Rate of Return

As an investor, trader or one who works hard and puts their extra cash in a mutual fund, IRA or just a savings account, we all want to know what our money is doing. Is it growing? At what rate it is growing? As option traders, I think we all need to reprogram our brains when it comes to what we want and should be satisfied with. Do you want to get ahead in life? Do you want a few of the better things in life? I want to provide  a nice home for my family! I want to be generous with my friends! I want to support charities I believe in! I want to travel! I understand life is short and I’m not here for a long time. I’m here to make every day count. No one will ever accuse me of not enjoying life. In order to do this you cannot only work, you must also make your money work for you. You must invest in something and get a return that will help you accomplish your financial goals. Different people have different ideas on how they want to invest. Some like to invest in business, real estate, precious metals, stock market etc, etc, etc. Me, I like the Options Market, and that’s what I teach with “Main Street beats Wall Street.” And because of the Options Market, I reprogramed my brain when it comes to what “Rate of Return” I want. The first thing I did was stop using the word annual when describing my return. I don’t want to think of an annualized return! I want to think in terms of weekly or monthly return. If you put your money in a savings account, CD or even a mutual fund, what is your weekly or monthly return? Who knows, it’s too small to look at in terms of weekly or monthly; you have to look at it on an annualized basis, and it will be single digits! Well, put on your seatbelt and read about my desired rate of return because I’ve been re-programed. I will not only talk about it, I will show you with real trades I post as I’m making them. No Hoopla!

One of my trading strategies I call “1Week/1%“ which is explained in “My Philosophy, Strategy and Risk” section, which is the menu item you are in now. Just go to the drop down box that says “1 Week/1%.” It does pretty much what the name implies. And of course, this involves selling an option. I look for a stock I’m interested in and look at the “option chain.” I look for an option that will give me a premium that is 1% of the stock price with an expiration date 1 week out. I try to get into the position the Friday before the expiration date. So if I sell an option this Friday, I want it to expire next Friday. Sometimes that doesn’t work and I get in after the weekend on Monday. Most of the time this would be a Naked Option, but sometimes I’ll buy the stock and do a Covered Call. Let say the underlying stock has a market value of $50. I would look for a premium of $.50. On 1000 shares the stock is worth $50,000 and the premium would be ($.50 X 1000) $500. How do we figure out the “Rate of Return”? You take the money made and divide it by the money invested. The money made is $500 and the money invested is $50,000. Take the $500 and divide it by $50,000 and you come up with 1%. Remember this simple formula to calculate your “Rate of Return.” This will be the “Rate of Return Formula.” When you go to the “1 Week/1%” page, you will see real examples and you will see live examples in the blog post.

My “1 Week/1%” strategy I use at least once a week. I do 1% return a week quite often but that doesn’t mean I do 50% a year. I do consistently get a 1% a week return but that’s on the money invested, not my entire account! Not too often am I completely invested. I like to have 20% of my account available for emergencies with some unforeseen market move. Since I work on margin, this helps prevent me from getting a margin call.

Let’s make this a little more interesting. #1, I always work on margin. #2, most of the time I do this strategy it’s with a Naked Call. You must go to the “Margin Account” page and “Naked Calls” page and completely understand how they work. When you buy stock on margin, you only lay out half the money. Your broker lends you the other half for a small interest charge. Now in this case, to buy the $50,000 worth of stock, you only use $25,000 of your own money. Now, in reality, I brought in $500 on a $25,000 investment. Use the “Rate of Return Formula” and you will see my “Rate of Return” is now 2% for the week. I named this strategy “1 Week/1%” but is actually 1 week/2% when working on margin. Working on margin is not for Grasshoppers!

When I do this strategy, 90% of the time I do it with a Naked Call. Again, you must understand Naked calls and understand the risk involved when selling Naked Calls. When you sell a Naked Call, you do not own the underlying stock. So, in our example, I bring in the premium of $500 but there is no lay out of cash for the stock. I still look at it as a “1 Week/1%” deal while not buying the $50 stock, in all actuality the $500 is free money! For the duration of the Naked Call I Will do a little more monitoring of the market, to watch and see if I have to cover my Naked Call before the price of the stock rises above the Strike Price. This is completely covered in the “Naked Call” page.

I hope this little explanation of one of my strategies (1 Week/1%) will help reprogram your brain away from the annualized rates of returns. As you see, I look for 1-2% a week or 2-3% every 2 weeks. if you want to annualize that, you’re looking at 50% a year! Well watch my blog post and see my live trades. There is no fool proof, automatic happy ending to every trade and “Murphy’s Law” does apply to the market, but you will see the winning trades outnumber the losers by a wide margin.