11 Ways The Village Id-Vestor Creamed the Market in 2015

By | January 04, 2016 Leave a Comment

Winning At Money Feels Great

It's that time of year when you sit back, and begin reflecting on your successes and failures of the past year--especially your financial ones. As you do this, I want to congratulate you on your wins. On your failures, I exhort you:

Do better next time. And don't get creamed ever again, starting now.

What needs to change for you to win? Do you know where every dollar of your money is going? Do you know how much you're spending each month, and what's left over? And how well the "leftovers" are growing?

If you answered "no" to anything above, you need to change. RIGHT NOW. Getting your personal finances straight is the first step. Saving comes next. Investing comes last, since you won't have any money to invest at all unless you can manage and save money well. This the fun part. It's the part where you get to cream the market, instead of it creaming you.

It's been a fantastically successful year in my household money-wise, by almost any standard. I didn't win the lottery, but I got the next best thing:  I started an awesome new job early in the year, which gave me a higher income, lower expenses, less travel time, less stress, a better work-life balance, and greater potential for personal and professional growth.

We've paid off lots of debt, saved up large chunks of change, ramped up our debt-payoff plans for the near future, and staked our claims for financial freedom in the coming years. The future is bright indeed.

But you probably don't care much about what I did personally--you're here on this blog for you. You're here to glean a little bit of knowledge, sharpen up the old financial noggin, and you're looking forward to the shiny veneer of a financial household and life that's strong, steady, and impregnable to any financial Moby Dicks ready to belly flop onto your ship's deck. A life where money works for you, instead of the other way around.

I've published quite a few articles this year about how to best grow your wealth safely, incrementally, and intelligently. Today, I want to review some of the recommendations I've made, and some I haven't, and look at how much closer to financial freedom you might be in the future if you stick with me.

Trade Recaps - A Few Things to Consider

By browsing through my list of all past articles, you can pick out a handful of times I wrote about ways the Village would cream the market by investing with stocks and stock options.

I've long said that the safest investing strategy is to marry the concepts of investing in stocks, and speculating with options, to capture the long-term benefit of capital appreciation and compound interest, while also taking advantage of short-term market moves, and volatility, to juice investing returns by double digits every year.

This is what I've been doing, and you should do it, too. You'll see the proof of "why" in a minute.

What I'll do today is outline the "speculation" side of things.... ways I've used options to give me returns far above and beyond what the general market gave us in 2015--which was -.7%.

Each of these position gains I list below include adjustments for trade commissions paid to my broker, so nothing is inflated at all.

Portfolio Returns

I don't always have time to write a new article for each and every new investment or speculation I make on my own accounts. For that reason, if you look over the below list of positions and see some which you don't remember reading about on the blog, don't fret... it simply means that I didn't write about it. But I still made the trade. On some I made money, others I lost it.

I calculate the gains based on the principal of "annualized returns." This helps me to compare any investment to another "apples to apples." For questions in detail on how this is done, see this article I wrote. 

Here are the positions I took this year in energy, tech, gold, oil, volatility, and inverse leveraged funds over the course of this year:

  • PHX (Panhandle Oil & Gas)
    • 5/27/15 - 6/15/15, Equity only, 5.1%, $104.2
  • INTC (Intel Corp)
    • 7/20/15 - 8/21/15, Covered Call option, 2.04%, $60.28 
    • 8/24/25 - 8/28/15, Long Call option, 21.04%, $19.82
    • 8/28/15 - 9/25/15, Covered Call option, .72%, $21.28
    • 9/28/15 - 10/16/15, Covered Call option, 2.07%, $61.29
  • GDX (Market Vectors Gold Miners Index)
    • 9/25/15 - 10/16/15, Covered Call option, 3.69%, $53.29
    • 11/4/15 - 11/20/15, Naked Put Option, .59%, $30.72 
    • 12/28/15 - 1/22/16, Covered Call option, 1.14%, $33.28
  • CSCO (Cisco Systems, Inc)
    • 6/15/15 - 7/27/15, Naked Put Option, 1.25%, $35.27
  • USO (U.S. Oil Fund)
    • 11/4/15 - 11/19/15, Naked Put Option, $-168.46
    • 11/19/15 - 12/18/15, Naked Put Option, $181.28
      • Combined = $12.82 gain
    • 12/18/15 - Shares were assigned, still open, cost basis = $13.88
  • VXX (iPath S&P 500 VIX ST Futures ETN)
    • 9/17/15 - 9/17/15, Long Call option, 8.79%, $5.82
    • 10/9/15 - 10/14/15, Long Call option, 15.27%, $27.82
  • SDS (Proshares UltraShort S&P 500)
    • 10/16/15 - 11/20/15, Long Call option, -100%, -$72.59

Total Gains: $393.30

The returns don't seem like much, but I wasn't using a lot of capital to do this. In any case, it's better than you made over the past decade in your savings account.

