Leveraged Theta

Friends, kindly answer the following, I’m curious:

1. What is your minimal acceptable rate of return, annually, pre-tax? (for those who don’t know, a MARR is what you would use to discount your own cashflows.  That is, what is money worth to you?)

2. In the following statement, what is X, Y, and A, B?

“I think, for the general public, it would take a new, green, fund runner X years returning greater than Y percent per year (after fees, and pre-tax) for most people to invest with him. And A years at B percent for me to invest.”

You don’t have to read on…in order to answer.  My answer is below.  Also, sorry, I’m going to get Disqus soon.

Personally, I’d never put anybody else in charge of my money – but if his track record was greater than 35% in bear and bull markets for +5 years, I’d be trying to learn from him, and considering investing.  I think the general public just wants a lack of volatility, as well as a good track record, I’d guess it would take +14% for 5 years for the general public.

I’m going to be ripped away from being able to spend ~10 hours / day on the stock market, in July.  I’m looking for a way to concentrate less on the markets, and still see higher than my MARR (minimal acceptable rate of return), 18%.  I believe I’ve found my strategy that I’m going to put to work, and test out. 

I’ve been really looking, and considering the permutations of a buy-write strategy combined with a derivative market making algorithm using SSO (double long the S&P). By the numbers, and using the last 25 years as history, it looks really easy to make +20% (almost guaranteed), and likely to see rates consistently as high as +35% annually.  Since it’s a buy-write, it’s by definition, less volatile.

Eg.

Let’s say I spend $50K, leveraged 1:1.2, so @ $66.40, I can buy 900 shares (1.2 x $50K = $60K to spend)

Wait patiently at the ask, trying to sell the $69 September calls for $7.70.  Given the average year the S&P has returned +10%, for the last 25 years, in the long run, it’s likely to see a 2% rise in 6 months, and the shares get called away.  (2% on the S&P will yield approximately 4% on SSO).  If that happens, the profit is $10.30 per share, or $9270.  After subtracting interest to borrow the leverage, it yields a return a little under 17% in 6 months.  Add a market making algorithm to capture the spread on the calls, and it bumps up the return quite a bit.  Then annualize  it, and…well…wow.  Of course, the last 6 months, this strategy would have been brutal, but the covered calls would have cushioned the losses greatly to a little less than brake even – hopefully.

Thoughts?

This is funny, overheard at western. It’s sad, it does nothing about the stereotype that is Western University.  I’ve never been a believer in stereotypes, after all, they are derived from the wisdom of the masses.  When I came to Waterloo, I remember walking around in first year, I noticed so many kids making reference to jokes about the natural log, electrons, and things that were non-linear.  We would get drunk and wonder about funny names for molecules, or get even more drunk and talk then fight about the differences between statics and statistics (of course both were slurred, after we smelled a few beer caps)…and my personal favorites included all discussions and references to random rates of change.  Within weeks of first year, I knew I was going to enjoy my stay at Waterloo.  And, I wouldn’t have changed them for the world.  It’s been fun.  33 days and counting until finals are over…almost half a decade later.

I went long, highly leveraged gold, early 2007 – got out when we breached $950/oz, a week or two ago. A few days early, but still not bad.  Smarter men called a local top better than I, which was only 2 or 3 days later.  I proved to myself that it’s actually possible to triple your money in less than a year, but it’s NOT for the faint of heart.  I won’t likely won’t ever try again, my life has been a mess watching and following it. I say that, but I’m a bit of an adrenaline junkie (not a cowboy, there’s a difference) so I’m probably not being completely honest.

The play is a story to tell, and one can quickly look back at the headlines.  I was long Northern Orion 2010 warrants, they turned into Yamana 2010 warrants.

I can’t stress this observation enough;  I’ve noticed for a few years now, the last 2 weeks of December, and the first 2 weeks of January, everybody and there dog, comes out with predictions for the year.  When there is a consensus amongst the predictions – jump on it, because the market will make it happen.  The prediction this year was $1000/oz in 2008…it’s only march and we already saw it come true.  I also twittered that I’m shorting puts in Yamana a bit ago, I went short July $19 puts for $2.50.  It turned out-bad timing, but I’m not leveraged, I’m long. It’s because I still think there’s upside ahead of this short term pull-back.  There’s a difference between being 3:1 bullish, and 1:1 bullish.

I also have had a horrible call.  Sandvine, which I’m sadly holding…but I knew getting in it’s a 10 year story - so I’m giving it +10 years. I’m down pretty big right now. I have faith in Waterloo.  I have faith that the Internet is growing too fast, and solutions need to be sold to fix it, I hope Sandvine steps up as a leader.  That’s all I’m doing – hoping, is that smart – probably not.  Should I have sold with profits a long time ago – yes.  Live and learn.

