A Balanced Approach for Portfolio Success

The Conservative Barbell Strategy

We recently reviewed a book written by Nassim Taleb called “The Black Swan”. In it, the author suggests an approach for investing called the Barbell Strategy. The approach is based on the concern that unexpected market events can happen with devastating impact to our portfolios. The Black Swan is about such events that are generally unknown, unpredictable, and cannot be planned against to mitigate losses. Because they are unpredictable they cannot be avoided, we need a way to protect assets as best we can against these unforeseen events.

The Barbell strategy uses the two extremes: Ultra conservative positions at one end and highly leveraged, speculative positions at the other end of the risk range. The strategy advocates having most assets in very safe securities like treasury bills and a small portion in high risk – high reward securities like options. The Barbell image is used to show assets at the two ends of the conservative / speculative spectrum. But the Barbell is unbalanced with 90% ultra conservative and 10% speculative. The concept is to invest 90% of the portfolio in treasury bills, therefore, the portfolio is fairly insulated from unplanned events like a Black Swan. In the event of some catastrophic event only 10% of the portfolio, which is invested in the high risk-high reward investments, is exposed to a loss. The high risk-high reward portion of the portfolio provides most of the returns under normal market conditions.

BarbellThe Barbell strategy is an alternative strategy to our popular RadioActive Trading approach. The RadioActive Trading techniques use a different tactic, but one that is equally effective in protecting a portfolio. RadioActive Trading advocates buying a high growth stock and protecting that investment with a put option. This is referred to as a Married Put strategy, but we use a unique setup to minimize risk, control time decay and lower the daily cost of insurance. The put option insures the stock position by guaranteeing a price at which the stock can be sold. The put strike price is positioned to limit the portfolio risk to less than 1% of the portfolio value. If there are ten holdings in the portfolio, any one maximum loss would only affect the portfolio by 1%, and if all ten succumbed to some Black Swan event, the entire portfolio would have only a 10% exposure.

Typical RadioActive Trading setup:AAPLbarbell

Buy 100 shares AAPL @     $113.10

Buy 6-month out 115 put @ $ 10.30

Total Investment =               $123.40

Guaranteed Exit (Put) =     -$115.00

Total At Risk =                 $ 8.40, 6.8%

The at risk amount in this RadioActive Trade is 6.8% of the capital invested. If you opened 100 shares of stock and 1 put option, you would have invested $12,340.00, with a total monetary risk of $840.00. In a $100,000 portfolio, this position would only risk 0.84% of the total portfolio, with only 12.3% of the total portfolio value invested in the position.

This setup offers limited risk, proper position sizing and an unlimited upside profit potential.

The RadioActive Trading techniques satisfy the ultra-conservative portion of the Barbell approach, but investors are more active in these positions as opposed to holding treasury bills. Our trading manuals, The Blueprint and the Home Study Course, help instruct investors on managing the position after it is established. By applying various income methods we can generate income against the limited risk position, reduce the initial at risk and potentially Bulletproof the position. ‘Bulletproof’ means we have canceled the risk on the position and have guaranteed a profit to the downside, while still leaving the upside open. Not all holdings can be managed into a bulletproof position, but many can. In any case, losses are limited and controlled immediately when the position is opened.

bulletproofWe have discussed two approaches on the conservative side of the Barbell: Treasury bills and RadioActive Trades, but what about the speculative side of the Barbell? The speculative side may include long calls or long puts, but PowerOptions has developed a credit spread tactic that might be considered also. The credit spread strategy uses a small percent of the portfolio with the goal of making a large gain in a short period of time. PowerOptions has developed a historically tested screening tactic that is primarily in cash and looks for short term credit spread opportunities that are capable of high returns. This credit spread strategy invests about 10% of the portfolio for about 5 days of time in VIX Bear Call Credit Spreads. These spread positions generally return 20% in that period of time. Opportunities to invest in these spread positions happen on average once per month, but there are often stretches of several months when there are no spread trades available to enter. But remember that you can’t lose your investments when in cash and when in cash you cannot be victim to a Black Swan.

