A Chronicle Into What May Be a Most Lucrative Investment Journey

Discussion in 'Journals' started by paysense, Mar 27, 2009.

  1. This is an attempt to chronicle my journey as a trader over the past 10 years.

    It began as a cursory investigation as a newbie trader into what may very well become one of the most powerful and lucrative investment methods ever devised.

    It all began in 1998. I was working in Silicon Valley as an engineer amongst many technicians that were following the daily movements of technology stocks.

    Having a minor in mathematics, I figured if there was anything to this - I should be able to determine if any value could be derived from trading versus investing.

    So I set out on my course, looking for a method that may be able to consistently produce above average, market-beating results...
  2. So I collected a number of texts that detailed various trading strategies that were supposedly providing the possibility of excellent <i>results.</i>

    Results are what truly matter. After all, if one is to become a devoted student and practitioner of trading - in the end, you want to attain the desired goal.

    For this endeavor to be worth my time and energies I figured a decent annual average coupled with a comparatively low drawdown would need to be accomplished for many, many years.

    I also determined that I desired the daily routine to achieve the system results to be well-contained. I was a working professional with a family and did not want this side effort to be all-consuming...
  3. After some initial investigations, I determined that most of what was purported as the "holy grail" had little chance of ever being such.

    I dismissed these and focussed on what seemed <i>may</i> provide a desirable outcome. After a bit more study I determined that the approach of selling <b>covered calls</b> may lead to some very desirable results.

    Not only did some stocks have high monthly option premiums. . .but the possibility of compounding these had a <b>potential</b> great reward. As they say. . .if you shoot for the sky, you may end up at a decent height!

    I know many here know what covered calls are since it repeatedly is pointed out that selling <b>naked puts</b> is a better strategy. The reason being that with a covered call you need to first purchase stock in 100 share increments (hence you are covered) before you are allowed to sell the call option to retain the premium.

    With the naked put strategy you need a higher level of account approval but can simply sell and retain the put premium thereby making one trade and reduce commissions.

    However for those that don't know how covered calls work, there are a good amount of company stock on the exchanges whose call option contract price is on the order of a 10% return. By selling the option you keep the premium, while all you need to do is hold the stock in your account for about a month.

    Example: Say a stock is currently trading at $20 a share. Furthermore, say the next month call options are trading for $2 a contract. Since each contract is equivalent to 100 shares of stock, simply buy the stock and sell the options to make a 10% monthly return - and this can be done in an IRA account!
  4. Why is this categorized under Index Futures?
  5. Seems simple enough and my mathematical mind began to quickly compute that a 10% monthly return is in excess of a 200% annual return!

    That would mean that a $10,000 account would grow into $1,000,000 in less than 4 years! Exciting stuff, but too good to be true?!?

    You be the judge...
  6. And so I embarked on my paper-trading trail with a set of simple rules to guide me.

    Take an imaginary portfolio of $20,000 and invest in 5 different stocks to lock in an approximate 10% return selling covered calls.

    I set up my method with a <b>stop loss</b> whereby I closed out the position IF the stock fell by the same premium amount received from the option sell.

    This routine should set me on the path to riches - after all covered calls work best in both flat and up markets!
  7. As Murphy (law) would have it, just when I set up my routine and started logging into a spreadsheet all of my trades. . .you guessed it. The market caught the "Asian Contagion" and went into a sharp and severe downturn.

    Nearly every stock went with the market by the wayside and hit my stop targets. I was jumping in and out of positions so fast it would make your head spin.

    Very quickly I was down 30% and was licking my wounds. How did this happen and what went wrong? More importantly, what if anything could be done to avoid this in the future?
  8. Stay tuned. . .we will soon arrive to the present and the use of index futures.
  9. GTS


    Before anyone gets too excited thinking Gilbert is going to share the holy grail with you, take a look at his performance at C2:


    Pay special attention to all the closed systems at the bottom that he drove into the ground.

    Check out this system, cryptically named 29417555:


    Notice that it was originally called "KC Partners" and then "KC Elite" (before it cratered) which are coincidentally names that other systems have.

    He creates systems, runs them into the ground then changes the name and starts new ones. Luckily C2 is wise to that game so it keeps the history of all names and you can't just delete/disavow a bad system once you've trashed it.

    It all brings back memories of that first post back in 2007 (http://www.elitetrader.com/vb/showthread.php?s=&threadid=94764&perpage=40&pagenumber=1) where Gilbert claimed "What we have is very consistent, comparibly low risk approach to exponential growth that launches into the stratosphere in a very short while. Loss periods are similarly contained through stops and emulate pullbacks as (mildly) seen from this chart. So you see downside is contained and upside predictable (as long as people continue to work and companies continue to grow profits: )."

    He then proceeded to try and fail to actually reproduce his amazing results on C2 again and again and again (until finally the thread was closed)
  10. Well, no one said the <i>evolution</i> of this trader/ money manager was a cake-walk or would be easy.

    "It is what it is." So be patient as this chronicle will eventually touch on all of the points. But let's start with 1998-1999:

    As you can see, the market and equity dropped for 4 straight months. It wasn't until October '98 that I realized I had to implement a new strategy parameter. After all I did not know the market was going to move powerfully off a "W" - shaped double-bottom.


    I needed to improve my plan to include and prepare for the inevitable <b><i>prolonged</i></b> (circa 2008-2009?) market downturn or Bear Market.

    And so I determined that I would NOT invest with my covered call approach during market corrections. I would simply wait it out in cash until the market "confirmed" that institutional or BIG players were moving back into stocks.


    This proved to be a boon for my investment approaches for years to come. The above graphic - on a percent basis - may not look as "pretty" as the value chart above. . .but they are the same.

    I would now be able to keep my equity solidly above the market averages - even during the inevitable downturns. Then "outperformance" would come into play.

    As you can plainly see, with an uptrending market the power of compounding a decent monthly return can seriously outperform or "beat" the market averages after just 6 months to a year.

    Again, although these initial results were very promising. . .this was all still done on paper - - but with impeccable integrity to properly uncover the end result. Next we will be tackling how this much-improved strategy method tackled the onslaught of the bursting tech bubble, the last bear market. . .
    #10     Mar 28, 2009