Friday, June 12, 2009


Brett had an interesting post the other day on capitalization and realistic rates of return. One paragraph, in particular resonated with me: Look at it this way: if you can produce consistent 20% annual returns on capital with modest downside risk, you will always have a job as a portfolio manager for a top hedge fund. If you, as a beginning trader, rely on a business plan that calls for more than that, you are probably unrealistic in your assumptions and overly aggressive in your risk.
Having been at this for almost 25 years (and still kicking) Brett's spin on managing your money and your risk is something I adopted many years ago in order to help me sleep at night and avoid the emotional roller coaster that many traders new to the business experience. I prefer it slow and easy and, because trading is how I pay the bills, my prime directive is capital preservation.
I hate drawdowns and have crafted my trading plan over the years to reflect this goal. While I don't have many days where I blow the doors off with gains, I also have almost no days with unpleasant surprises. . .and that's the way I like it.
Maybe not your style (or reflective of your trading goals), but it works for me.
Also, with today's money market rates and 1 year CDs yielding almost nothing, it makes sense (to me) to deploy the bulk of the account into a program that can generate a low risk 2% per month.
It that spirit today's post takes a look at a chance to pick up 2% for 36 days exposure using a simple buy/write of the Costco July 45s.
COST has been consolidating for a few months now and looks to be near bouncing off medium term support at 45. A current buy/write will get you a break even of $ 43.96 and will yield a solid 2% if COST closes above 45 in July.
The 47.50s are for the more risk tolerant, and offer the potential of a 4% return over the same period.
A 47.50 butterfly is another setup that has possibilities. I mean to profile that in a future post.

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