Typical VIX Bear Call Spread:   VIX @ $17.51VIXBearCall

Sell 7-Day Out 20 Call @ -$0.90

Buy 7-Day Out 22 Call @  $0.55

Net Credit =                       -$0.35 

Risk = Strike – Credit =     $1.65

%Prob. Of Full Profit =       80.0%

If the VIX remains below $20.00 at expiration, both calls expire worthless. Although the Bear Call Spread offers a leveraged risk to return ratio ($1.65:$0.35, or about 5:1), applying proper position sizing and only allocating 10% of your total portfolio to this speculative position will still reduce your exposure to a Black Swan event or bad timing.

A portfolio setup in the VIX strategy may have many periods of time with low activity. Inactivity is difficult for many investors to tolerate as many investors want more action. Some investors act like gamblers in a casino who jump from one table to the other trying to break the bank. But investing is a business, not a form of entertainment. It takes patience and risk control to succeed in the market and an awareness that a Black Swan may show up at any time.

In summary, we have presented two ultra conservative investment approaches for 90% of a portfolio using:

  1. RadioActive Trading strategy using Married Puts -or-
  2. 90 Day Treasury Bills

As previously discussed, the RadioActive Trading strategy fills the same criteria for limiting risk as treasury bills, but it allows investors to be more active with trade adjustments and further limiting the already low risk.

We have also suggested the use of a VIX credit spread tactic to implement the 10% speculative side of the Barbell as an alternative to long puts and calls.

Applying these two techniques in a Barbell allocation provide a very conservative limited risk approach to investing through the use of options and proper position sizing, while still offering the potential for high returns. A portfolio constructed of these two strategies with the Barbell allocation will enable an investor to:

  1. Eliminate exposure due to Black Swan Events
  2. Realize regular income and leveraged profits
  3. Be active in the market without taking on large risks

Click Here to see more information on The Blueprint, the full work on implementing the proper Married Put technique and the various income methods to help Bulletproof a position.

Click Here to register for a 14-day Free Trial to PowerOptions, to see possibilities for the VIX Bear Call Spread approach, PLUS access to patented search and analysis tools for options traders.

Effectively Track and Manage your Options Investments

As we approach options expiration you need tools to properly track, evaluate and manage your options positions.  All of this can be done using the Portfolio tools on PowerOptions.

You can quickly create and enter new or existing positions into the Portfolio tools. Once a position is entered you can set Alerts to be notified when profit targets are hit or when losses may need to be managed.

As you track your positions you can link to the Position Analysis tool to see your current liquidation and future expiration values as well as view various roll out opportunities for your positions.

As you are viewing potential Roll Out Opportunities you can link to the Trade Simulator tool to see the before and after profit and loss graph of your current position compared to the potential adjustment.

This video shows just how easy it is to enter positions into the Portfolio and evaluate adjustments as expiration approaches.  Enjoy, and we hope you have a profitable expiration!

5 Keys to a Successful Option Spread Trading Plan

The key is likely to first develop a trading plan for your spread positions in conjunction with the tools on PowerOptions. A trading plan may consist of:

  1. What are my goals for monthly or annual income?
  2. What exposure am I willing to risk in the market?
  3. Should I look for lower probability trades with a higher return, or higher probability trades with a lower return and higher risk vs. reward ratio?
  4. What is most important in your trade selection:
    • The underlying security?
    • Minimum option premium?
    • Volatility?
    • % Return or % Annualized Return?
    • % Probability?
    • Difference in strike prices (risk on the trade)
    • Time frame for an open position (weeklies vs. standard expiration).
  5. Detailed Exit Strategy, including what is an acceptable loss vs. management techniques in various situations.

This may sound like a lot to cover but once you map out a trading plan the pieces will fit together regarding:

  1. What criteria are most important to use in the PowerOptions search tools.
  2. What steps will you use to research and analyze the position more effectively.
  3. What alerts to set in the Profit and Loss Portfolio tool as you track your spread positions.
  4. What to look for when adjusting, rolling or closing a spread position.

The PowerOptions’ staff is available every trading day during trading hours by email and toll-free phone lines to help you get your trading plan together and get you setup with the PowerOptions tools to make your investing plan easy to implement.

