Planning

Objective:
Use an trading/investing strategy that can generate monthly deposits into a checking account to cover for all personal expenses on each month.

Process

  1. Investigate strategies that can be used to create portfolio/passive income
  2. Investigate types of investments that can be used to generate portfolio/passive income
  3. Research feasibility of options as a means of generating portfolio/passive income
  4. Research feasibility of covered calls as a means of generating portfolio/passive income
  5. Determine my ability to use covered calls as a means of generating portfolio/passive income
  6. Paper trade and measure results
  7. Put money into the market, trade, and measure results
  8. Minimize Risk
  9. Generate consistent returns
  10. Increase portfolio size
  11. Repeat Steps 8, 9, and 10 until expenses are covered

Investment Selection

Index vs Individual Securities
During steps 3,4, and 5, my portfolio size was small, so I was focused one or two investments each month. Covered calls on “regular” stocks could yield 1-2% using covered calls, but the monthly cashflow was not high enough to keep me interested. And as an investor, I had also seen the effects of price manipulation on stocks, and knew it would not help me create “consistent” returns each month.

I read (need to find the source) that indexes are difficult to manipulate because of their sheer size, and therefore index-based investments could have some inherent benefits against manipulation. And index-based investments are less likely to suffer from manipulation, since fund managers are rewarded for matching “average performance”. Assuming that any changes/errors/omissions in the fundamental values of an individual security will be averaged out by an index, would allow me to focus on technical analysis for buy and sell decisions.

So I decided that my strategy should use index-based investments, rather than an individual security such as shares of Apple or IBM. And using index-based investments limited me to “funds”; and more specifically funds that had options (mainly ETFs and ETNs).

But I still hadn’t solved the yield problem. It was around this time that I discovered leveraged ETF’s. Basically, these ETF’s try achieve 2-3x the daily price movement of an underlying index. And “daily price movement” is huge. This means that rather than focusing on matching “average” performance of an index, performance matching is on a daily basis and NOT long term. So fundamental valuation is inaccurate at best (leveraged instruments are horrible investment tools and great trading tools), forcing me to use macro-economic trends and use technical analysis for buy and sell decision-making.

Tax Treatment
I no longer trade partnerships (i.e. any investment that provides a Schedule K-1).

When first developing this strategy, I traded UGL and AGQ. The cashflows and capital gains I made trading these two ETF’s were nice; the surprise $15,000 of “income” I had to report on my W-2 from the partnerships was not.

For those wondering, UGL and AGQ are Limited Partnerships that are not covered by the Investment Act of 1940. As such, any investor is really a partner. A partner is responsible for his or her share of income distributions within the partnership. This does NOT mean you receive a check, just that you are liable for taxes on your “share” of the partnerships activities. The problem here is that I wasn’t an investor…I was a trader.

Who
I have been influenced by and combined concepts from several sources:

  • Robert Kiyosaki
  • William O’Neil
  • Michael Covel
  • Victor Sperandeo
  • Thomas Stridsman
  • Marvin Appel
  • Guy Cohen
  • Tim Ferris

Where
I selected a discount brokerage with low commissions on option trades. Although I trade on a monthly/weekly basis, the potential for significant commissions exists with any type of active strategy. My goal is to make money for myself, not someone else, so limiting trading commissions is an important factor when choosing a broker.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: