Tracking Results

I’d like to think that investing in stocks is not really very akin to betting on horses.

I’d like to think that.

But really, the only way to know is to track your results.

While I’ve been using spreadsheets to do so for years, going all the way back to VisiCalc. I’ve never been very sophisticated in the manner that I track positions.

All I really want to know is how well each position performed relative to the default action, which for me, has always been the S&P 500.

Back in the days of “Option to Profit” I used to update spreadsheets for subscribers daily, but eventually went to weekly when it became pretty clear that no one was looking at the details of the trades.

That’s what they were paying me for, I suppose.

I also kept and still do, summaries of all of the trades in individual positions. Those can be found by clicking on the “Results” tab and then looking for an individual stock.

Starting today, I’ve added a very simple graphic that will be updated nihtly and am calling it the “Scorecard.”

Unlike the old weekly summary sheets of Option to Profit, there won’t be 60 stock lots to follow at any one time. By the time the portfolio matures, I expect to have 10-15 stocks and anticipate one or two new positions each month, with hopefully one of those maturing into a LEAP position each month.

Instead, the bare bones information will be summarized, including the “Relative ROI (%)” and the “Theoretical ROI (%).”

The Scorecard makes use of color coding in order that the end user can easily distinguish between open and closed positions. Additionally, color coding is utilized to indicate uncovered positions, as well as activity for the week, which may include outright purchases of shares, option premiums or dividend accumulation.

Those are the qualitative issues at hand.

The quantitative issues are relatively straightforward.

At this point, all I want to track is my share cost, my accumulated premiums and dividends and how the S&P 500 has been performing during the holding period for each position.

Just as the daily closing prices of positions may change and just as premiums and dividends may accumulate and change, so too, will the ROI calculations.

With a portfolio transitioning to longer term holdings, I don’t care too much about short term price gyrations, except as they may impact some new positions that only had short term options sold upon them and that may be at risk for becoming uncovered.

For those wondering, the Theoretical ROI (%) is based upon the strike price of any outstanding short positions. If none, then the strike price of the option nearest to the cost of the underlying shares will be used.

For positions that have been closed, the comparative S&P 500 level will be frozen in time, while all open positions will continually be compared to the week’s closing S&P 500 level.

Since everyone’s portfolio will be different, not only in the stocks included, but also in the relative amounts of each position, there is no attempt to “average” the returns, nor do they take into account trading costs, nor taxes.

To be totally fair in comparing results to the S&P 500, there should also be an adjustment made for the yield on the S&P 500, which has historically been about 2% each year. The Scorecard doesn’t include that adjustment, but in general, when and if I write about returns, I tend to work an estimate of that adjustment into the comparisons.


Relative ROI (%)

Relative ROI (%) is the difference between the ROI (Return on Investment) of the underlying investment and the change in the S&P 500 for that same time period.

The ROI (%) is (Current Share Price – Cost per Share + Accumulated net premiums and dividends) divided by Cost per share

It is then compared to the S&P 500 performance.

The difference, is the “Relative ROI (%), which by convention is positive if there is superior performance of the investment as compared to the S&P 500.

Once a position is closed, it’s ROI (%) will still be given in relative terms, but it’s absolute ROI (%) will also be indicated in the Theoretical ROI (%) column.

Theoretical ROI (%)

The Theoretical ROI (%) is the anticipated ROI in the event that shares are assigned at the strike price of the current outstanding short call contract. In the event that a position is not covered by the sale of a short contract, the nearest strike level above the cost of shares is used.

As premiums and dividends may accumulate, the Theoretical ROI (%) will vary, as will it with daily price fluctuation.

Closed positions will also be listed under this column, but the color code will indicate that those gains (or losses) have been realized and are no longer theoretical.

At present, the Theoretical ROI (%) is given in absolute and not in relative terms. At some future iteration, an additional column may be added to also provide the relative performance, as compared to the S&P 500.

Additionally, while I have never been a fan or annualizing results, especially with short term trades, as the portfolio moves to a longer term, there will be greater validity to presenting such data.


Our First Trade

I guess it’s at least a little exciting.

That is, making the first official trade on LEAPtoProfit

The only problem is that it’s more of an “OTP Legacy” kind of trade.

That is, it was a trade, in this case the sale of calls on a position that was opened during the days of “Option to Profit.”

Still, let’s dissect out what the thought process was behind this trade.

If you go to “How Does it All Work,” you will see the basic thought processes that are involved in making a LEAP trade.

In this case, Newmont Mining (NEM) was trading at about $38.45.

I looked at the January 2020 options, which expire in about 18 months.

That’s longer than I would generally look, but Newmont Mining is already an old position, going back about 5 years, so what’s another 18 months?

For me, i has clearly been a “Buy and Hold” position that has, to this date, exceeded the S&P performance by about 20% (about 10% when considering dividends).

I looked for a strike price about 10% higher than the current price.

What I received was a premium of $3.85/share, or approximately 10% of the current share price.

To that, I add the imputed dividends of $0.84 over the next 6 quarters, or about another 2%

That means, if the shares are assigned, the return for this trade would be approximately 22% or about 14% annualized.

Maybe that’s not much for some people, but it lets me sleep.

And it just gave me a fair amount of cash.

I can use that cash as cash or I can use it as part of PRIP Strategy if I was still in that asset accumulation phase of life.

The trade looked like this:

To Trade Alert Subscribers it came through as:

OTP LEGACY – STO Newmont Mining (NEM) 1/17/20 $42 calls $3.85 bid

Hopefully, there will be some more trades coming, particularly some new positions either going directly into LEAPS or working our way there through Leapfrogging.

A Different Way of Measuring Performance

After a hiatus of a year from writing articles for anyone, I recently had the good fortune of getting re-acquainted with some long time readers of these pages.

A new reader was less than welcoming and had some serious questions about performance, which included the use of non-standard metrics, with a particular emphasis on the impact of tax rates.

I’m all about non-traditional, but I bristled a bit when considering the thought of being compared to a standard that no one else was using or to try and normalize individual considerations, such as trading in a tax deferred account versus a taxable account or using a discount brokerage versus a more costly one.

Over the years, I’ve been far more interested in the generation of a return in excess of what the market could offer and was always happy to pay taxes on any good fortune or to take advantage of existing tax laws and benefit from the use of strategic losses.

For me, having retired from a pretty lucrative profession at a relatively early age, “return” was a very tangible concept and not a paper construct.

I wanted and I needed cash. I also wanted and needed it in a reasonably reliable stream.

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Happiness With a Losing Trade

One’s definition of “loss” or “gain” may be a very personal one.

In business courses I had taken while in public health school, there was always an emphasis on “opportunity costs,” and some than 30 years later that concept constantly inserts itself as I look at and measure outcomes.

The “opportunity cost” is a simple concept. It basically asks the question “What did it cost you by not investing in an alternative?” Often, to standardize that question, the alternative investment is selected to represent something of low risk and high liquidity.

You generally don’t prove your point or disprove someone else’s point by selecting a non-standard, or little known alternative or an outlier.

Additionally, you don’t prove your point by selecting a specific or narrow period of time, which itself, may be an outlier.

What prompts my thoughts this week is a disagreement with a reader over a number of tenets of investing in which I believe, had incessantly practiced and had  expressed in  an article last week, “Re-Thinking Buy and Hold.”

But also, another reader had shared his own experiences with early assignment of “In The Money” call options just prior to the ex-dividend date and that prompted my response in general about dividends and early exercise, but then with specific details of a trade that same week in shares of General Motors (GM).

That purchase of General Motors turned out to be very timely for telling a story.

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