I was up over 10% this month, keyword of course being was. For those who follow my blog, you will see on a monthly basis I update with a “personal portfolio update,” letting my readers see where I stand in performance.

Recap:
July +11.8%
August +12.88%
Sept: +4.54% (as of 9/20/12)

If you are a familiar with investing, odds are you will take a look at that recap and immediately identify that I am operating on a very leveraged scale. I mean 12% in a month? My account must be moving like a pinball, and honestly it really is.

But despite having up to 4-5% move on a daily basis, I still prefer trading with LEAP options over stocks. You may say that I’m playing with fire, but I see it as trying to get a fire going.

I have roughly $15,000 in my account as of today, a big step up from what I was working with at the start of this year, but relatively a small drop in the bucket when it comes to trading.

I believe that I can fairly easily hit a 10% a year return, but 10% on $15,000 ($1500) is immaterial in my eyes.

Because I am so confident that I can hit 10% a year, I want to amplify my return through leverage. With discipline I believe that LEAP options are the perfect vehicle. Highly leveraged securities but retaining a finite loss possibility.

If I had a bigger bank role, then 10% would be just fine, but I simply need to grow my account at a pace greater than 10% a year. As an FYI, Year to date I’m up 63.26%, which is insane.

The bottom-line is that to obtain such a crazy percentage, like all investments, I must take massive calculated risk.

Why am I being so Aggressive if it could turn against me?

  • I still believe I can outpace what I could do with traditional stocks
  • All investments have risk, you make the investment because you think the risks are worth it (article to follow about this)
  • My account balance is still small enough that I am comfortable taking this risk

Your “account balance is still small enough,” when will it be too large?

I believe that I will always have some port of my portfolio invested in the strategy I’m currently implementing. That being said, if I had for instances 100k in this account, a portion of my account would probably be in cover calls to take the edge off the volatility. I know this would hurt the return, but once I get myself established a little more, it will be best to mix up my portfolio into low risk/reward and higher risk/reward portions.

Why wouldn’t you just implement the strategy for the entire portfolio if you are so confident you can beat 10%?

I see cover call writing as the way the truly rich can obtain consistent lower risk returns. If my account was say $5 million, 6-10% return a year with lower risk would be the logical choice. I want to slowly work myself into a position where cover calls are obtaining a respectable return, so I will be able to ween off the high volatility. You never know when the next big crash is coming, it could be this year or 15 years from now and unless you are perfectly hedged (which tends to be a little tricky) you stand to destroyed. I would much rather lose 15% off a large amount than potentially 30+%.

Why are you writing this article?

To reaffirm myself. I am confident in my strategy, but I tend to get too caught up in the “Monthly Performance” number. As I said before, I was up a little over 10% and now I’m only up 4.54% for the month. So after taking this hit, I look at my investments and thought “I’m happy with my positions.” I still had the overwhelming desire to act, even though I don’t need to. I can’t say that each month will fall in the positive, but I still believe that my options (most of which expire in Jan 2014) will be good investments long-term.

Final Thoughts:

I plan on selling my house (Should net about $25-30k, hopefully), and I hope to have my account to roughly $50,000 by the end of 2013. If I can grow my account at a rate of 30% for 5 years, 20% for 5 years, and ultimately 10% for 10 more years, my account would grow as follows:

After 5 years – $185,646 (pre-tax and inflation)
After 10 years – $461,811. (pre-tax and inflation)
After 20 Years – $1,198,173 (pre-tax and inflation)

This implements my idea of “slowly weening off the volatility.” These calculations of course assume that I do not add any money into the account as well.

And to add contrast and really hit my idea of “trying starting a fire,” if I was just to aim at getting 10% a year:

After 20 years – $336,374 (pre tax and inflation)

Not bad, but not good enough.

 

Filed under: InvestingOptionsPersonal Portfolio Update

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