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The $25,000 Portfolio - Stepping Our Way to a 10-Bagger!

|Includes:Citigroup Inc. (C), DIA, SPWR, XLF

I can't believe we're doing this again!

Thanks to FINALLY getting out of the damned DIA Feb $122.75 puts at $5.15, we're up to around $35,000 virtual Dollars on June 11th's $10,000 Portfolio (and we ran through the preliminary results last Friday, where we also predicted "Alpha 2 says "Cliff Ahead").  As I said in yesterday's post "once more into the breach, my friends" and we're going to put our profits to work with the fairly ambitious goal of getting to $100,000 by December 31st.

This portfolio will be available to Voyeur Members but trade ideas during chat will have their usual 1-hour delay.  Premium members will get the trades with no delay and hopefully Matt will have a new system running that will allow Basic Members to see $25KP comments with no delay as well.  New trade ideas and updates will be copied into the comment section of this post or, assuming I write one, the updates of this post.  If you are not a Member yet, now is a good time to join.  Check out the subscription page - Our EXAMPLE trade on C just closed up 200% and our ENP example returned 137% - not bad for free samples, right?      

We didn't play the $25KP this week but Monday's DIA play in Member Chat was a good example of the kind of trades we'll be looking for.  The trade idea there was:

DIA $117.75 puts should give good bang for the buck at $1.06. If I had the new $25KP up and running I’d go for 10 with a DD at .86 and a stop at .76 for a $400 risk on the first trade.

As you can see from the chart below we didn't get our chance to Double Down until Wednesday and there was a brief and scary dip Friday morning that touched our .76 level but, of course, my Friday morning Alert to Members went with 2 aggressively bearish plays (TZA and QID) so we were clearly not going to let a little flush scare us.  


This is why we AVOID hard stops!  When you put in hard stops you will get triggered on spikes all the time.  When you see that quick move in the opposite direction prior to a stock making its big move - that's what pro traders and market makers call "flushing the stops."  It's a specific move designed to, as Cramer likes to say "shake out the weak hands" before making a move in the intended direction.  This is why our Strategy Section focuses on the concepts of scaling in and rolling positions.  

In the above example, we would have been happy, of course to make .60 off our original entry had the move been straight up.  In fact, we would have taken .20 off the table if we had been in for more than $200 risk at the time but our GOAL on entry was to double up at the lower price so we didn't need to be satisfied with the 1x gain on Wednesday.  Although, I will point out that, had we taken the 20% gain off the table and re-entered when we got to our next goal, we would have done even better.  Patience and following the rules (mostly) is the key to enjoying an active portfolio like this one.  

So this trade made (at $1.62, which was up .70 (up 73%) $1,400 on 20 contracts.  That's not the kind of gains we should expect every time but it's the ONLY trade I identified as a $25KP-type trade idea during the week and we do need to make $1,500 a week this year to make out goal!  On Friday, I identified another $25KP opportunity (also didn't count although we may go in officially on Monday) of the NFLX Weekly $200 puts at $1.55 (just 4) and we rolled those up to the Weekly $210 puts for another $1.90.  That's $3.45 in now on 4 puts that are already down to $2.50 so a $380 loss so far.

Now would be a good time to discuss allocations and stop losses - nicely relevant to this example!

Allocations:  As Sage and I noted in last week's "Smart Portfolio Management" article, every $100 counts in a small portfolio.  We need to always be aware of our total risk on a trade and we need to, as Kenny (not Jim) Rogers advised us: "You've got to know when to hold 'em, know when to fold 'em, know when to walk away and know when to run...    Every gambler knows that the secret to survivin' is knowin' what to throw away - and knowin' what to keep."  Even in an aggressive portfolio, we never INTEND to allocate more than 10% of our cash to a single trade, possibly 20% in a small portfolio.  That means our allocations are generally $2,500 and the positions entries we look for are generally in the $600 range, which gives us a chance to Double Down twice and hopefully roll if the trade goes against us and we decide to stick with it.

