A Chronicle Into What May Be a Most Lucrative Investment Journey

paysense · Mar 28, 2009

Actually the next 12 months of paper-trading again unveiled real good results. We didn't encounter much of any downtrend or have to move to cash for the better part of that period:

In fact with a 30% drop in the Nasdaq, our equity (by scaling back positions) fell no more than 20% retaining the bulk of our gains - helping to further validate this stop-loss method!

This cursory investigation into "market-beating" results using covered calls indeed was proving it's mettle.

As you will soon see, the next 12-30 months were not as easy to navigate - similar to our recent market behavior. But, if we could retain the bulk of the prior two years of gains we may indeed be on some solid footing...

paysense · Mar 28, 2009

To continue, when the tech bubble burst the stock market was about as insane as it has been during our latest bear market.

For the long-term investor, capital preservation must immediately be bumped to the front as your main focus.

Fortunately, the stop-loss methods in place made this nearly routine. As covered call positions were one-by-one stopped out - with stock prices moving down to the "breakeven" point (less the premium discount). . .moving to cash before index losses are magnified came natural.

Then with each (failed) bear market rally a tentative approach to "testing" the market by phasing into covered call positions that subsequently are stopped before I can get fully vested, further helped to minimize losses.

So what you are now looking at above are the end result of 3 years of paper-trading during varied market conditions using covered calls.

A simple approach yielded hedge fund beating results and in fact obtained a CAGR (compounded annual growth return) of 52%

Furthermore, risks or drawdown are severly contained!

I would simply select less than 10 covered call positions and grow an account. I have always referred to a long term "average" that can be compounded as the result to strive for.

I only recently remembered that CAGR (compounded annual growth return) is the correctly stated result (52%). Mutual funds will simply take the total return (250%) and divide it by three years and call it an "annualized" 83%!

It should be noted that this far exceeds the very best "annualized" returns of say 30%. . .which actual equates to less than a 15% CAGR. So these results were definitely worth further investigation...

paysense · Mar 29, 2009

OK, just to put things in their proper perspective here is an example of a 20 year mutual fund chart with an initial and final investment of $20,000 compounded at a 10% annual return (CAGR).

What had been achieved on paper for 3 years at a 52% CAGR took 13 years with your mutual fund.

In just 2 more years at this same 52% growth rate, a $20,000 account will grow to $162,275. That exceeds the 20 year chart value in just 5 years!

When you compare the risk or "drawdown", I think the covered call approach is indeed quite acceptable. Other considerations may be scaling up or at what investment amount one would consider comfortable -

$20,000?, $50,000?, $100,000?, $500,000?

What does 10 years provide those willing to stay for the long haul?

10 more or 20 years?

In either event the CAGR of 52% ("annualized" at 82%) can be done without much risk, time or effort (Covered Call Fund management is easy) to where it would NOT take long for say 1/10 an investors net worth to be invested and grown to nearly their TOTAL NET WORTH in just a smidgeon of time (~10 years).

Furthermore, tracking the solvency of said account or approach would not be difficult or frightening (like opening up your 401k statement

.

In reality though, the process of letting this high probability successful venture unfold is still not instant enough for today's society - despite the hard investment lessons recently learned!!!

This chronicle will eventually answer all of these particulars and then some...

paysense · Mar 30, 2009

I know that many here just aren't that interested in the pursuit and accomplishment of compounding a decent annual average over multi-year periods, but when you now see what attaining this goal can accomplish. . .the results are undeniable.

So if you are in a category of people that are living on a nice cushion and are already very comfortable this approach may not drive you. After all EliteTrader is mostly in reference to those that can fill up their monitors with multiple screens and take a $50k account and "scalp" $25k-$30k a year off of it.

If this is you...stick to what you know. Personally, if I had the temperament to stare at a computer monitor all day - every day, I would at least take your approach and compound the 25 or so annual percent return!

Or you may be an "accredited" investor that has exposure in hedge funds to help balance out your larger LONG portfolios. The longer-term performance of these may not be an absolute goal. A few years here and there with decent gains simply may suffice.

But make no mistake about it, the much elevated goal I have set has been achieved and greatly improved upon, refined and is now running smoothly - still with yet no real capital. All in due time. . .giving me a meantime to share with you my insights.

That being said, my main concern is to establish, refine and nearly perfect an approach that will first off not blow out an account - - all the while steadily growing gains in a compounded manner with many, many, many years in doing so.

paysense · Mar 30, 2009

I don't have any brokerage statements to show you, but in 2002 I liquidated $20,000 from my company 401k account (I was a Sr. Optical Engineer for KLA-Tencor, Inc.) and began trading my covered call approach. I also set-up and launched my "Training Institute" website.

I figured I would need the extra capital and the routine of posting and e-mailing "trade alerts" along with being held to an exhaustive series of webinars I wrote - if I attained results similar to that on paper the previous 3 years.

This would make for me the best form of discipline as a trader. After all...if I KNOW what I can produce, state it and then clearly demonstrate it keeping all of my parameters - what else would there be to prove this 50% CAGR can in fact be perpetuated indefinitely!