Conversions Are A Riskless Options Trade

option conversionConversions, if you are able to receive a credit, are no risk options trades with a very limited reward.

One example of a conversion is:

Buy shares of SLV @ $18.73
Sell JUN 18 call @ -$ 1.08
Buy JUN 18 put @    $ 0.34

Net Debit =         $17.99
Guaranteed exit/assignment = $18.00
Guaranteed Profit =          $ 0.01

1.  Possibility for a no-risk trade
2.  Credit is received
3.  Management is not necessary
4.  Opportunities can easily be found with PowerOptions

1.  Guaranteed Profit is extremely limited
2.  After commissions limited profit might turn into a loss
3.  Due to low profit, 1,000s of shares may need to be traded which hinders the retail investor
4.  Opportunities may appear, then disappear quickly.  I found this trade on PowerOptions, but by the time I linked to the profit and loss chart the trade showed a guaranteed loss of -$0.04 due to price changes in under a minute.

Stock Insurance OR Portfolio Insurance – Revisited

With the addition of new and interesting securities to help hedge a stock portfolio, the question arises more and more: ‘Is it better to insure my stock directly or use a different hedge to insure my portfolio?’

This is a very important question which has many components to it. During a PowerOptions Open Forum Webinar on January 14th, 2014 this question was posed. The actual question was: Continue reading

MORNING UPDATE: PriceWatch Alerts for BA, TSLA, AAPL, and More…

MORNING UPDATE: PriceWatch Alerts for BA, TSLA, AAPL, and More…

February, 11 9:00 AM ET – PriceWatch Alerts for BA, ATVI, MNST,
Overview, News Leaders and Laggards, Today’s Economic Calendar,
and Index Support & Resistance Levels.

PriceWatch Alerts for BA, ATVI, MNST, TGT, YPF, TSLA, DISH, BLK,
MMM, RIG, AAPL, NPSP, GM, X, DLTR. Continue reading

Weekly Options Crash Course for Options Expirations

When the weeklies were initially offered on standard stocks, you would have only the next week out option. The new option would be released on Thursday morning prior the current weekly option expiring on Friday.

Continue reading

Filter for MACD added to the PowerOptions Search

A new filter for MACD has been added to the PowerOptions Search tool for all strategies! This new filter (located in the Technicals tab) will allow you to search for stocks where the MACD is above or below the Signal Line and by how many days. You will also be able to screen for stocks where the MACD and Signal Line are above or below the Zero line. This filter will allow you to better screen for stocks with positive or negative momentum.

Timing Investments when Stock Price Crosses a Moving Average

Timing your entry into a position using options is very important because time premium is continually eroding from the position.  Ideally we want to enter a bullish position just as the stock is about to move up.  It is not possible to know in advance when the move will occur, but we can get an early indicator once the move has started.  There are several tools available to help the investor pick the best time to enter a position.  One such tool, which has been recently added to the PowerOptions screener, is the crossing of a stock price above a moving average such as a 20 or 50 day moving average.  Another form of this tool is to use the crossing of the 20 day moving average over the 50 day moving average as a bullish trigger.

Investors will scan charts looking for this type of crossing to trigger a buying opportunity.  They also look for confirming volume as the crossing takes place, however, this effort can be very time consuming.  Using the PowerOptions screener an investor can scan the entire market very quickly to find a first-time stock price crossing of a moving average.  The parameter scanning form in PowerOptions to capture the moving average crossing is very simple to use: Continue reading

Portfolio Tools offer Trade Management Ideas

Have you been using the PowerOptions Portfolio tools to help track and manage your options positions? If not, now is a great time to start!

PowerOptions free trial users and subscribers can enter new positions into the Portfolio directly from the patented Search tools or manually with just a few clicks. Some basic features of the Portfolio tools to help you better track and manage your positions are:

  • Profit and Loss Portfolio tool tracks your current positions as linked trades – meaning your covered call position will have the stock and call option linked together rather than separately.
  • View Original Expected Gain vs. Liquidation Value vs. Future Expiration Value for the entire position, not just the individual leg. Continue reading