Losses: Screw talking about losses.  I just realized that this may be the problem a lot of people have with trading.  So much so that it only just occurred to me that this very standard approach to trading may be part of the problem!  Most of you guys don't have problems taking losses - hell, you lose all the time, right?  It's PROFIT taking that you need to work on!  Nothing frustrates me me in chat than hearing about someone getting behind on a trade that was already well over 20% but then went behind.  THERE SHOULD BE NO SUCH THING!  Even in the DIA trade above, look how much better off you would have been just taking that first 20% and running and THEN coming back in when you got your price on the pullback.  When I say every $100 counts in a small portfolio - I mean it!  

Sure we want to make that one trade that nets $1,400, like the one above but you can't count on those.  They happen once in a while but we're only, and I mean ONLY trying to make $75,000 this year.  We are going to trade about 200 days.  That means we need to make $375 a day on average, not $1,400!  With $2,500 allocations we figure we'll have 5-10 active trades at any given time and if we pull out 10 $100 winners a week, that's $1,000 right there!  Throw in the occasional 100% gain and we'll be in very good shape!

Now we can talk about losses:  Losses are easy (back to the Strategy Section).  We never want to lose more than 20% on a position.  That's $500 on a $2,500 allocation.  Simple enough?  We also make decisions at each 20% step so, when we enter a trade with $600, we'd better damned well know what we intend to do if that trade falls to $420.  If we double down at $420, we're in for $1,020 and we'd better have a plan for $800.  Yes, $800 would be just 5% below our DD point right but WHY THE HELL DID YOU DOUBLE DOWN IF YOU STILL THOUGHT IT WAS GOING LOWER?!?  Ah ha!  You don't know, do you?  That's why we don't robotically double down at 20% (we try not to robotically do anything) but we do need to evaluate and come up with a game plan, even if that game plan is:

At $420, let's see if they hold $250 and, if not, I'll take my $350 loss and walk away but, if so, I'll double down off the $300 line on the way back up and then I'm in 2x for net $900 with the position at $600 and if we go back to $400 ($500 loss) I'm going to give up and walk away and if we get back to $900, I'll take half back off the table and ride the rest out with a lower ($450) basis.  

If you do not have this much of a plan on each of your positions, you are violating my hero, Winston Churchill's tenets, which I'm sure you've heard: "If you fail to plan, then you plan to fail."  Churchill also made the very wise observation, which is relevant to investing: "A plan which succeeds is bold, one which fails is reckless."  Churchill was a big planner, a chess player and a strategist - he would have liked option investing!  Whether you are invading Normandy or playing Netflix to finally stop going up - YOU NEED A PLAN!  You need to allocate your resources, plan for contingencies and have both an entry and and exit strategy BEFORE you put your first dollar at risk.  

stock photo : Risk Analysis Concept Word Cloud as BackgroundNow, we talk about risk and we talk about losses and in our strategy section we talk about Sun Tzu, another great strategist but keep in mind that Churchill was a guy who knew how to dig in too!  We were bold and reckless in digging into our DIA short position in the $10,000 Portfolio and we did end up taking a loss in the end.  Had we gotten the downturn on schedule, we would have had a huge win but we didn't and, on the whole, we would have been better off taking our allocated $1,000 loss early on and moving on to more profitable opportunities.

We will not be so aggressive in the new portfolio.  We don't have a clock ticking on us as we did with the last leg of the $10KP and, most importantly, we aren't already up 200% and willing to take big risks.  We will, at first, be working very hard to make $5,000, then $5,000 more and then $5,000 more.  That will bring us up to $40,000 and THEN we can get a little more aggressive as we have a profit cushion to play with.  

So, prepare to be bored!  In this way, my small, aggressive portfolios can be a trick as we end up using a lot of those boring, low-risk, highly hedged strategies I preach about constantly - even as we are trying to make 300% in a year.  That's how we went from $10,000 to $25,000 in less than 4 months last year.  In fact, we "accidentally" made money so fast, I lost my nerve to keep going and we shut the portfolio down in late October with $30,000, because it was a bullish portfolio and I no longer trusted the bullish side of the market.  Silly me, of course - turns out there is no other side of the market!  Still, we won't be so dogmatic in the $25,000 portfolio because we can afford to take plays in both directions - that's something that is hard to do with just $10,000 (not if you are trying to make big gains).  

