Stocks A to Z / Stocks B / Brookfield Corporation (BN)
No. of Recommendations: 1
I recently delved into another book exploring the options strategy I previously mentioned: "Intrinsic" by Michael Yuen.
Yuen's take offers a fresh perspective compared to the original text. His analysis starts with a compelling statistic: If you were to randomly select any tech stock from the QQQ over the last 10 or 20 years, you'd have approximately a 75% chance of outperforming the S&P index. Even if we extend the horizon to 30 years, the stocks within the QQQ at the time would still have outpaced the S&P. The following forms the foundation of his approach – identifying stocks trading 5-10% below their 52-week highs, exhibiting a consistent upward trajectory over time, and possessing a competitive advantage or "moat." Yuen also emphasizes the importance of a tight breakeven point for the deep in the money (DITM) LEAP options he targets, ideally within 5% or less above the current stock price. He will go to 10% if that is all that is available. He favors DITM LEAPs with a delta near one and expiration dates of two years or more.
The brilliance of this strategy lies in the math. The call options are cheaper than purchasing the stock outright but capture the same dollar gains. For instance, if the option premium is $25 and the stock is priced at $40, a $10 increase in stock price results in a 40% profit for the option holder versus 25% for the stockholder.
Of course, the downside risk is amplified in declining markets, but given historical market trends and the multi-year horizon of this strategy, it often outpaces the S&P significantly. Despite its apparent advantages, one might wonder why this strategy isn't more widely adopted.
No. of Recommendations: 9
It's just leverage. Leverage is good when things are going up, and bad when they're going down.
I tend to agree with the observation that the Nasdaq 100 type of firms have historically grown in value MUCH faster than the average firm, and might continue to do so for some time into the future.
But leverage on those puppies? Maybe not. I doubt someone who started around the millennium would have had much of a portfolio left in October 2002. Having a multi-year horizon for your intentions might be good, but two year options aren't quite a match for those intentions.
That being said, it's probably a fantastic idea if you start it when that group of firms has just sold off to very cheap levels.
Jim
No. of Recommendations: 1
“Having a multi-year horizon for your intentions might be good, but two year options aren't quite a match for those intentions.”
This reminded me of Robert Hagstrom comment. He said on a recent podcast that the higher returns of LBO outfits is often simply related to their leverage and if Main Street investors added an extra 50% margin to their index ownership, the 5 year returns would be very similar. He was Not recommending that people do this, but was making the point that higher returns was not related to particular brilliance from the LBO management, just leverage & if one holds the index position with margin for 5 years, it will appreciate the vast majority of the time.
No. of Recommendations: 1
if one holds the index position with margin for 5 years, it will appreciate the vast majority of the time.
So you could do that by buying call options on SPY or $XSP for cheap non-callable margin. $XSP goes out to Dec'2025 and SPY to Dec'2026. Almost 2 years and almost 3 years.
In mid-Feb, the implied interest rate for the DITM $XSP call was 4%. About half of the margin rate at IB.
I guess the S&P 500 Futures could work, too?
No. of Recommendations: 0
Yes, now may not be the right time to buy tech. stocks in the qqq.
