| Author |
Message |
     moleman
Member
Username: moleman
Post Number: 18
Registered: 10-2003Rating: 
Votes: 1
|
| | Wednesday, February 18, 2004 - 06:41 pm: |  
|
Hi
Recently I came across www.compoundstockearnings.com and signed up for the free subscription. If you visit the site and scroll down a bit you can see the incredible return they’re claiming. The guy running things, Joseph Hooper, claims to be making over 200% a year for the last 5 years. The lowest he says he’s ever made on any trade is 14% PA in the 10 years he’s been doing it. His goal is to make 5% every 7 days on average and compound the returns.
What he’s doing is using Calender LEAPS spreads. He’ll buy a call LEAP with at least 8 months to expiry then write a higher strike price short dated call using his set of rules. The benefit of this compared to standard covered calls is you get a lot of leverage as the LEAP costs much less than owning the shares and covers the written call. And as with covered calls time is working for you.
I’d never thought of doing this so after reading his emails for a few weeks and finding him really helpful in answering questions I purchased his book. Its easy enough to understand, though has a few gaps as its a work in progress, but shows you in a practical way what you need to do to implement his system, including screen shots from the services he uses. He also has a subscription service where for $US100 a month he’ll send you an email once he opens a new trade and when he closes it. These are from seminars he runs. On the site and in his emails you just see the closed ones and the result. It all seems above board…
So I’m going to look further into Calender LEAPS spreads. I was wondering if anyone has tried this technique, what are the pitfalls to look out for, good references and if anyone’s dealt with CompoundStockEarnings.
cheers
moleman
|
pilgrim
Member
Username: pilgrim
Post Number: 8
Registered: 01-2004Rating: N/A
Votes: 0
|
| | Thursday, February 19, 2004 - 09:20 pm: |
|
Hi Moleman.
Don't know anything about it, only looked at it because you mentioned it, but certainly looks interesting.
I've sent off for the free emails and received some older ones,they seem to be pushing the Book,CDs and the subscription though, but the Yanks can be like that, so may be ok.
What do you think about the Book,is it worth the US$80?
It also seems as though the CDs are needed,4 of them about US$70 each.
Then the US$100 monthly subs. may be needed once you've gone that far.
I'm now always suspicious after getting milked because I believed in people,but from what I've seen it looks very interesting.
I'll keep looking into it, and hope you will keep us all informed.
|
shaguar
Member
Username: shaguar
Post Number: 231
Registered: 10-2002Rating: N/A
Votes: 0
|
| | Thursday, February 19, 2004 - 11:56 pm: |
|
Hey Bundy, if you saw this thread would you mind to comment on calender LEAPS spreads technique (Pros and cons). Cos I think you are the one who has the expertise on this area. Thanks!
Cheers,
Shaguar.
|
moleman
Member
Username: moleman
Post Number: 19
Registered: 10-2003Rating: N/A
Votes: 0
|
| | Friday, February 20, 2004 - 01:06 pm: |
|
Hi
Glad to get some replies on this one. I'd certainly like to see more discussion on options and derivatives. And I'd certainly value Bundy's input to.
Regarding the book, well I buy anything I find interesting, believing that if I just get one useful technique along the way, it will pay for the books many times over. As for this book, well it does need some work. The first 40 pages describe calls on shares which, as I understand, CompoundStockEarnings did until 2001 then switched to LEAPS. To understand covered calls you're actually referred to a web site. The book takes you through brokers to use, what to ask for etc. You could figure this out from asking the people here. I found the next 15 pages of the book on LEAPS at www.poweropt.com/bonus/leaps-spread.pdf. As you can see on page 15 he talks about getting 38.9% if called out and 33.3% if not called out (Assuming the share price doesn't massively fall?) over a month by using calendar LEAP spreads on a blue chip share, and provides a screenshot showing the calculated returns from PowerOptions (bigger in the current book) - maybe 200% PA is a possibility... and time is working for you with this technique which is what I really like.
