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$100,000 Virtual Portfolio – Conservative – 25% Annual Returns

I’ve had a few new members ask me about deploying a new virtual portfolio.

I thought it would be a good idea to do a little practice run using the WSS platform with ORDINARY margins so these will be trades anyone can make.  My intention with this virtual portfolio is not to touch it very often and I WILL NOT be able to watch it all day.  So, this will be an ideal virtual portfolio for the "set and forget" crowd.  Obviously, you can do this with $50,000 or even $25,000 – just buy less positions!

Our goal is conservatism and earning a least 2% a month.  We did this with last spring’s Q2 $100K Virtual Portfolio, which was doing better than $1,000 PER WEEK until we closed it in week 18.  If those two things don’t seem to go hand in hand – I hope to get you to think again as we use many of the techniques we learn ever day at PSW to take advantage of different market movements.  I haven’t tried the new option system at WSS yet so we’ll see how it goes and how much of a pain in the ass it is but, basically – if you are the kind of trader who is busy during the day and has little time to deal with a virtual portfolio – then we’re in the same boat on this one!

If you are brand new to our site I seriously request that you don’t "experiment" by following this live.  You can paper trade too until you get the feel for managing these positions.  For new Members, we have a "New Member’s Guide" which pretty much lays things out with these standard assignments:

  • If you are new to options, read Sage’s Book
  • Read 1 full month of my posts and all comments, you will get a good feel for the site, the kind of trades we do and also get to know a bit about the people in chat.  Knowing people’s various expertises and understanding their market philosophy and position makes the next live comment they make much more informative…
  • Read Option Sage’s articles under his tab, many were co-authored by me that highlight various option strategies with real-world examples.
  • Watch The Man Who Planted Trees, a short video about investing that characterizes a solid investing philosophy.

AFTER you do those things, then we are ready to talk about setting up a virtual portfolio, which brings us to the question of what would be a good model virtual portfolio for $100,000.

In this trading environment I’m NOT going to be establishing a lot of stock positions early on.  For now, I want to practice some option techniques we can use to make 2% while keeping most of our cash IN CASH – ready for whatever the market may bring.  I will be putting up a buy/write virtual portfolio on WSS if all goes well for Q2 but, for now – our Buy List is doing so well, why change things?  Typically, you can categorize the buy/write plays as fairly low risk.  The idea there is we’re buying stocks at discounts to the current trading price and scaling into the positions over time.

Setting realistic expectations is key too, the biggest mistake you can make with $100,000 is to jump right in and spend it.  I’m going to put down a minimum for each play and an allocation

So let’s look at a quick set of trades we can set up – I’ll be putting them into the WSS platform this evening (good to cancel orders) and tomorrow we’ll see what fills and make adjustments from there:

First off – let’s sell some puts!  What’s our outlook?  We think we’re going to be range-bound and avoid major sell-offs so what TOP NOTCH stocks and ETFs that we REALLY don’t mind owning can we sell puts against that will give us a 5% return OR a very cheap entry? 

UYG – Selling 20 April $5 puts for .15.  Net $300 credit.  Net $4,700 in margin (all margins are according to TOS non-PM account).  I’m committing to buy 2,000 shares of UYG at net $4.85 ($9,700).  UYG is now $5.73 and I have no expectation of this filling.  Margin should be less than $1,000 in a non-PM system and as long as you have reasonable transaction fees ($10 flat or $1 per contract), this is a nice kind of trade to make. 

SIRI – Selling 50 April $1 puts for .15.  Net $750 credit.   Net $2,250 in margin.  This is nice bang for your buck, a 33% return on margin and max commitment of just $5,000.  Do we mind owning SIRI at net .85?  No, the stock is at $1.10 now and if we end up owing it and sell $1 calls for just 0.02 per month, that’s still a 28% ROI! 

BAC – Selling 10 Apr $15 puts for .40.  Net $400 credit.  Net $1,921 in margin.  Also good bang for the margin buck.  We’re committing to 1,000 shares of BAC at net $14.60 ($14,600), which is a bit steep so we have a potential loss to hedge against here. 

This is a good time for a lesson on hedging.  Do I need to hedge UYG?  No I don’t.   $4,700 is a very manageable amount for me to allocate to a financial ETF at a 20% discount off the current price and I am confident that I can sell .45 of premium a year against UYG – even if they drop to $2.50 (always allow for 50% disaster) so I have faith in getting a reasonable ROI – THEREFORE, I DO NOT NEED to cover it

Let’s say you wanted to buy a $40 pair of jeans and there was a reverse auction and you bid $20 for them.  Do you need to take insurance against owning them at $20?  No – you WANT the jeans and you’ll be happy to own them for $20.  The fact that you get them at $20 shouldn’t make you change your mind about owning them should it?   OK, now let’s do AAPL.  Let’s say I offer to buy AAPL for $89 in Jan by selling the $90 puts for $1.  What if I get it for $90?  Should I spend .50 insuring against that possibility or do I REALLY want AAPL at net $89?  Of course it depends on why it’s at $90 (Jobs could die, they could lose the patent on the IPhone or IPod) but if I’m willing to buy them for $90 today as a long-term hold – why not commit to buying them at $89 a year from now? 

