The ‘Investors’ selections are based on two components: The time decay inherent in an option’s premium (theta) and the price direction of the underlying stock. Since all of the ‘Investors’ selections involve the sale of credit spreads as a part of the strategy, volatility can be a factor in achieving good profitability.
During normal times, the market’s volatility, based on VIX readings would be in the 20 to 30 range resulting in acceptable credit spreads (premiums). While the ‘Investors’ selections will perform in any market environment, normal market volatility is desirable when trading this approach. (See below for a description on VIX).
There is a difference between the stock selection method used between the ‘Traders’ and the ‘Investors’ strategies. Both processes are based on the Market Edge(www.marketedge.com) computer generated opinions which are either Long, Neutral or Avoid. These computer generated opinions have been the backbone of the Market Edge web site (www.marketedge.com) since 1992 and consistently have produced a better than 70% accuracy rate with the winners outperforming the losers by a 3:1 ratio. Since the average holding period for the ‘Investor’ selections is between eight to twelve weeks, these opinions require no adjustments and are ideal for identifying good long or short- sale candidates for the ‘Investors’ strategies.
Position Size: It is a good idea to allocate the same dollar amount of risk capital per ‘Investors’ transaction. The criteria behind all of the selections is the same and the performance should be similar. If you have $100,000 in capital, a 5% ($20,000) to 10% ($10,000) position would make sense. Our published results are based on 10% allotments. You will notice that at times the number of open positions will decline from eight-nine down to one or two or in some cases none. That is because the computer algorithms cannot find attractive selections and chooses not to play. Usually when that happens, a market decline is in the cards and the correct action is to be on the sidelines.
Exit Strategies: The ‘Investor’ positions should be closed when either the Market Edge Opinion is downgraded or the designated open time frame for the position is met. Both of these scenarios are noted on the Optionomics web site. The 21st Century Covered Calls strategy has an eight-week open time frame. The Low Cost Put-Call Hedge and the Billionaire Risk-Reversal strategies have twelve-week time frames due to the expiration time periods of the anchor puts. Both the Low Cost Hedge and Billionaire strategies use the sale of weekly credit spreads to finance the cost of the anchor puts. Ideally, as Friday’s expiration approaches, the value of these spreads declines to $0.00 as time decay (theta) comes into play. If during the week, a favorable move in the stock sees rapid decay in the credit spreads premium, down to $0.05 or lower, it is recommended that the credit spread position be closed.
What Is VIX: VIX is the ticker symbol for the CBOE’s volatility index. VIX is a computed index based on the price of options on the S&P 500. It estimates how volatile those options will be between the current date and the option’s expiration date. The CBOE combines the price of multiple options and derives an aggregate value of volatility. VIX values greater than 30 are generally associated with a large amount of volatility as ‘Investors’ fear or uncertainty results in bidding up the price of puts. Values below 15 generally correspond to less stressful, complacent times in the markets resulting in a decline in option premiums.