I’m now calling, and re-iterating that we’re seeing a market bottom here real soon.  Ie, sometime in the next month or so, if not already behind us (this week).  Good stocks are getting cheap, we’re going to capitulate, but I see a light at the end of the tunnel – and a bull is on it’s way.  Smart men a buying.  Buffet just made his largest purchase of his own stock, which is essentially a hand-picked S&P. One fund runner I know is launching a new billion dollar fund starting in May.  He picked may, to fix his broken rep.

I’m so pumped to be working at Deloitte, here take a look at their 2008 Economic Predictions.  It was published in January, but the year’s not over, even if everything is coming true already – it’s still cool.  I’m going to be working right along similar teams working on similar stuff.   Also, I guess this is worth sharing in the same post, I picked up this months ago: 10 2008 Pridiction.

I couldn’t not watch the action today.  I swear I’m taking the next few days off from the markets – it has been intense.  I need to catch my breath and it’s only Tuesday.

I got out of SSO for a nice quick buck, shortly after the open today, I didn’t think we’d see any higher levels after the FED.  I really felt, so did dogwood, that the market was going to sell off if we didn’t see the full point.  I tweeted, the markets had an 84% chance of a full basis point cut.  Markets were violent, but  bounced back to the previous highs for the day – so I guess our logic was off.  Live and learn.

Don’t get me wrong, soon I’m going to go long SSO, for the long haul.  First little sign of real strength.  Could be soon.  Could me months.

I’m long stuff, stuff I should have sold. I want to believe in present value.

I’m desperate to call a bottom, I want one so bad. I just about can’t take it anymore – That’s bullish. But this market is insane right now. No confidence in anything. As ‘they’ say, when there is blood in the streets, buy Real Estate. Right now I say – there’s bears on the street, GET OUT THE TRAPS! There is no metaphoric value there, don’t try to find it, sorry for wasting your time.

Here are those asinine predictions:

1. The FED gets the Samurai swords out (duh this is almost guaranteed now…why is this even a point…you should move onto the next one…the market should NOT rally on this, but it will since people are dumb)

AND

2. The lows, put in sometime this week, on the S&P 499 holds until I can’t remember this post.

AND

3. That same Standard End Poor turns out to make us End Rich; we see 1600 before I get married.

AND

4. Lehman Bros. is the LAST bank that bends over, and takes it, in 2008.

Basically…I want to see CL be turned into CS.

I got an idea, just for fun, I’m going to make Andy a one way bet. I know he’ll take it. If all of my dumb predictions come true, I’ll send him a bottle of bourbon. If not, oh well, he’ll drink his own bourbon.

By the way, lets cross our fingers for Thiago Avila, who after a 2 day interview, may or may not get a job offer at Morgan Stanley…now…since he’s likely competing with a bunch of ex-BSC owners. But not too hard, cause Microsoft still has a go at him in an interview this Thursday – GOOD LUCK BUD! Whoa just realized it’s MS vs MS.

Disclosure – Way Long AVLA, buying SWAN on dips haha.

I can’t wait to have a large enough network to harvest the wisdom of crowds on command. Those who have it, have earned it. Kudos.

So…to summarize the preliminary results of this poll (the first 11 comments).

Looks like nobody who voted thinks Bear Stearns is going to stay independent. And the leaders like Mathew & Peter think, there is a moral flaw in the fabric of humanity if they survive because of the fed. I concur. The rest of the results don’t surprise me.

1. 0% of voters think Bear Stearns will stay independent

2. 40% of voters think february lows will hold

3. 37.5% of voters think the fed will cut 1 full point.

4. 66.7% of voters think the market will close higher on Friday than Monday.

I broke answers down into boolean, that is, yes or no. Anybody that was wishy washy or qualitative without specifically answering, was not included for that single question. I’ll update this post when more people comment…I love analytics.

Disclosure – Long LDZN (Find out what this means)

Everybody who knows me, knows how much I dig demographics.  I found this interactive flash map of the US census data, through Max’s site, while it might be nothing new, it’s new to me.  I’m adding it to my fun links, scroll way down.

The only thing America has left to sell the rest of the world is it’s flare.  The blood of American icons and fads will be the exports for years to come.  Case study 1: All rolled up into one nice blog and T-shirt company.  That’s right, the front door of this “multi-million” dollar enterprise is a blog.  Filled with stories, inside jokes, cool pictures, communication to customers and ads for their products.  You can get a lesson in marketing, margin, costumer satisfaction & branding power all from somebody that inspires and somehow makes me want to spend $38.99 + shipping and handling to Canada for a T-shirt: Johnny Cupakes

He says he “won’t sell out” but I’m looking forward to the IPO. Sooner the better.