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Dear Fellow Trader,
As you know, we have made some significant changes at Money Map Press. Our goal is to return to the ethos of making investing profitable. Naturally, that changes my tone slightly regarding what I want to focus on here at Midday Momentum. But it's not the end of trading within this letter.
Because, when done correctly, options and trading present ways to maximize the profitability of investing. As I noted on Friday, I'm not a fan of wild speculation on call options. For example, buying a call with only a 30% probability of success - can make a lot of money if the stock explodes higher. But you can also lose the entire position quickly (which is why I preached about using stops and keeping your stakes smaller).
But let's say we add another call option into the mix at 30%.
What are the odds that both finish in the money (and are profitable)?
The answer is 30% times 30%. And that is just 9%.
But what about my preferred strategy of selling put spreads on stocks that I want to own? What about selling puts with an 80% probability of success?
And what happens if we do that three times?
The probability that all three trades 80% times 80% times 80% is 51.2%.
Those are better than even odds.
This isn't the end of trading for me. But it brings us back into a deeper conversation of important trends, understanding sector momentum, and combining other important metrics to improve your profitability.
So let me show you the three important themes that will drive our investing and trading...
The Doctors are In
We will focus our attention, as usual, on insider buying at companies. As is proven in the following paper, executives at companies experience the best source of alpha between the time they buy their stock and the time the markets announce the purchases. We want to replicate their success. Remember that selling puts or buying the stock at lower levels of companies with strong fundamentals than the executive's purchase is a terrific long-term strategy. (Anginer, Deniz and Hoberg, Gerard and Seyhun, H. Nejat, Do Insiders Exploit Anomalies? (November 1, 2018). Marshall School of Business Working Paper No. 17-1, Available at SSRN: https://ssrn.com/abstract=2625614 or http://dx.doi.org/10.2139/ssrn.2625614)
Second, we want to focus our attention on value and momentum in a buy-and-hold environment. A portfolio of value stocks using the Piotroski F- Score and the Ben Graham Number has delivered some of the best returns of the last 30 years. We will target and replicate this strategy where applicable. I will be talking about this much more over the weekend in Postcards. (Amor-Tapia, Borja and Tascon, Maria Teresa, Separating Winners from Losers: Composite Indicators Based on Fundamentals in the European Context (February 8, 2016). Finance a UVA - Czech Journal of Economics and Finance, 2016, Available at SSRN: https://ssrn.com/abstract=2729191)
Finally, we are looking for a return to weekly momentum in the cycle of investing. We don't need to …
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About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.