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Saturday, April 20, 2024

Buy List – Q2 2010 – My Top 20 (Members Only)

OK, now I'm putting pressure on myself

I hate saying top 20 because the top 20 could change next week if the market conditions change but, for now, I did a lot of reading and thinking over the weekend and that led to me writing "The Worst-Case Scenario:  Getting Real With Global GDP!" in which the short story is:  Things are just simply not bad enough to sit on our hands with a big pile of cash

PLEASE keep that in mind at all times - our buying premise is that we have cash (with a target of staying at least 75% cash right now) and we ALREADY have our disaster hedges, which are already in the money.  If we have a 5% hedge in place that pays 25% on a market drop of no more than 20% below where we are now, then we can expect to have 25% of our money from that hedge to pay for any stocks that are put to us and, if we are only allocating 20-25% of our cash to buy round 1 here, then logically, that extra 5% we're putting up as insurance will pay for the rest.  

That means, if we spent $25,000 to buy round 1 of stocks and $5,000 of insurance that pays 500% if we hit our assignment area (down 20%) and we are assigned a basked to stocks, which force us to double down, then the $25,000 we need to double down with will come from our insurance hedge and that means we'll be in 2x the stock for $30,000 with $75,000 more cash on the side (assuming it was a $100K Virtual Portfolio). 

Let's keep this example dead simple and say we buy the SPY for $106.82 and let's say we buy 300 shares for $32,000.  Now we cover that with the sale of the March $103 calls for $12 and the $95 puts for $7 and that nets out to $87.82 ($26,346) and our upside at $103 is $15.18 ($4,554 or 17%)

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