Engineering Professor (EngProf6)
Hybrid Timing Model for Analyzing
Stocks and Indices
(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.
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.
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.
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.