So I’m not going to cover UYG or SIRI because there is no disaster I can foresee that will make me sorry to own them at 1/2 price.  BAC, on the other hand, may have some individual failure or scandal that worries me so I need to make a mental note to hedge against a $14,600 Financial commitment.  For the sake of simplicity here, I’m going to put the hedges right after the plays where appropriate.  Figure BAC may drop to $10 in a major disaster.  That means I have $4,600 to protect here.  I want to offset about half of that loss so I’ll be looking for $2,500 in protection.   

FAZ – Buying 30 April $15/17 bull call spreads for $1.20.  Net $3,600 debit.  No margin.  FAZ is now at $17.79 and ANY move down in the financials (and it’s hard to imagine BAC crashing without taking down the index) will keep them over $17.  Our break-even on this trade is $16.20 and that’s 10% down from here and lower than FAZ has been – ever.  I love hedges like this because it is possible to win both ways and, if FAZ drops below $16, I should still have .60 left in this trade (the current $17//19 spread is .70) and I can spend another .60 to roll my insurance out 2 or 3 more months. 

Since my insurance payout is $2,400 any time FAZ simply does not go down, I can lose $1,200 in April and $1,200 in June and if my August attempt is a success – I will be even on my insurance.  Meanwhile, I’m hedging against $1,450 in upside plays so far… 

VLO – Selling 5 Apr $18 puts for $1.05.  Net $525 credit.  Net $1,750 in margin.  Another good deal!  We love VLO and wouldn’t mind owning 500 shares at net $16.95 but that’s $8,475 on round one so we will be avoiding an assignment.  Since we can roll these puts along to the Sept $15 puts, now .80 and the Jan $12.50 puts, now .60 for now worse than a $200 loss (assuming we spend .40 to roll to the Jan $12.50 puts) and since we’d be THRILLED to own 500 shares of VLO at $12.50 in Jan – there is no need to hedge this entry. 

That’s about 1/3 of our cash committed (worst case) and we’ve got $1,975 in credits so far.  That’s 2% of our $100KP already but it’s over 2 months, not one so more work to do!  I’m not at all a fan of natural gas but I am a fan of selling premium and UNG is down to $8.87 and we can buy that and sell the Oct $9 calls and $8 puts for $2, which is $6.87 with a 16.5% upside so let’s call that play:

UNG – 500 shares at $8.85, selling 5 Oct $9 calls for $1.20 and 5 Oct $8 puts at .80 for net $6.85/7.43.  Net margin about $3,000.  Commitment $7,430.  I picked October because that takes us into hurricane season but this is one I may decide to pull the plug on if nat gas looks very weak.  Really playing for the presumed market manipulation here, not the fundamentals, where nat gas can still go down to $3.50! 

KEY – Selling 5 Apr $7 puts for .45.  Net $225 credit.  Net $1,280 in margin.  Commitment of $3,275.  I like KEY and don’t mind owning them at $6.45 as a 1x entry.  We already have a financial hedge so we may as well re-use it for this one!

WFR – Selling 5 Apr $12 puts for .75.  Net $375 credit.  Net $1,160 in margin.  Commitment of $5,625.  How can I not pick my favorite under-appreciated tech stock?  Can’t argue with collecting $375 against $1,160 in margin for 2 months anyway….

SPWRA – Selling 5 Apr $19 puts for $2.  Net $1,000 credit.  Net $1,800 in margin.  Commitment of $8,500.  I had to go for this one, it’s my favorite solar play.  WFR and SPWRA are both down for the same reason – fear of diminished subsidies from the EU for solar power and yes, I’d be happy to own it long-term but anticipate doing so below net $15 after several rolls. 

GE – Selling 10 Jan $12.50 puts for .65.  Net $650 credit.  Net $1,260 in margin.  Commitment $11,850.  Not done yet…

GE – 5 Jan $15/17.50 bull call spread for $1.20.  No margin.  Commitment $600.  What I like about this pair is my "worst case" is I end up owning 1,000 shares of GE for net $12.45.  If GE is above $12.50, the worst we have is a net credit of $50 and the upside is we collect $750 in addition to the $50 we pocket at the beginning of this trade.  Note that $11,850 is a big commitment but we are doing this because it’s a low-margin commitment and we’ll use the cash for other things rather than lock it into this trade (as we don’t really believe GE falls to $12.50 again).  Our biggest fear here is going to be a CRE failure. 

