Cannot say it enough

The collection of knowledge, and - more importantly - the generosity to share that knowledge, that exists on this board is truly amazing! The ideas and philosophies on this board have led me to results that would have otherwise been nearly impossible.

As recently as this past November 3rd, my investment accounts had been stuck in a free fall, having been hit hard by several things - but mainly inexperienced and foolish trading, margin, and option usage. These mistakes did not happen all at once, but separately and over a span of a little less than 2 years. I would try one strategy, have some success, get a bit too excited about it, and then end up losing a big chunk. I tried to learn from my mistakes, and would try a different strategy, but in a terrible run of about 1.5 years, ended up seeing my portfolio value cut in half. I was terribly discouraged, but still believed that investing for yourself, if done correctly, would provide the best chance at financial freedom. I am mid-30s with a solid job, but certainly not one that I would like to continue doing until I am 70. My goal to retire by 50 years old had taken a terrible hit, and my chances were quickly approaching non-existent.

At one point, several ‘professionals’ were strongly advising me to give up on investing by myself and either hire an advisor to handle such matters, or invest in mutual funds. I continued to read the ideas of this board, and tried to read and analyze any piece of investment advice I could find. I read bad articles along with the good, to try to see investing from different perspectives and form my own way. I know that I will make many more mistakes, but my goal is to learn from them and become an incrementally better investor with each mistake.

I realize that many of the top stocks followed here have performed incredibly over the last almost year, in a run that will not be easily repeated. But as of yesterday, my portfolio (whose value on November 3rd was almost exactly half the value of its previous highs 1.5 years prior) has gained 301% from 11/3/16 to 9/12/17 - it is quadruple the value, and double of its previous high (from July 2015)! Not in my wildest dreams would I have imagined that a run like this was possible, and this has put me ahead of pace to retire by 50.

I have 5 children (between the ages of 4-11), and have nowhere near enough talent, knowledge, or time to put together all the reports in such a way that the members of this board do. You guys make it so easy for someone like me to research a company without having to crunch all the numbers myself or do all the background work. A majority of the stocks I own are from this board, and a good amount are from the Rule Breakers service. I still try to do my own (rudimentary) research, but benefit immensely from the insight and analysis provided by this board. If I am able to, I plan on trying to do the same for others at a point in my life when I no longer have so many balls in the air needing to be juggled.

I just want to send a big, huge, ginormous thank you to everyone who posts on this board - I couldn’t have done this without your help. You all have handed me the opportunity to provide for my family like I want and retire when I want…just incredible. I have been following this board for a long time, and it will without a doubt continue to be one of my most frequented stops in the future. I promise to be much less of a lurker and more a participant as soon as I can convert my current luck to knowledge.

Tim

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Congratulations if you have truly quadrupled your portfolio in 10 months! I’ve never heard of anyone doing that before. Maybe in one stock, but never an entire portfolio.

Can you explain how you did that? You must have employed some very risky techniques with some large bets, as this cannot be done with “modified buy and hold”, no matter how good your timing is.

So you may have used some of the stocks from this board, but not the philosophy from this board.

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Hi Tim,

Congratulations on your success! One thing for you to think about is to develop a strategy to deal with the eventual downturn of fast-growth stocks/[the market] when companies like NVDA, AAPL, UBNT, SHOP, et al fall 50-80% as has already happened in the past.

Given that this would have a large impact on your retirement, better to have a strategy for dealing with severe volatility ahead of time than the ‘deer in headlights’ behavior we see in so many investors both retail and professional.

Best,

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I have owned roughly 30% stocks, and the rest options. If I’m buying, I mainly buy LEAPs if they are available, and employ the modified buy and hold with these. I occasionally sell puts with very near expiration dates on stocks I wouldn’t mind owning more of. For stocks that only have options out for the next 6 months or so, I have found amazing returns with those, but they still make me nervous d/t short-term volatility. Some examples of when I have used that more than usual is with LGIH’s recent earnings. I felt like they would crush it on earnings, and after the June Sales announcement (at the beginning of July), the stock sat around $42 for a bit so I snatched up a bunch of August calls, and made a killing selling shortly after earnings. LEAPs just became available on SHOP (my biggest position and getting close to high enough that I will probably trim soon at 23%), but I’ve cleaned up with several different trades with them…some as high as 900% gains. I 10x’d my money on KITE 171020C125 calls that I bought 6/26 and sold 8/28. Another 10x on EXEL 171020C3 that I bought on 5/22/15 and sold 1/12/17. Made a complete gamble (not an investment, this was purely a gamble) on the SPLK170825C58.5, bought 8/23 and sold 8/25 for 167% gain. I don’t usually do that, but I was feeling like rolling the dice on that one, and it worked out, but I’ve had it backfire on me for sure, too.

I definitely have thought about protecting my portfolio in the event of a downturn, and am not ready for it at the moment, but am transitioning into more stocks and less options, and also plan on buying some put LEAPs to buffer potential losses. I plan on having probably 1 put for every 3 to 5 call options (or 300-500 stocks) I own, to provide some downside protection while still not throwing too much money away. The plan is still extremely fluid, but that’s what I’m thinking so far.