But as fate would have it, my covered call approach ran into a market that contained a series of bear market rallies or head-fakes to where I could not make any of the gains I so desperately was banking on. The strategy was still on course, it was just my patience that wore thin during the first nine months.

We did get a tradable rally into the fourth quarter through to the new year that brought my drawdown to breakeven - further proving my stop-loss methods retain capital in a routine fashion. Unfortunately, the account did not grow into gains, so I waited.

Again, this strategy is best compared to the Nasdaq since growth stocks are what I mostly invest in.

I later learned that I can pretty much count on or expect (since individual annual return years vary widely) - aside from a 50% CAGR. . .but an out-performance of about 25% versus the Nasdaq.

Also, I was encouraged throughout all periods that my initial drawdown in 1998 which undercut the indexes was for the most part kept well above it since. Also, with the tech frenzy in the late 90's, in some of those years I simply just kept pace with the Nasdaq, while since I am able to keep a healthy divergence with it. These are the metrics that kept me knowing I am always still on track with expected results.

In fact a simple "scientific" analysis can let the subscriber or OP $$$ KNOW that their expected and lofty results and goals were being met. All one had to do is first see that in any monthly or quarterly period severe drawdown in excess of say 20% isn't being experienced and that compared to the market outperformance goal of about 25% for each rolling (as current charts are graphed at website) 12 month period. Then you can KNOW that the 50% CAGR is being accomplished and multi-year (see previous "compounded" charts) wealth is being generated.

With this simple covered call approach coupled with my stop methods a set me on a headache-free journey to routine hedge fund beating results.

paysense · Mar 30, 2009

Fortunately (which is usually the case, except for the present abysmal, prolonged 2 yr. market period with the rare tradable market rally) the market did bottom and I moved into stocks in March 2003.

This generated - using up about 1/2 of the available margin and on occasion an additional 1/4 - a 120% annual return using covered calls!

2004 and 2005 presented additional gains using some more tradable rallies:

I quit my day job in 2001 and just before income from my web-based services started quickly growing in 2003 disaster struck. This was a sad period in my life where I lost my family, home, step-children and what financial footing I did have through an unplanned divorce.

paysense · Mar 30, 2009

But I maintained my course, with each step confirming that I was on the right track. In fact there has never been anything but total support for this approach with each turn from beginning to end.

There has never been ANYTHING that has ever said - maybe this is not going to work like I thought. It always has reinforced me and let me know it does.

So in 2006 we achieved again comparable expected results and we were off into 2007 where I came to the forums of ET in May.

As you can see it doesn't take but about 6 months to gain a divergence from the Nasdaq (forget about the S&P 500 and the Dow) and that rallies off market bottoms became routine.

paysense · Apr 1, 2009

"So in 2006 we achieved again comparable expected results and we were off into 2007 where I came to the forums of ET in May."

We dilly-dallied for the first half of 2007 using my covered call strategy. Very similar to 2006 - a divergence with the benchmark indexes, as seen from my comparison charts showed still no progress in the first half of the year.

BUT THEN. . .again similar to 2006, the Stock Market was setting up for another correction. My positions were getting stopped out as I gradually moved to cash which normally is positioning just prior to a somewhat prolonged fall.

That was going to again be my chance to prove to the ET world, etc. that I do what I say and will gain in out-performance to thereby target the next bottom and have another "phenomenal" year.

However, the central bankers would have none of it. A surprise discount rate cut and vehement Fed intervention for the next year-and-a-half prevented that wash-out and then sent us into a PROLONGED bear market.

We are still not sure that we have bottomed. Gains from August to year-end were not forthcoming and in fact for the first time sent me nearly even with the Nasdaq for that WHOLE YEAR.

Yet, being in cash from early 2008 I not only gained the 25% or so out-performance for the previous year. . .but quickly gained another 25% out-performance for 2008!

That felt good since I was under the microscope at ET and hadn't made any progress comparable with the past in a 6-12 month period. It all came back to me though like clockwork.

The only tradable rally for my strategy was the Spring '08 - which I caught and posted all trades LIVE here at ET: Managing Funds for a Living

http://www.elitetrader.com/vb/showthread.php?s=&threadid=94764

I also had a strategy that sold WOTM (way-out-of-the-money) index options off of bottoms and tops as we entered corrections that I had worked out on paper and started a thread at ET to monitor this: Naked Index Calls = $$$$

http://www.elitetrader.com/vb/showthread.php?s=&threadid=96547

So I had been at ET for about a year and had demonstrated how to maintain value from funds when things went topsy-turvy with a high growth approach (remember, if "hundreds of percents" has been gained over a few years - during the bad one you DO NOT want to lose much. . .if you plan on managing a compounded rate for 5-20 years.)

I also showed how gains can quickly be made using covered calls once a rally is targeted. Unfortunately, it only lasted a few months but still beat practically everyone else.

Also note that markets periodically do provide multi-month rallies - in fact many during each 5 year period. So PATIENCE was key throughout the last 2 years!

