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My Investment Strategy For 2013

|Includes:Apple Inc. (AAPL), GLD, GOOG, IWM, NFLX, SPY

About a year ago, I described My Investment Strategy For 2012.

As a reminder, my trading philosophy is not to "predict" the prices of individual stocks and indexes. I simply don't know what the markets are going to do. I also don't care about models, forecasts, P/E ratios, DCF analysis etc. Most of this mumbo jumbo stuff is useless - the markets will do what they have to do and will usually laugh at your analysis. Instead, I'm using strategies to make money in any market. If you want to stop guessing where the markets or individual stocks will go, those strategies might be for you.

Here are some of the highlights of my trading philosophy:

  1. I don't want to predict where the markets are going. Some people would say: diversify - and you will be fine. One of the problems with diversification is that during times of turmoil, asset classes tend to become highly correlated, defeating the purpose of the diversification in the first place. This was especially true during the financial crisis in late 2008. This caused even a safe haven like gold to fall along with everything else.
  2. Control your risk. I prefer to have smaller winners and smaller losers. Risking less on each trade allows me to allocate larger capital per trade and still risk less.
  3. Position sizing is the key to success. If you risk 50% and allocate 20% of your account per trade, five losers will cut your account in half.

Those who follow me on Seeking Alpha know that pre-earnings strangles and index Iron Condors (IC) are among my favorite strategies. I described the first one here and the second one here. This is not a coincidence. Those two strategies have strong negative correlation and provide very good protection against any market surprises.

As a reminder, the first strategy involves buying a strangle or a straddle a few days before earnings and selling it just before earnings are announced (or as soon as the trade produces a sufficient profit). The idea is to take advantage of the rising Implied Volatility (IV) of the options before the earnings. In general, I look for companies having a history of big post-earnings price moves. Those big moves will cause the IV to spike before earnings. For some higher priced stocks, I might sell further Out of The Money (OTM) strangle, converting it to a Reverse Iron Condor.

So how did this strategy perform in 2012?

Not bad, thanks for asking. My trading alerts produced a 152.5% ROI using the mix of those non-directional strategies.

2012 was a year of low IV, and we had to make some adjustments to the strategy. Specifically, we had to lower the profit targets of the earnings plays to 10-15% and to be much more nimble in taking profits. We also added some new strategies to the mix, specifically vega positive trades like calendars. As a reminder, Iron Condor is theta positive vega negative trade, which means it benefits from the time decay and decrease in IV. A calendar spread is theta positive and vega positive trade, which means it benefits from the time decay and increase in IV. In times of low IV, you need more vega positive trades to take advantage of any jump in IV.

We added few more strategies to our arsenal, such as GLD strangle and/or calendar, to take advantage of record low GLD IV.

Let's take a look how a hypothetical portfolio might look. I'm assuming we are in the busiest period of the earnings cycle when most of the big names report.

  • 10% in the Russell 2000 Index or the Russell 2000 Index ETF (NYSEARCA:IWM) Iron Condor
  • 10% in the S&P 500 index ETF (NYSEARCA:SPY) Butterfly
  • 10% in the SPY Double Calendar
  • 10% in Apple (NASDAQ:AAPL) Reverse Iron Condor
  • 10% in Google (NASDAQ:GOOG) Reverse Iron Condor
  • 10% in Netflix (NFLX) strangle
  • 10% in SPDR Gold Trust ETF (NYSEARCA:GLD) Double Calendar
  • 30% in cash

The portfolio is non-directional and delta neutral. The goal is to generate 5-8% return per month on the whole portfolio.

I think that those strategies can bring a steady growth to any account, no matter what the markets do. And the best part is - you don't have to predict the market direction anymore.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.