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Hi Timwvurx,
First off congratulations! Incredible returns over the last year and quite impressive.

Having said that, I have to offer caution here. Your accolades to this board are great and right on the button. Impressive community built here and one of the first places I go to read on the boards (except maybe the boards to which I am tickerguide!). It is an awesome place to come look for stock and portfolio advice. However, you need to understand that a large number of the stocks here are high flyers and very volatile and the last year has been great for them and it appears that you have leveraged them quite strongly.

If you read Saul’s knowledge base you will see that he talks about staying invested through thick and thin. Not panicking in bear markets where 50% reductions occur. I understand you are thinking about buying puts but you haven’t as of yet. Are you ready for a 50% reduction?

It is kind of interesting because your first post talked about starting on a strategy, show some initial profits and then get hit with big losses. Well I can’t help but feel like you are in the middle of that experience again. You just haven’t been hit yet. So I have a homework assignment for you, if you want to do it.

Take your entire portfolio and assume that every position goes down by 25% in a week. No trades, no fudging by saying you would get out, just roll up the numbers. I am guessing you might lose more than 50% of your equity. Maybe a bit more than 50%.

A 25% drop can happen, some goofball in power in North Korea could decide to push the button, or about 100 other scenarios I can think of. Not what I expect but where would you be… can you live with that? I guarantee you Saul understands the risk of a 25% reduction, he’s lived through it more than once and I believe it is why he doesn’t deal in options, that would be crazy with tha type of stocks he owns.

Now I am not telling you not to use options, i use options. I am telling you to understand the leverage you are using. If the answer to my question isn’t bad or at least one you can honestly live with, then okay.

And again congrats, the truth is even, if you went too far, you have won!!! Perhaps it is time to walk away from the table while you are ahead…or at least pull some money off the table, get some sleep and decide on what your next step should be.

Finally, this is not meant to offend. I apologize in advance if you have been offended. I mean only to offer advice I would want someone to tell me… good luck and congrats Again. It sounds like you have taken a big step towards your goals for both you and your family.

Good luck!

Respectfully
Randy

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I appreciate the words of caution…I am currently in the process of trying to ‘fight the demons’ and become more defensive. This is by far the best success I’ve ever had (my previous times of success were increases of 10-25% in shorter periods, followed by a smaller crash). I’ve gotten up to 10% cash (I have been at less than 0.1%), and when several of my options expire 10/20/17 I plan on using that to redeploy more defensively. Maybe I’m stupid or naive to try to milk another month out of it, but whatever decision I make I will be able to live with. I have no doubt that a 50% reduction would be painful, but it’s nothing that I haven’t already handled…and this time there won’t be any professionals looking over my shoulder putting even more doubt in my head. I don’t take any offense at all, like I said I appreciate any advice. I have been hesitant to share my results just because I don’t want to come across as bragging (or lying) but I had to share my thanks to the people on this board who have helped me immensely. And I am fully aware that a minuscule amount of my results are due to skill, and a much greater portion is due to luck…but I’ll take it! Now I’ve just gotta keep going and hope my current plan doesn’t suck!

Tim

If you read Saul’s knowledge base you will see that he talks about staying invested through thick and thin. Not panicking in bear markets where 50% reductions occur. I understand you are thinking about buying puts but you haven’t as of yet. Are you ready for a 50% reduction?

This happened to me between Aug 2015 and Feb 2016. The worst of it was between the middle of January 2016 and February 2016. A large majority of my positions were down 40-60% from their peak, but I was highly leveraged with short put positions that I had used to buy long calls. I wrote about the experience here:

http://discussion.fool.com/conviction-can-be-dangerous-32756562…

Using options and leverage works great when your stocks are rising but it can be disastrous, as Randy has already pointed out in his cautionary post, when your stocks are falling. Tim, I echo Randy’s words of caution.

I still use options but I use them a little differently now. My new tactics with options use has been working extremely well over the past 6 months when I started increasing use of the approach. I have been selling near term puts to finance leaps. But I have also kept a 10% cash cushion in case something goes wrong. The approach I use works as follows.

  1. I identify a company that I believe will probably increase in value greatly over the following 18-24 months. This is always a company in which I already have a significant position. Usually this company also is in a secular growth market so I don’t need to worry about cyclicality (side note: I once used this approach with SWKS which in hindsight was a mistake because upgrade cycles are, ummm, cyclical. When a stock can be cyclical, I don’t think it’s a good idea to try to predict 18-24 months into the future because you might get caught in the cyclical downtrend.

  2. Next, I try to identify a near-term catalyst. Often this might be an earnings release date. Or it could be a clinical data release date, for example.