By buying the book you get a free month with PowerOptions which is worth $US40. And a free week of the subscription service which I'll get on March 1-8. For the rest of the book there's 10 or so pages of rules that he uses. The book's a work in progress and later chapters are sent for free. Probably I'd say no to buying the book at this stage as I'm yet to see the rules work in practice - so far the main thing I got from the book was an introduction to the idea of calendar LEAP spreads and what services to use to implement them. And you can't fault the help. I read the book and sent off 3 questions and received a 60 odd line reply the next day.
I was wondering if you can do something similar here. For example you can buy 2006 NCP calls, and there's open interest, but I never see a bid or ask. How do these get traded?
I'll post further on what I find, experiences etc.
cheers
moleman
|
myc
Member
Username: myc
Post Number: 1
Registered: 02-2004Rating: 
Votes: 1
|
| | Friday, February 20, 2004 - 05:10 pm: |
|
Hi,
I’m new to this board but the post caught my eye.
I’ve been trading option strategies for around three years and these are my comments.
Firstly, I’ve got nothing against calendar spreads using leaps. I trade them myself.
I don’t like the way they present the figures and this is what I’d suggest:
You say “As you can see on page 15 he talks about getting 38.9% if called out and 33.3% if not called out (Assuming the share price doesn't massively fall?)”.
The share price doesn’t have to massively fall for the strategy to be showing a loss at the near term expiration (when the short calls expire). By my quick reckoning with the prices given, the downside breakeven point was about $37.20 at the July expiry. This isn’t a massive drop from the current price of $38.75. I’m a bit dubious about the prices they quote as well as there is a large skew between the leaps prices and the near term prices. In the example given this means that they are receiving a large premium for the short options compared with the premium paid for the leaps. While this is possible, don’t assume it will always be the case.
My suggestion is to understand the risk/reward more fully. You can get options strategy models for free from a number of sources (or you can pay a lot for them). The one I use is this one:
http://www.hoadley.net/options/strategymodel.htm
It’s free, it’s excellent and there’s also a good online tutorial. Once you understand how it works, and it will probably take some time and effort, you can plug the numbers in yourself and have a better assessment of the risk/reward than relying on the figures they give you.
There are also some excellent options books around. If I had to recommend one I’d go for Macmillan “Options as a strategic investment”.
Be careful with parting with your money too quickly.
Cheers
|
moleman
Member
Username: moleman
Post Number: 20
Registered: 10-2003Rating:
Votes: 1
|
| | Friday, February 27, 2004 - 05:58 pm: |
|
Hi Myc
Welcome aboard! Sorry it’s taken a while for me to reply to your post but I’ve been busy at work... I follow what you say and appreciate your comments. My money’s not going anywhere until I fully understand what’s going on, appreciate the risks and know my exits. Do you do your calendar spreads on US or Australian stocks? And do you know how long dated calls in Australia (eg 2006 NCP calls) get traded?
I’ve come across the idea of using covered calls to generate regular income, where the emphasis seems to be on getting the income rather than on increasing the portfolio value, a few times now. The belief seems to be that if you get the income then the portfolio value will increase in the long run anyway as blue chips go up in value in the long run. Sounds like something from FA rather than TA doesn't it?
The first time I heard of this idea was from a guy who had become a property millionaire in 4 years. As I understood it, he’d buy blue chip shares for long-term investment then write out of the money calls against them. If called he’d get his 10% or so for the month, convinced another buying opportunity would present its self since the 120% annualised return was out of the norm for a slow moving blue chip. If not called out he’d just write another call. The premium, dividends and the rent from the properties paid his mortgages. He used FA for share selection. If a share wasn’t making 50% every 2 years he’d dump it and switch to something else, but he didn’t use stop-losses, convinced blue chips go up over the long term.
I read something similar in http://www.amazon.com/exec/obidos/tg/detail/-/1585971162/102-8726942-6660955?v=g lance. Check out the reviews – seems to be working for some people. For me, the case studies in this book seemed contrived. Sure you could follow a stock from $40 to $2 and back again, writing calls all the way, and make money if your timing was perfect…
CompoundStockEarnings seem to present similar ideas with the twist of using LEAPS. From what I can see:
1) All trades are on blue chip shares
2) 15 to 20 positions are open at a time across different industries and sectors for diversification.
