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Strategy

UPDATE 09/07/2017

In my post “A bitter return to Lending Club” I wrote that I would be returning to investing with Lending Club but this time I would be very conservative in selecting notes to invest in.

Originally, I wanted to invest only a very small amount of money ($25 dollars a month) but later on, I changed my mind a bit and decided to invest more ($100 dollars a month). In this strategy update I would like to write down my strategy for investing in Lending Club:
 

Here are my Lending Club screening & investing criteria:
 

1) deposit $100 per month

2) invest only $25 per note

3) invest only in “A” and “B” notes

4) invest only in 36 months notes

5) invest in notes with loan payment to income less than 10%

6) invest in notes with employment more than 2 years

7) invest in notes with debt-to-income less than 25%

8) invest in notes with no public records

9) invest in notes with credit score more than 700

10) invest in notes asking less than $10,000 dollars

11) if available cash is sitting in the account screen loans daily as long as all free cash is invested.

12) if no loans meeting criteria show on the list, skip that screen and screen next day.

13) reinvest all interest to new loans.
 

UPDATE 03/01/2016

Time to update my strategy. Again. I know it sounds weird but yes, I need to update my strategy, because the one I wanted to use showed up to be a dead end.

I was trading naked puts at some point against dividend stocks but later I turned into spreads. When analyzing why I found out that I started losing money as soon as I deviated from my strategy. The biggest issue was that I started trading stocks I didn’t want to own, so I started defending my trades, rolling them converting them, doing whatever I could to avoid assignment.

So I turned into spreads against SPX hoping that that would be the right strategy to make tons of money and not to worry about being assigned. Of course, SPX cannot be assigned, right?

I was losing money even faster and I couldn’t stop it.

It is time to go back to basics and start with what originally worked well, but this time stick to the plan.

I will be trading options against dividend stocks as of now only putting the SPX spreads aside for the time being.

So I am back to trading options using dividend stocks as underlying and my account is again growing up fast and strong.

How do I analyze trades and select stocks to trade?

First of all, I do not do technical analysis as a cartoon comic book as some traders do it. You can spend hours and hours creating nice and beautiful charts concluding whatever outcome or prediction but it doesn’t work. By doing so, you are setting an expectation and that results in disappointment. Believe me, I was there. I was trying to analyze movements, potential reversals, supports, resistances, all sorts of levels, woodoo lines, tree lines, tops or bottoms, or all sorts of patterns to be used as a prediction of the future move. I wanted to be on the right side of the market. But I got nowhere. It was only a comic book with a huge disappointment at the end.

Then you end up blaming FED for rigging the market, high frequency traders, or other investors either panicking, being too optimistic, or irrational, or Yellen saying this or that, or any analyst predicting this or that. But there was only one person to be blamed and that was me. All charting, was a tea leaf future predicting and results were worse than mediocre.

So I do not predict or forecast the future. If I wanted to forecast, I would get a job in a local weather station or TV.

This doesn’t mean however, that I do not use technical or fundamental analysis. I do use them. But I used them in the most simplistic way possible to determine a trend and fundamental reasons for the stock being in that trend. I do not predict at which level the trend ends, turns, drops, dips, bumps, jumps or make a pirouette. I trade that trend as long as it works. When it stops and reverses, then I change the strategy to follow a new trend.

To see my trades and trades of other traders almost online and with explanation why we are taking it, you can join our trading group on Facebook and see for yourself. Or you can join us and post trades for others to to learn from you.

 

 · Accounts

 

First, let’s review what I am doing and that I am not that crazy as you may think when reading about my trading of options.
I use several accounts and my options trading was just a small part of the entire investing empire I have. But not anymore as lately my options trading kicked off and skyrocketed. It is now a very significant part of my empire and generates an increasing and solid income.

 
TD trading account
 

This account is reported on this blog This is my trading account I use primarily for trading options. I will not be buying and holding stocks in this account unless necessary as part of my trading strategy. This account’s purpose will be generating income to be invested in my other accounts and abridge my early retirement income before my 401k and ROTH kicks in.

 
401 k account
 

This account is not reported on this blog I invest in a 401k retirement account. As of today I contribute 7% of my income and every year when I receive an increase I increase my contribution by 1%. I also get 3% employer match. Choosing investment vehicles in this account is limited but I could choose funds which pay large distributions or dividends (as much as I could) which can be reinvested. I rebalance this account every 6 months.

 
ROTH IRA account
 

This account is reported on this blog This is my dividend growth investing account. I primarily invest into dividend growth stocks and reinvest dividends. I will also use options strategy but not as my primary goal.

 
Scottrade account
 

This account is not reported on this blog I opened this account because I loved the FRIP program. It is not my primary investing vehicle, but I really love to play with the FRIP. It is a play money account. I invest into dividend stocks and use FRIP to be buying new shares and new stocks. I am just curious how this account would build up overtime as I am not contributing any money to it. I just deposited $600 dollars starting money in it about two years ago and let’s see how this works out 20 years from now.

 
Motif investing account
 

This account is not reported on this blog This is yet another pet account to me. It is not a primary investing account but I loved the concept of creating my own mutual fund and let that fund play out on its own. It is an excellent idea utilizing fractional investing. There are many stocks I always wanted but couldn’t afford to buy them or didn’t want to spend $50 dollars only in a regular account (like ROTH) due to high commissions and fees. Motif allowed me to buy those stocks and now they are growing and generating income.