SRS – Selling 10 Apr $7 puts for .35.  Net $350 credit.  Net $1,115 in margin.  Commitment $6,650.  I want to cover GE and I’m confident I can roll SRS if CRE does well and, down the road, if we can get in at $5 or less – this is one of those things I’m pretty sure we can sell .50 a year in premium against for a nice 10% annual ROI, even if they fall to $2.50.  This, of course, can win even without losing GE and, of course, this is just the first of 5 planned covers of $300+ each so I’m covering over 10% of my GE commitment long-term. 

All right, that’s a nice start for now!  We’ll see how the week goes and update over the weekend.  Keep in mind they may not all fill and we’ll have to evaluate as it goes along.  Once we fill in a dozen positions at prices we want, things should calm down nicely.

 


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  1. Phil

    Here’s a snapshot of the filled positions as of this morning:

    It’s very normal to show a loss when you first enter option posiitons simply because of the bid/ask spread but we’re really getting killed here because friggin’ WSS filled my FAZ spread at $1.47 rather than $1.20 and that makes a HUGE difference, especially as we have 3,000 options!

    Notice we are "down" $1,110 on that position.  That’s another thing to watch out for when you purchase verticals as you can get all sorts of crazy net numbers while they are working and you have to tune them out and concentrate on the only thing that matters, which is:  ARE WE ON TARGET?

    FAZ went UP yesterday and is now at $17.91.  We have a $15/17 spread.  If today were expiration day we would be getting + $1,590, not – $1,100.   That’s how far off the net current value is from "reality."  While we don’t count our chickens before they’re hatched – if you are going to trade spreads you have to learn not to cry over milk that hasn’t actually spilled either. 

    Learning to do this means UNDERSTANDING how these trades work well enough that you can look at your portfolio, look at the $1,100 loss and KNOW that it is WRONG.  A big rookie mistake is panicking out of spreads that LOOK like they are going against you and you have to learn to ignore that and to KNOW when you are on track or off track because you can similarly have a gain you don’t deserve and maybe it’s time to take the money and run too! 

    OK so we are missing SIRI, 2 legs of UNG (WSS does not let you enter short straddles so I have to do each leg individually), the GE bull call spread and the short the SRS puts.

    All we filled was the short puts on UNG and I can live with that.  SIRI there is no way we chase and pay another nickel and just having the short puts on GE is fine too so no worries today and we look fine into a weekend I’m leaning bearish on (after we get our BS pump to 10,428). 

  2. dflam

    PhiL : In your $100 k portifolio, you say :
    GE-5 Jan. $15/ $17.50 bull call spread for $1.20. No margin.Committment $600. What I like about this pair is my worst case is I end up owning 1000 shares of GE for $12.45. If GE is above $12.50,the worst we have is a net credit of $50 etc.
    How do you end up with $12.45 stock price. the numbers don’t make sense to me. Did you mean to buy the $15/ $17.50 bull call spread? thank you
    dflam

  3. dflam

    Phil Never mind . I understand it now. when you say pair, you include the puts w/the bull call spread.

  4. Phil

    So glad I could clear that up!   8-)

  5. Phil

    Quick update – We have now filled everything but the short calls on UNG, which is dangerous as I really don’t trust UNG at all but it’s an October play so way to early to worry. 

    Actually, that’s not true.  I say that but that’s because, in my mind, I already know that the Oct $9 is $1.05 with a .53 delta, which means we hit our mark if UNG goes up .30 to $9.  Should UNG fall .20 instead to $8.50 and look to fall below it, my fallback would be to sell 1/2 the Jan $8s, now $1.75 with a .66 delta so a .20 move down should cost about .15 and I expect to collect $1.60 on 1/2 vs my original intention of getting $1.20 on 1x. 

    That means if UNG goes back up from there, I can clearly make a 2x roll to the Oct $9s for more money than I initially intended and, if UNG falls farther, If I sell the other 1/2 of the Jan $8s for $1.20 (my stop) then I’m in for average $1.40 and that means I’m now in for $6.65/7.32, which has a 20% upside at $8, which is 10% down from here so I can live with that.

    That’s what I mean when I say it’s too early to worry! 

    I think that goes back to something I read in a James Bond novel decades ago – Always know what your exit strategy is before you walk into a room or, in this case, a trade.  I know I often give quick answers to things but I want to use this space to teach strategy so I’ll try to remember to stop and analyze my thought processes in more detail – things I certainly don’t have time for in chat but this is very worthwhile as we’ll be following these trades over time…

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