Conservative Options Strategy

Mighty Stalagmite - a Conservative Options Strategy That Doesn't Lose Money

The Mighty Stalagmite - A Conservative Options Strategy That Doesn't Lose Money

Is a "Doesn't Lose" Strategy Possible? Some people would argue that a truly efficient options market would theoretically not allow a totally risk-free strategy to exist for very long. Yet an option mechanism called a collar can be established that does guarantee no loss, and it is used fairly commonly as a hedging device by sophisticated investment banks. However, it is a little unusual to come up with a strategy that "guarantees" no loss but also allows for the possibility of a gain when the market behaves as we wish.

A 10-year backtest of the Mighty Stalagmite (underlying stock - SPY, the tracking stock of the S&P 500) showed that about one month out of three, an adjustment would have to be made because the stock had moved 8% in one direction or another - we expect there would be no profit or loss for the portfolio in those month.

The backtest showed that in the other 2 out of 3 months, an average monthly profit of about 4% would result. If these figures hold true, the portfolio would earn 32% each year with never a losing month.

I cannot offer a guarantee that the portfolio will never lose money. The risk profile graph we published last week clearly shows that if the S&P 500 falls by 10% in a single day, a loss situation will be faced. A stock price drop of that magnitude has occurred only once (9/11/01) in the past 10 years. But as one great sage noted, there is never only one cockroach. So we have to be prepared to handle these rare events.

After the 9/11 disaster, the strategy would have recovered nicely in the subsequent month, and a loss would have been avoided for the two-month period. Since I can't guarantee that two 9/11-type events would not occur in subsequent months, or the market did not quickly recover some of the loss in a subsequent month, I can't make the guarantee. But I believe that the odds are overwhelming that a loss will never result for even a two or three-month period. If the money is invested for an entire year, the odds should be dramatically higher that a gain will result instead of a loss.

A Complicated Strategy: The Mighty Stalagmite is not for the do-it-yourselfer subscriber. We cannot to offer up-front Trading Rules. While we can explain the general decision rules when placing the initial trades, the problem comes in the details of the adjustment trades. Depending on how much time has elapsed before the stock moved enough to trigger an adjustment, the solution may differ.

So the bottom line is that we firmly believe that we have created an options strategy that never loses money if it is carried out for a year. Such a claim is not possible for even the most conservative mutual or bond fund. They often lose money. Contrast that record with the Mighty Stalagmite which could handle a market (S&P 500) that dropped up to 5% every month of the year and the portfolio would still make a gain for the year.

I invite you to become a Terry's Tips subscriber and learn the full details about the Mighty Stalagmite, the option strategy that doesn't lose money. You can sign up here. It could be the best investment you make this summer.

Happy trading.

Terry