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 Engineering Professor (EngProf6)

        Hybrid Timing Model for Analyzing Stocks and Indices


Last Updated: November 10, 2007    


(How To) Grow Your Wealth Quickly

and, after I complete my objective,

Anyone Can Make a Million Quickly



I have invested over the years but I’ve had difficulty making a good return. In retrospect, I didn’t have the discipline or a model to be ‘successful’. I am trying to change that by using a model of price movements. I developed what I refer to as the hybrid timing model which evaluates cyclic price movements in the financial markets. By using the model, I hope to be able to generate unusually large rates of return.


My past investment universe included stocks, options and futures. Again, in retrospect, I could not succeed because I was not able to get a handle on the time trends of the issues I was investing in. So about 7 years ago, I stopped my active investing strategy (except for a few buy and hold stocks). During this time, I fiddled with mathematics to try to get a handle on how short term moves occurred in the markets.


In early 2006 I came to the conclusion that the model I had developed was of sufficient accuracy to be of value in the short term investing arena. During the last year I have done a variety of things. In one sense I am pleased with the results. However, I was not able to generate a profit – let alone a large rate of return. There are many reasons which I will discuss in the coming months. However, after my experience with the first year, I am more confident than ever about the future.


My Target

I have set a target for myself. My objective is to convert $5,000 into 1 million dollars in 2 years. Hence, the title of my work: ‘Grow Your Wealth Quickly’. My plan is to use options to carry this out. My official starting point for this endeavor was  Nov. 1’06. HOWEVER, my first year was a write off. I did not make anything. Only my broker did well (about $5K of commissions). But I have not given up. In fact, I am happier and more confident now than one year ago. The model has also evolved and so I feel I am up to the task at hand. Thus, I am restarting ‘My Journey’ on Nov. 9, 2007. Stay tuned – it promises to be exciting.



Based on what I have learned, I have concluded that one needs to use options to make money quickly (or to loose it quickly). While the simple buying of call and put options is quite risky, I have formulated a strategy that couples credit option spreads and the buying of calls and puts. Incidentally, I have spent the last year evaluating a number of strategies. I now feel I have developed a viable strategy for growing wealth quickly.


So what are option spreads? Simply put, an option spread is a strategy (in its simplest form) that involves 2 calls (or 2 puts). The investor buys 1 call and sells short another call with a different strike price. For a credit spread, the investor sells a more valuable option and buys a cheaper option for a net credit to one’s account. This can be done with both calls and puts.


Examples of Credit Spreads

Let’s consider the SPY ETF that mirrors the S&P500. I originally wrote this on Sunday, July 30’06. So, let’s consider the August 2006 contracts. Credit spreads can be created with calls if you think the trend is down. Credit spreads for an up market would be created with puts.


Consider the following credit spread involving calls (down SPY trend):

Buy:  August 129 SPY   @  $1.10

Sell:  August  127 SPY  @  $2.35

The cash SPY when these option prices were retrieved was $127.98.

In this case you would be credited with $1.25 (less commissions). The maximum loss that you can incur is $2.00. Thus, in initiating this spread, you would be required to deposit $0.75 which would be coupled with the $1.25 credit for a total of $2.00 (the maximum loss). The spread has an intrinsic value of $0.98. If by expiration (in 3 weeks), the SPY has dropped to 127 (or lower), you pocket the credit of $1.25 you received. If the SPY closes at expiration at 128, you get to keep $0.25 of the $1.25 credit. If SPY closes at $129 (or higher), you give back the $1.25 credit plus the $0.75 you deposited. The bottom line is that you are risking $0.75 to have it become anywhere from zero to $2.00. If you are good at identifying trends, you will be a winner.


Another credit spread involving calls of SPY is:

Buy:  August 130 SPY  @  $0.70

Sell:  August 128 SPY  @  $1.65

This spread would yield you a credit of $0.95. The intrinsic value of this spread is zero. You would risk $1.05 to enter this spread. If the SPY remains unchanged (or goes down) by expiration, you pocket the entire $0.95.


Why a credit spread and not a debit spread. My simple answer at this point is because of the eventuality that the market (SPY) reverses. Let’s assume the SPY has just entered a down trend. You decide to sell the Aug 127 at $2.35 and buy the Aug 129 at $1.10 for a credit of $1.25. The cash SPY is 128. Let’s further assume you were right with the trend and 2 weeks later the SPY is at 127 (a drop of 1). At that point in time, there may be an issue you will need to deal with. Expiration may (for arguments sake) be 1 or 2 weeks away. You need to go into a credit spread involving puts. So what does one do with the call spread. With regards to the calls you can close the spread completely or you may buy back the call you shorted (and hopefully you will be able to buy it with the funds you received as credit). If you only buy the call you shorted, you would be left holding the call you bought. If you are right about the reversal to the up side, that call will increase in price. At the same time, you would initialize a credit spread with puts.


The above paragraph was writing in the summer of 2006. As I write this paragraph we are in November 2007. I still believe that a move should be initiated with a credit spread. However, my current strategy is to buy back the short leg of the spread based on the half-hour model I have developed. And when the half-hour model realigns with the trend set by the daily model, I once again short the option I bought back. This is quite an interesting strategy which I have started to use in the last month. It promises to be exciting.


To illustrate, let’s consider a move in the QQQQ’s. Let’s assume that the daily model has just initiated a down trend in the QQQQ ETF. I would initiate a credit call spread (this is a bearish strategy) when the half-hourly model pointed down. So I now have a credit call spread and let’s assume that the down trend based on the daily model will persist for 9 days. In the meantime, the half-hourly model will probably have a number of reversals. Let’s focus on the first one and let’s assume it happens one and one-half days later. So at that time I would buy back the call option I shorted and would be left with only a long call position. At some point, the half-hourly model would reverse back to the down side (and re-align with the daily model). I would then short the call option again to reestablish the spread.


In a nutshell, the overall objective is to hold a credit spread. However, the return can be increased by trading the short position in the spread. This is what I am starting to do in ‘My Journey’ – Part 2.


Food For Thought

A $1,000 investment if doubled ten times in a row would be worth over 1 million dollars. Can it be done? Yes – maybe not 10 in a row, but… What you need is to have a good handle on the trend. I plan to do it. This is my Tour de France. Stay Tuned. Naturally, your comments are welcome.


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