These gains required about $3000 in available capital at any given moment. So, if I would have had $50,000 to invest instead of $3000, I'd have done much better dollar-wise.

To determine my gain for the year, I take the $393.40 I made, and divide it by the amount of cash I needed in my portfolio in order to initiate these trades. I've over-estimated that amount at $4000 in order to be conservative, since some of the positions overlap, and more cash was needed at times, but most of the time, we needed about $3000. But if I put the number at $3000, the gains would be exaggerated, and I don't want to do that.

Here's the math:

$393.30 / $4000 = 9.83%.

Remember, we only had trades opened for about 219 days out of the year, or 60% of the time. We calculate what our annualized gains would be (the amount we would have made if we replicated these trades over the course of the whole year) by doing the following:

= 1 / (219/365) * 9.83%

= 16.39%

So, from May 27 through December 31, we grew our money by 16.39% annualized.

That's not bad. In fact, it's GREAT, considering the loss I would have incurred simply by placing my money into the S&P 500 Index for the year (OK, with dividends, I would have made 1.1% last year, but that's no better than a savings account, really. By that comparison, I might as well not be investing at all, since my savings is guaranteed).

Also, the historical return over the past 80 years in the market is about 12%. So, I consider myself not only lucky, but somewhat skilled at executing these market-creaming strategies.

Look What Happened When I Broke My Cardinal Rules

In short, I got creamed.

You'll notice there are a couple of losses sitting in my portfolio. I hate to admit it, but yes, EVEN I LOSE SOMETIMES.

I only lost money doing the things I recommend no one do: selling naked put options and buying call options on volatile securities. In this case, they were USO put options, and an SDS call option, a leveraged S&P 500 index fund.

I don't generally recommend anyone without several year's trading experience and discipline undertake speculation by buying call options, or by selling naked put options on anything that's not rock-solid.

The reason I entered these trades is, I thought I had the market on those securities figured out. "Prices on oil just can't go lower," I thought. Well, oil did get creamed. Things can get a lot worse than we often think they can.

I held the USO options far longer than I had originally planned, and lost my shirt. I had to enter a new position to cover the old one, trying to turn it into a winner. I succeeded a little, but I'm still underwater a bit, but in the coming months as things roll forward, I am confident I'll realize the gain.

As for SDS, well, I expected the market to drop in the short term, but it ran up much higher than I thought within the time frame where the option was live.

Had I not been so stupid, I would have made $453 on $4000 in capital, 11% in 219 days, or 19% annualized.

Replicating These Gains

If you're crafting an investment strategy which involves the use of options, I BEG you: Do not undertake this with your life savings, or if you have just $4000 total to invest as it seems like I've indicated here. The market will CREAM you. How so?

Position sizing is the concept of making sure no single investment in your portfolio exceeds a certain percentage of the total amount of money you have available for trading. Following this rule ensures you don't have all your eggs in one basket when you drop it.

Taking a $3000 position in options trading, when you only have $3000-$5000, is foolhardy. Anyone doing that is bound to get burned. I wouldn't recommend doing it with anything less than $20,000-$30,000 in total investable funds. Having more capital would allow you to take 8-10 medium-sized positions across several sectors of the economy, which is enough for a small portfolio to be sufficiently diversified, avoiding risk.

So, if you don't have $20,000, save up until you do, then attempt options. Park your cash in some solid stocks I've written about elsewhere until you've saved/grown your money enough, and take the meantime to learn as much as you can about how all of this works.

The best way to learn is to read, read, read as much as you can to learn about how the general market and individual commodities and sectors function. Once you'd like to whet your feet, open a "paper" account with your broker, which most brokers such as E-Trade, TDAmeritrade, and Scottrade all offer. Paper accounts allow you to simulate trading strategies without actually putting capital at risk in things you don't understand.

As we move into the new year, I look forward to booking even more impressive gains.

The outlook for the market isn't exactly "rosy", as I've noted in a previous post, and I feel like there are going to be many opportunities this year for us to grow our money in unbelievable ways.

It's going to be a great year, so follow along.

Live long and invest,


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