To make more clear how this might work, here’s my first example. I had been purchasing SQ shares at various times in April 2017 for prices between $16.86 and $18.06. At the time I saw that this company had the potential to go up 5-10x in a few years. It still had a small market cap, it was growing super fast, the customers love the products and services, etc, etc. We already know all the reasons for owning SQ. But the important point was that I believed 3 things: 1) secular growth without cyclicality, 2) business growing very fast, and 3) lots of room to grow (smallish market cap with a small share of its TAM). SO that actual options trade was as follows:

*Bought the Jan 2019 $20 calls for debit of $3.65 per share (trade was on May 2, 2017)

*Sold the May 19 2017 $19 calls for a credit of $1.18 (trade was on May 2, 2017)

*Sold the May 19 2017 $19 puts for a credit of $0.92 (trade was on May 2, 2017)

The 2 short put positions were intended to partially offset the cost of buying the leaps (long calls). The trade was executed as a multileg trade for a net debit $1.55 per share. Each leg of the trade was comprised of an equal part to the other 2 legs. At the time, SQ was trading slightly below $19. I chose the strike prices of the sold options as close to the current price as possible to maximize the premium. I chose the strike price of the leaps a little high to limit the cost but not too much higher so that I could maximize the return should SQ run up nicely over the next 20 months. I also already had a long position in SQ shares so the short calls would not cause a loss since these short calls were covered. The catalyst was an earnings release on May 3, 2017, one day after I put on the options trade. As we know, the earnings report was well received and on May 4th, SQ rose as high as $20.42 and close just below $20. In this case, I decided to close the May 19, 2017 calls and puts by buying them back for $1.25 per share. This left my overall cost of the Jan 2019 $20 leaps at $2.80 with a breakeven price of $22.80. I will own the leaps. Why did I buy back the May 19, 2017 options? I didn’t want the short $19 calls in case the stock would rise in the following few weeks so I also closed the puts so I could book an overall profit. I also wanted these short puts gone so I could sell puts for another stock that had a near term catalyst. I have to stay disciplined on how may short put positions are in my portfolio. I keep that 10% cash cushion and I like to rinse and repeat this strategy frequently so I can build up positions in leaps. The leaps remain in my portfolio while the nearer term short puts either expire worthless, get rolled forward until they expire worthless, or get purchased (closed out) back. It’s a rinse and repeat strategy. Over time I am trying to build up more and more long leap positions using the 10% cash cushion as protection to own near term short put positions repeatedly.

I recently used this strategy to add Jan 2019 $100 SHOP calls to my portfolio. The purchase of these calls was financed (a net even money trade) by selling Aug 18, 2017 $105 puts. In this case, I had to roll the short puts forward 2 weeks to avoid share assignment. I received an additional credit for rolling forward and on Sept 1, 2017 the $105 SHOP puts expired worthless. I will note that the $100 leaps were a bit more expensive than the near term $105 puts so I sold 3 puts for every 2 calls that I purchased in order to get the even money trade. So now I still own the $20 calls on SQ and the $100 calls on SHOP with a Jan 2019 expiration. The puts that were used to fully or partially finance the calls are no longer in my portfolio. Having the puts gone has allowed me to use my 10% cash cushion to sell more puts to finance leaps in another stock that I think will appreciate a lot in the next couple of years. That stock is NVDA. I bought the following Jan 2019 calls: $150 calls, $160 calls, and $170 calls. The puts used to finance the $150 calls are gone, and I am still working on eliminating the puts used to finance the $160 and $170 calls.

This strategy is working very well because these stocks have been going up. If the stock remains range bound in a tight trading range, then it’s ok because I can keep rolling the puts forward to extract small profits (works great when weekly options are available). If the market and the stocks drop then this approach will probably lead to losses so be very careful and disciplined if you decide to use this approach or options at all.

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most option purchasers lose money long run
most stock purchasers make money long run

Stock owners , at least ones owning Saul type stocks , can expect 50% losses at some time. Part of the game. Assuming the companies are good ,time will bail them out of the loses. But owning mostly time limited options??

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I definitely have thought about protecting my portfolio in the event of a downturn, and am not ready for it at the moment, but am transitioning into more stocks and less options, and also plan on buying some put LEAPs to buffer potential losses. I plan on having probably 1 put for every 3 to 5 call options (or 300-500 stocks) I own, to provide some downside protection while still not throwing too much money away. The plan is still extremely fluid, but that’s what I’m thinking so far.

Your strategy will lead to you losing all or mostly all of your money again. Pls rethink this.

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I’m sure many, if not most, option purchasers lose money, BUT if used properly, they can actually reduce risk while capturing the gains. The trick is to use them in appropriate amounts and make sure a catalyst within your option timeframe exists.

KITE is a perfect example of this. For those that may not be familiar, KITE had a Phase 3 test result coming out and an FDA decision coming within the expiration period of the Call I recommended. I think a person could loose about 50% of the stock price if data or the FDA went against KITE. By using a call, I risked 20% of the stock price, and captured the all the gains.

Option trades are NOT the mainstay of my portfolio, but at the right time and right place options should be an option ;o)
Best,

bulwnkl

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the ‘deer in headlights’ behavior
Hard to avoid if you have not thought about what to do before time. Because unless you have been through one it is hard to believe how much you will be shocked by seeing your retirement melt away like a popsicle in July. Nor despite a belief that you don’t care ,that you are immune, how much you will be influenced by the constant doom and gloom of the media and everybody you know.
We are not Vulcans but emotional social animals by genetics.

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Buying calls is not a risk-reduction strategy. Buying puts is a risk-reduction strategy.

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