 

 · Put selling strategy

 

The strategy is very simple. I am selling naked puts against dividend paying stocks.

 
You must trade this strategy only against stocks you are willing to own.

1) Sell puts against dividend stocks as long as you get assigned.
2) If you get assigned, keep the stock and sell calls against the stock
3) Sell calls against the stock as long as you get assigned
4) While waiting for assignment collect dividends.

 
 
In my TD account when I get assigned to the dividend paying stock, that will be the only time I end up holding that stock in the trading account. I will only hold it as long as I get the stock called away from me when selling calls against that stock.

I will use this strategy in my ROTH IRA account. The only difference is that I will be selling calls only against shares acquired through the put selling strategy.

For example, if I hold 100 shares of an XYZ stock as my core holding and I sell a naked put against that stock and get assigned I will end up holding 200 shares of that stock.

All dividends from that stock will be automatically reinvested into my core holding (increasing my core holding) and I will be selling calls only against the acquired 100 shares, so if I get called away, I still keep my core holding (possibly increased by dividends reinvesting program).

 

 · Dividend Growth Strategy

 

I will search and invest into dividend growth stocks and reinvest dividends primarily in my ROTH IRA account. I will be buying these stocks and hold them forever (if possible).

To purchase new shares I will use an OTO strategy (contingency order or “one triggers other”) which trails the price of the stock. This technique allows me to buy the stock cheaper.

During my accumulation phase when my account is small and generating less than $1,000 dollars per month in dividends I will use DRIP program for reinvesting dividends.

After my account grows larger and I start earning more than $1,000 in dividends I will stop DRIP program and start using dividend for selective re-investing.

The reason for $1,000 limit is commissions and fees. Unless you can buy shares for free, it is better to buy with $1,000 or more. If you use less, it becomes expensive.

To choose a dividend stock I want to invest in I created a screener which selects the most undervalued stocks for me.

 

Of course, this screener is not necessarily a buy list I will be blindly investing into stocks which are listed as “buy”. I will use those stocks for further evaluation.

 

 · Money distribution

 

After I grow my accounts enough to start distributing money I will use the following rules for money withdrawal or reinvestment.

 
In my TD account:
 

For every $1,000 monthly income I withdraw $200 for my own use and spending (paying bills, debt, vacation, but also buying dividend stocks for example in Scottrade account, or saving to my ROTH IRA account). After I reach $10,000 monthly income, I will take out 50% for my own use. The rest will be left for taxes and account growth.
Still long way to go!

 
In my ROTH IRA:
 

After I reach $2,000 monthly income I invest 50% of that income into dividend growth stocks. The rest will be used to grow my options trading portion of the account.

 
 

See my old strategy >>



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4 responses to “Strategy”

  1. David Haley says:

    What are your thoughts on selling puts on a 3x fund such as TNA?

    • Martin says:

      I guess it would by like trading any index. I would have to watch it for some time to see how its options react to the market moves. The only thing I do not like is that it is not marginable so trading June contract 60 strike you make 53 premiums and you will need 5,346 margin to trade it. Too much money for not much music.

  2. Steve says:

    Hello,

    I’ve just found your website and read several posts. You’ve done a wonderful job of sharing and imparting your knowledge in a clear and concise read. Kudos for your commitment to assisting others in their efforts to trade options profitably.

    One question I had though in your SPX trading strategy relates to the 40 dollar wide strikes you use. Your discussion of the logic in using the wider strikes seems to neglect one important metric in designing trades and that is margin impact.

    If I choose to trade a Nov1 15 iron condor in SPX with short strikes of 1700/2200, using your 40 dollar wide strikes I get a trade that looks like this – 1660/1700/2220/2260. Using TOS, I right click on the trade, hit “confirm and send” and a dialogue box pops up which shows me I will get a $202.01 credit after commissions with a resulting buying power effect of ($3,797.99) which equates to a 5.31% return on risk.

    If I then use the same short strikes but make the strikes 5 dollars wide, I get a trade that looks like this – 1695/1700/2220/2225. Now I adjust the number of contracts so it comes as close to the buying power effect above of ($3,797.99) and I get 8 contracts. Again, opening the dialogue box which summarizes the trade, it shows a credit of $246.01 after commissions with a resulting buying power effect of ($3,753.99) which equates to a 6.55% return on risk.

    Isn’t that getting me more bang for my buck? Please consider the above scenario and see if I’ve missed something.

    Keep up the good work.

    Steve

    • Martin says:

      Hi Steve, thank you for you kind words.

      To you question, it is a matter of priorities. Yes with 8 contracts you get about $44 more or 1% more, but your risk losing entire credit is a lot higher than mine. As I tried to describe in the post, 5 dollar spread has a higher likeliness of the price smashing thru both strikes than 40 dollars spread. It is the same with 50% credit capturing strategy. When I receive $180 credit, why liquidating it at $90 and not keeping the entire credit and letting the trade expire worthless? Well, the numbers are against you and you will be better off with a wider spread and closing it at 50% credit although it looks better otherwise at first look. And actually it is not. Trading 5 dollars spread is OK if you do not have that margin available (I do not have it, so I only trade 10 dollars spread and working towards 40 dollar spread goal). So the entire spread width meaning lays in probability of success and not the immediate gain. I personally would prefer lesser gain but lower risk and higher probability of success than 1% more gain and a chance that if the trade goes against me I have higher chance of losing the entire risked spread.

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