It is my hope that the markets are not so crazy that we can't avoid having to make quick adjustments and I will try to put in entry and exit targets on each trade idea BUT (and it's a Big But), let's keep in mind that I am NOT Nostradamus - these targets are based on what I see at the entry, ideally the adjustment is my intention at a certain decision point but we get MORE INFORMATION between our entry and the trigger point so we don't just jump in and DD exactly when the stock or option hits our line, nor do we exit exactly at a stop but, WHEN IN DOUBT, we follow our rules (see Strategy Section).  

I am also not omnipresent.  I can't watch every position so it's your job to remind me when a stock is nearing our decision point - don't assume I see it!  Keep in mind this is a virtual portfolio and the purpose is to teach portfolio management and option strategies over the course of the year and yes, make a few dollars along the way but trying to make $75,000 on $25,000 is VERY AGGRESSIVE and a lot of these trades will be risky so think of this as something one would do with a $25,000 risk allocation in a $200,000 portfolio - certainly not something you should do with your only $25,000 or even half of $50,000!  

Exercise number 1 is going to be learning that there is no harm in asking:

C is nicely volatile and the March $4.50 calls currently have a bid/ask of .32/.33 but they were .30 last Monday when the VIX was lower so we don't want to pay more than that.  So we can offer .25 (yes, I'm very greedy) for 20 contracts, committing $500 on the off chance we get a spike down and get our price.  This may not trigger and it ties up margin but it's good to have a couple of small "wish" buys in your portfolio as you never know what kind of wacky fills you are going to get (remember the guys who got to buy P&G for $1 in the flash crash - it's because they had an offer in - just in case someone was crazy enough to sell it).  

XLF is another one we'd love to own so 5 of the March $15 calls (now $1.40) for $1 if we can get those.  Notice our allocation size is still an early scale so this is our starting point and then we can DD and roll if we get better prices - not to mention take covers.  

SPWRA is already down far enough where it's attractive so this is our first affirmative entry and we can sell 3 Feb $13 puts for .65 ($195) and that should tie up about net $800 in margin.  Keep in mind our obligation is to buy 300 shares of SPWRA at net $12.35 (now $13.20) and we don't REALLY want to spend $3,705 on the stock but, if we HAVE to, it's not going to kill us.  If they do fail $12.50 we'll need to make a decision on whether to dump them or not.  Ideally, SPWRA holds $13 and we get paid $195 for NOT buying the stock, using margin we have no plans to allocate anyway.  This is like getting paid $195 in interest for tying up $800 in your account (24%) FOR A MONTH!

While making $195 may sound REALLY boring against a $25,000 portfolio - 12 of those is $2,340 a year, a nice return on our money for sure!  You'll notice in this portfolio that, other than the occasional buy/write, we will rarely enter a stock position without first selling a naked put to give us a cheaper entry.  As I warned you - this is probably going to be a lot less exciting than you may have thought.  One of my goals here is to trick aggressive players into learning that you can trade patiently and still make a nice return...

Of course we need to do better than $2,340 a year here.  It would be nice if we could commit the whole portfolio to that strategy and make 24% a month but then you are not spreading your risk and that greatly increases your possibility of taking a huge hit and getting knocked off the path before you start.  This is one of the hardest things I have to get new Members to understand - our goal is to make these plays EVERY YEAR, YEAR AFTER YEAR.  

So, if we allocate 10% of our portfolios to these kinds of trades and if that 10% is fortunate enough to make 24% a month then we end up with about 30% in that allocation by the end of the year.  If the rest of our portfolio is so conservative it makes no profit at all - that's still a 20% gain on the WHOLE portfolio for the year and, as I often point out - 20% a year is A LOT OF MONEY!  

The real key to making a lot of money is to consistently make a little money for a long time (just ask Warren Buffett).   We don't have a long time in this Portfolio so we're going to be way riskier than that but keep in mind that we will also have hundreds of more conservative plays during the year that will go for nice, conservative returns.  What we're looking to do in the $25KP here is accelerate that process bu mixing conservative and aggressive plays that give us a better than 20% overall return ($5,000) each MONTH although, as you'll see, we will start out trying to build a very small profit base and then get a little more aggressive as we build up that risk allocation in our portfolio.

Overall, we try to follow Warren Buffett's Rule #1 (and he only has one) of investing:  "Don't lose money!


Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in C, XLF, SPWRA over the next 72 hours.

Additional disclosure: Positions as indicated but subject to change
Stocks: C, DIA, SPWR, XLF