Sunday, October 26, 2008

Investment plan

Maybe I have been watching CNBC too long, as I am starting to believe, that the current price levels are actually starting to look interesting to begin a longer term investment in the markets. Despite the gloomy economic outlook I'm convinced, that the (financial) world will not end and that we will avoid the Japanese stockmarket pattern in the US. I might be wrong, but then I'm starting small so I will not incur huge losses.

I have no idea which company is worth investing in and actually 8 years ago I lost so much in the stockmarket, that I'm still not willing to trust myself in this regard. But I know a lot about indices and trading indices is what I do for quite some time now. That's the reason, why the Proshares Ultra ETF's look like a good investment vehicle to me. Volatile enough, that even small investments can offer reasonable returns. And the Long ETF's trade at such depressed price levels, that this fact makes them a nice learning vehicle.

Take 100 UYG long now, which are the Ultra Financials, and even when the Financial sector is nationalized, the maximum you risk is 825$.

But just owning stock is not what I look for nowadays. I'm a greedy bastard, which means, if I decide to become a stock owner I want to be paid for the risk taken and that means Covered Call writing.

So after I take the long UYG at 8.25, I will decide that I am content with a 30% profit in 20 days.

That would mean a price for UYG of 10.73. Selling a 10$ call for 0.75, for which I will get 75$ gives me exactly that. If UYG trades above 10$ at expiration, I have to deliver my UYG shares and give up the additional gains, but as I said I'm content with a 30% profit in 20 days. It's like taking a target in my futures trades. I usually miss 50+% of a good move in any trade taken, but I'm more than content with a nice profit made. And if UYG trades below 10$ at expiration I got a nice 75$ for holding something worth 825$. That's 9% interest paid in 20 days! Try to get that for just holding your stock in your account.

Ok, that's a fine return, but in November I plan to buy another 100 UYG.

Now Art Cashin on Friday said something very interesting: If he would like to invest in this environment, then he would sell a put and wait until the stock is given to him.

I first did not understand him, to tell the truth, but it's actually ingenious!

I know, that I have an investment plan, which tells me to buy 100 shares every month and I have the money to do so.

Now I think about the investment I am willing to make and about the price I think it's reasonable to add. 30% below the current price level is a price I consider worth adding to the financial sector. So I think UYG is worth another investment at 5.78$. That means I will sell the 7.00$ put at 0.80, which gives me 80$. If UYG trades below 5.45 at expiration, I pay more for UYG than necessary (I included my profits for the expiring call here). But considering my belief, that the US can and will avoid the Japanese stockmarket syndrome, which shows us a declining stockmarket for 2 decades now, I think, I will see a time in the future, when the financial sector is sound again and the UYG will trade above my average.

And if UYG trades above 5.45$ or even better above 7.00$ my next investment in UYG is already 80$ cheaper.


In the unlikely event, that UYG trades above 7$ but below 10$ at expiration, I receive 155$ for owning stock I want to have and consider worth adding to. Not a bad return for 20 days doing nothing.

Obviously I'm not the first thinking these thoughts and I'm sure some of you reading this can point me to errors in my thinking, as I really have not a lot of understanding in options trading. Please let me know, if my basic thinking is wrong, if I take on higher risks than I see now following this plan.