Hello,
From time to time I post here how my investment strategies are doing, hopefully in easily understandable terms.

I have just posted summaries of how each of the three DIY investment strategies performed over the 2011 calendar year. The latter half of November and December saw the worst period for all three strategies since inception on 23^rd January 2010. Isonomy Turbo saw the worst of it, but such occasional drawdowns (drawdown = losing period) are not unexpected, especially so for Isonomy Turbo as it is the most volatile strategy of the three.

There were two main factors combining together to drag down performance towards the end of the year:

1. 1. Falling Implied Volatility, which reduces options prices. Strategies that hold options (Plus and Turbo) lose money when IV goes down. This factor affected Isonomy Turbo the worst but had no effect on plain Isonomy.
2. 2. Rapid fall in the price of gold and silver. This affected all three strategies.

Nevertheless all three finished the year with a decent gain, which is more than can be said of the majority of investment funds!

Click here for the Isonomy 2011 summary.

Click here for the Isonomy Plus 2011 summary.

Click here for the Isonomy Turbo 2012 summary.

Dean.

With this post of performance summary I am providing figures for the Isonomy Plus trading strategy covering the 2011 calendar year, as well as the 23 months since inception as of December 31^st 2011. The figures I am giving you are:

• • The growth (or decline) over 2011, from beginning of January 2011 to end of December 2011
• • The total growth since inception, from the start date 23^rd January 2010
• • The best growth over any 12 month period, in other words the best profit you could have possibly made by investing and encashing over the best 12 month period
• • The worst growth over any 12 month period, in other words the worst profit or loss you could have possibly made by investing and encashing over the worst 12 month period
• • The worst loss (otherwise known as max drawdown) since inception, in other words the worst amount you could have possibly lost in any period by investing and encashing at the absolutely wrong times

With this post of performance summary I am providing figures for the Isonomy Turbo trading strategy covering the 2011 calendar year, as well as the 23 months since inception as of December 31^st 2011. The figures I am giving you are:

• • The growth (or decline) over 2011, from beginning of January 2011 to end of December 2011
• • The total growth since inception, from the start date 23^rd January 2010
• • The best growth over any 12 month period, in other words the best profit you could have possibly made by investing and encashing over the best 12 month period
• • The worst growth over any 12 month period, in other words the worst profit or loss you could have possibly made by investing and encashing over the worst 12 month period
• • The worst loss (otherwise known as max drawdown) since inception, in other words the worst amount you could have possibly lost in any period by investing and encashing at the absolutely wrong times

With this post of performance summary I am providing figures for the Isonomy trading strategy covering the 2011 calendar year, as well as the 23 months since inception as of December 31^st 2011. The figures I am giving you are:

• • The growth (or decline) over 2011, from beginning of January 2011 to end of December 2011
• • The total growth since inception, from the start date 23^rd January 2010
• • The best growth over any 12 month period, in other words the best profit you could have possibly made by investing and encashing over the best 12 month period
• • The worst growth over any 12 month period, in other words the worst profit or loss you could have possibly made by investing and encashing over the worst 12 month period
• • The worst loss (otherwise known as max drawdown) since inception, in other words the worst amount you could have possibly lost in any period by investing and encashing at the absolutely wrong times

Confusion…

…and mystique surrounds options (and other financial derivatives) even though there is a wealth of information easily found on the Web and in books. But somehow these exaplantions don't cut it for some people. In my correspondence with traders of my strategies (those who have subscribed to receive the real-time trading signals via Collective2) I have on occasion found myself having to explain the very basics yet again to people worrying about the wrong things.

Since my strategies make use of options I will write a series of articles here about them, in a slightly different way which hopefully will show that they are not as mysterious as many think.

In fact, the principles of "high finance" are not really that complicated; it just has a reputation for being so. A good grounding in, and/or feel for, a hard science helps a lot. But just logic and common sense go a long way on their own! Of course, basic principles can be put together in complicated ways – see the title picture above – but that applies to almost anything in life. 

First let me dispel a major myth: trading 'derivatives' is very dangerous. You are gambling if you buy and sell futures or options or CFDs or whatever… "whatever" being quite apt as these complicated things are so complicated only a few wizzos in the City and Wall Street can even begin to understand them.

WRONG, this is not true!

As I said, I will just talk about options in the following articles, but much of the basic logic applies to other derivatives as well.