3) PowerOptions is used to find trades with a high premium for the short-term call compared to the LEAP price. You’re right the returns are skewed and they search for this. This results in the same 30 to 40 shares often being chosen.
4) Focus is on getting the 5% return then getting out of the trade asap with this 5% intact.
· If the share price drops then buy back the short-term call for a 5% gain when you can sell the LEAP and get this gain. If the share price is going gradually going down then the argument seems to be to write calls until the sum of the premiums is at least the cost of the LEAP over a 5-6 month period, then get out.
· If the share price increases/ remains level then close position with 5% gain when you can.
· Most trades have a life of less than a week.
5) Use LEAPS instead of shares for leverage.
Which makes me think - if these high premiums are available in the US markets, and blue chips, even if volatile, move in well defined channels, is it possible to keep writing calls until the price of the LEAP is amortised? What I don’t understand is what do you do if the share price dives and you can’t write calls so the premium and written call strike is greater than the LEAP cost. I asked CompoundStockEarnings and they said they hadn’t had a problem with this even through 2001-2002. Is it possible this can be done in the US on some stocks (the 30 or 40), even if we can’t do it in Aus?
What attracted me about them, and why I posted to see if anyone else had done this, was they publish closed trades and returns of trades they’ve done each week. The figures I quoted in my last post were from PowerOptions screen shots so should be reproduceable. CompoundStockEarnings say that if you subscribe you get all entries etc so it seems like I could check what they were doing. And you pay monthly so can cancel any time… Next week I get my free week of the subscription service so will have a better idea of whether this is worth considering, or if its all just crazy talk. Even if they’re duds, it got me thinking about whether I could combine this strategy with a trend following scheme. It seems worth investigating as there certainly seems to be a lot of benefits to trading calander spreads rather than regular covered calls.
cheers
moleman
|
tricky
Member
Username: tricky
Post Number: 2
Registered: 10-2003Rating: N/A
Votes: 0
|
| | Friday, March 05, 2004 - 10:36 am: |
|
Moleman, thanks for starting this thread as i feel there is some valuable discussion to be had around Leaps. I have also recently had a couple of people talking about their use.
I am sure that myc was talking about the open interest on the option series affecting the in/out price when he mentioned that was a 'bit dubious' about the prices they quote he also says 'In the example given this means that they are receiving a large premium for the short options compared with the premium paid for the leaps. While this is possible, don’t assume it will always be the case.'
for example, in answer to your question on NCP 6 month calls. Yesterday, with NCP rising to $12.40 the price for November's $12.50 call was $1.18 - the last time NCP traded at this level (16/2) the option was traded at $1.30. This 12c drop in value has little time decay element and is explained by volatility and the market makers squeezing a profit. The effect would be magnified with the short option price.
I would imagine that the US market would have the necessary Open interest on long dated calls to make the playing field a bit more level and give more consistent returns.
tricky
|
moleman
Member
Username: moleman
Post Number: 21
Registered: 10-2003Rating: N/A
Votes: 0
|
| | Friday, March 05, 2004 - 07:12 pm: |
|
Hi Tricky
Glad to see there are a few others interested in this. I'm actually really enjoying just learning about calander spreads using LEAPS as its a new subject to me. Also I hadn't looked at the US market before nor appreciated its potential. But the late nights this week then getting up for work are killing me...
Regarding the skew in the option prices, CompoundStockEarnings suggest taking whatever bid or ask is on offer so any benefit will be to the market makers not to them. I'd suggest looking at www.poweropt.com which has a free 14 day trial period. This is a website for searching for good option trades. If you go to the SmartSearchXL section you can search Calander spreads using LEAPS which can be used to verify the CompoundStockEarnings figures are possible, and even frequently possible.
