinterest118k
Pinterest
fb-share-icon
40
45
Follow by Email8k
RSS780