But I got a lot of flack - not only because I am selling covered calls adding the extra commission (selling naked calls only take up a single transaction cost) - but I was told simply going to cash and retaining past gains was not good enough. Investors want you to make gains during the downtrends. My multi-year APR spoke for itself, but this seemed to be ignored.

Add it up. . .

2006: +34.17%, Nasdaq +9.52%
2007: +11.56%, Nasdaq +9.81%
2006: +27.86%, Nasdaq -40.5%

If you had invested $200,000 with me, it would have grown to $381,864 in just 3 years. That is a 90.93% return USING COVERED CALLS during a time when the market fell 28.44%!

So much for market-beating hedge fund results.

So far so good as we are well on track with the stated 50% CAGR! Furthermore, the best is yet to come with an imminent new bull market in the throes.

(You will soon learn that this was not the half of it.)

Also sending trade alerts was not the same as an independent audit from Collective2, so I began a hybrid approach in May 2007 that coupled covered calls with selling naked index options, which tracked fine. . .

paysense · Apr 12, 2009

To continue, despite some difficult market conditions while I was tracked at Collective2 and EliteTrader for 6 months from the end of May until the end of November 2007. I also graphed using my own excel charting each daily bar and Nasdaq comparison chart.

http://www.elitetrader.com/vb/showthread.php?s=&threadid=94764&perpage=40&pagenumber=11

My strategy that combined covered call trades during flat-to-up market periods with WOTM (way-out-the-money) index spreads to try and capture each major trend - immediately went into drawdown as the pending summer correction was halted by the Fed surprise move.

I didn't immediately buy into the ensuing, brief 2-month "rally" (despite my signal, yes folly), but DID track fine as I updated my excel snapshot coupled with the Collective2 equity graph.

Notice, gains were being made off the lows and the majority of equity was preserved. The CC strategy (50% CAGR) was being combined with the Index Spread strategy to create about a 75% CAGR.

You see, those 15k pullbacks on the way up from the lows over those months was the intended "volatility" of the combined strategy (coupled with those market conditions) because with another 6 or so months, equity - with a decent few month trend - would first off be preserved and then with much certainty jump or continue to traverse a significant amount up to about the $150 to 175k level.

You have to remember that to look at my near 10 year track record using covered calls, you can see that with accuracy and consistency I will phase into uptrends and out of downtrends - - which were to then be used to capitalize using the bearish index spreads.

Then I blew up. . .

paysense · Apr 28, 2009

As can be clearly seen, this budding fund manager had indeed obtained an ~6-month track record from an independent auditor in the form of Collective2.

Not only were more than 7 years of past results demonstrated at my website with covered calls nearly exact with audited results, but for the first time a WOTM index option (spread) strategy was included to help enhance results.

I use past covered call performance charts - contrasted with comparable market periods. . .to easily verify that current results are on track. After all to obtain a consistent long-term average, we can have no periods that crush past results.

In other words, if some periods do not provide gains - we at least want to maintain most of past gains and still out-perform the benchmark indexes. This is very apparent.

So during this nearly 6 month period, not much was provided with CC gains however drawdown was contained - in keeping with similarly (prior) market periods. Futhermore, gains (from the lows) were being steadily made or "enhanced" using the index spread strategy.

Gains do vary with each diverse and varied market period, but overall a 50% CAGR is acheived with my covered call approach and an added 25% - for a 75% total can be obtained using the combination.

I believe I demonstrated this and a continued upward trajectory could have been perpetuated for years had I not stumbled upon the an instrument called futures.

No I hadn't been (much) aware of these, however what would you do?!? I knew I had a continuous track record and skill to phase into and out of mid- to long-term market trends, but was using covered calls which required more management of positions and commissions. Furthermore it did not capitalize on the downtrends.

Yes, the index spread strategy gave an answer for this and was working well enough. . .but the sum total of the trades managed was adding up. Also, I did a rough calculation to verify what a relatively small margin amount with futures could have done with each market up and downtrend I had accurately targeted.

The result I got led me (as it would you) to decide to suddenly move right into optimizing my basic "trend-following" strategy, honing the use of index futures.

HOW DID I BLOW UP!?! Well at the time the market again started to shift madly. I opened a futures position (with the trend) that initially went encouragingly very well (in all truth, TOO well) that then dove a bit too much from the new high. I do not remember what I did - if you do not know entirely how to manage these highly-leveraged instruments you can quickly run into trouble, but with the sudden volatility I made a wrong decision and the leverage instantly made things much worse and basically destroyed what I would consider a decent equity curve that contained undue drawdown.

As it looks today - hey! we are beating the market (lol),

and at that time (note: futures contracts were only used at the very end),

So, unfazed, I closed the account and set out to efficiently learn everything I need to make this work for me. I continued my strictly covered call system at my website that continues to perform extremely well to this day, however I was intent on KNOWING that eventually and soon I would greatly increase my CAGR (compound annual growth rate) - perhaps 4-fold - with much less work and the same long-term consistency!