I've also signed up for free with www.optionsxpress.com. Apparently their contingency orders are easier to use than at www.interactivebrokers.com and they have free live data. They sent me an ad which you might find interesting. It contains a free report at: http://www.terrystips.com/ox_free_report.shtml?c1=testing&source=ox2. The link for the Fannie Mae report is also worth reading as it shows all the trades made to make 242% in a year. Maybe you can't do it all the time but it shows the potential of the technique when applied to blue-chip shares.
With CompoundStockEarnings I found I didn't like that they don't use a trend following strategy. Switching from calls to puts in a down trending market just makes sense to me but they say they don't do this as its too confusing, and they say they don't need to as they still make money. I think what they're doing is using the short term volatility of the blue chips to buy and sell the calls to get their 5% a week. But if a share dropped, I'd find it pretty hard to drop my money management, close my short term calls then have faith that the share price won't go down too much as its a blue chip. But having said that, I found no reason to doubt they're making some decent profits. And the help they gave is excellent.
I think I'll look into Terry'sTips and may even buy the white paper. If you look on the site he's been giving at least a $1000 a day to charity for the last 4 years so must be doing something right! And using trend following, longer term methods, explaining why he's doing what he does when he does it and having contingency plans for the unexpected really appeals to me.
I'm really enjoying learning about this stuff and at this stage see no reason not to try trading a few small positions in a month or two.
cheers
moleman
|
troubador
Member
Username: troubador
Post Number: 1
Registered: 04-2004Rating: N/A
Votes: 0
|
| | Thursday, April 08, 2004 - 12:45 pm: |
|
For those interested in the www.compoundstockearnings.com approach to trading options, I have started a Yahoo group. The purpose of the group is to try to attract users of the approach so we can learn from each other. There are two of us so far and the discussion is becoming lively already. I've been using the approach for 1.5 months and Dave for 8 months. Neither of us are experts, but we have learned something that may help you or others. Some of the posts from Moleman are right on. It looks like he has been studying it in some depth. If you know of someone using the compoundstockearnings approach, please share this with them. We are trying to attract a critical mass. The link to the site is: http://groups.yahoo.com/group/www-compoundstockearnings-com/
Hope to see some of you there.
|
moleman
Member
Username: moleman
Post Number: 38
Registered: 10-2003Rating: N/A
Votes: 0
|
| | Thursday, April 08, 2004 - 02:49 pm: |
|
Hi Troubador
Thanks for your comments. CompoundStockEarnings got me interested in Calendar LEAP spreads, introduced me to PowerOptions (www.poweropt.com) and other sites like it and made me aware of the sort of returns you can get on slow moving blue-chips in the US using these techniques.
I still believe they are using the short term volatility of these shares to make their returns. And I believe the system is flawed as it doesn't take into account the trend of the share. If a share is going down why not use puts? Saying you won't use puts as it's "To confusing" like Joseph says just isn't good enough. Since the bulk of the cost of the trade is in buying the call LEAPS, I'd want to make sure I was buying LEAPS for a share that was trending up, rather than collecting on the short term call as the price dropped then praying the LEAP then went back up. Joseph doesn't do this as he says blue-chips always go up (but in what time frame?) so sometimes his system won't work as someone on your Yahoo group has found out.
One of the basic ideas with options is to sell overpriced options and buy undervalued ones. The best time to do this and which combinations to use is explained in David Caplan's "The New Options Advantage" that Bundy recommended. This really is a fantastic book and highly recommended! I also found the white paper from www.terrystips.com (he trades with the trend!) useful for ideas (eg. short iron condor spreads, delta neutral spreads on QQQ, DIA) - though not necessary.
What I believe from my investigations is that if you're armed with this knowledge, a search engine for finding option trading opportunities, an option analysis package and a good charting package you'd be way ahead of the competition. This is because most people know little about the importance of volatility in determining prices, whether an option is over/under valued and the different spread options you can use. This means there are good opportunities to make trades where the odds are in your favour as you have an "edge".
Currently I'm trading my first bull call spread on AMP (AMP above $5.66 end of June I make 75% in 11 weeks, 354%pa - who needs Joseph?) and hope to start trading the US markets using the above in July.
cheers
moleman
|
|
Auto-Fit Trendlines