A derivative is called a "derivative" because it is not real on its own – its properties derive from something 'real' such as a lump of gold or a barrel of oil or ownership of a company (i.e. shares) or a house or whatever. A derivative is just a contract. The details of that contract between two people (or organisations) are what make it an 'option' or a 'future' or 'Contract For Difference' etc.

Think of any contract: Mr Wright writes a contract in which he promises something (within reason; he must be in a position to honour his promise) and then sells it to Mr Buyer who pays Mr Wright for his promise. In the financial markets many of these contracts are completely standardised and regulated so that Mr Wright doesn't have to think about what to write – he simply picks the contract he wants and then he and Mr Buyer sign their names. This standard type of contract is what the Isonomy series of strategies make use of.

So far so simple.

Doesn't sound dangerous, does it? Well, the perception of danger comes from:

1) The fact that when large institutions misuse derivative contracts it makes the headlines.

2) When ordinary people first learn of their existence they tend to use them for the purpose of gambling; greed and hope take the place of logic and common sense. Invariably this leads to losing money – it's the casino that wins in the long haul.

3) The people (and institutions) who use derivatives sensibly never get publicity – they don't get rich quick or collapse in scandal and shame, and so their story is too boring to report or pay attention to.

Put another way, are cars dangerous? Well, if you drive like a maniac without practice then definitely yes! But if you drive sensibly then it is a very useful thing.

Needless to say, the Isonomy strategies are very firmly in camp (3) above!

In the next article I will go into some detail about what an option contract is and will explain it (I hope) in such a way that you will get it even if at the moment your brain goes completely blank whenever "option" or "derivative" or "financial" is mentioned leaving behind just a sense of dread at getting involved, and disgust at how the dirty capitalists are taking from the poor to give to themselves

Dean.

Roughly speaking, the trades listed here can be translated into the following:

Having made some money as the price of gold rose strongly earlier in the year, we were no longer positioned to benefit significantly from further rises. Since the kind of options we maintain work best when they are not too far from the prevailing price of gold, we had to adjust our position upwards. Doing that increased our risk so we hedged by buying some insurance which pays out if the price of gold falls.

The trades

Isonomy Plus made the following three trades in August:

1a) Buy-To-Close 1 GLD December 2011 $145 put option.

'GLD' is the symbol of the SPDR Gold Trust exchange traded fund that invests in gold.  It is a way of investing in gold without having to by the physical metal and finding somewhere to store it safely. The fund does that for you!

What we did here was to buy back an option contract that we sold some months ago. We sold the option which has a strike price of $145 when the price of GLD stock was around that same level so we got quite a good price for it. By August the price of gold (and hence GLD too) had risen way above that level so we could buy the contract back early for less – this is a form of “sell high, buy low” instead of the more usual “buy low, sell high” that traders aim for. I say ‘early’ because it expires in December so we could just have waited until then, at which point it would become void and we no longer have to buy it back. But closing early means we can go ahead and make a new trade instead.

See here where some terminology is explained.

1b) Sell-To-Open 1 GLD December 2011 $185 put option.

Having closed our position at the $145 strike, we were free to open a new similar position at the higher strike of $185. This new trade was to write a new contract with a $185 strike price and sell it for cash; hence "Sell To Open". We got some money up-front again for this contract, essentially doing the same as we had months ago when selling the $145 contract which was closed in trade 1a.

A short hand way of describing this pair trade is to say that "we rolled the GLD put contract upwards in strike price".

Simplified result: This pair of trades generates a profit if the price of gold stays the same or goes up. It results in loss if gold goes down.  In order to limit the risk should the price of gold fall over the next six months or so, we added the third trade below.

2) Buy-To-Open 1 GLD January 2013 $160 put option.

We bought a new put option contract to balance (or ‘hedge’) the one we sold in trade 1b. This is our insurance: if GLD goes down a lot, the put at $185 strike which we sold in trade 1b will go up in price and so we will eventually have to buy it back at more than what we sold it for; i.e. we make a loss of the trade. However, our $160 put which we bought will also go up in price so we make a profit in this one.

Simplified result: This trade generates a profit if the price of gold goes down but it results in a loss if gold stays the same or rises. Trade 2 can be interpreted as buying 'insurance' since we lose money (pay a premium) if gold does not fall, but we make money (i.e. the insurance pays out to us) if gold falls.

Wrapping up

This is all a part of my investment strategy.  As far as performance is concerned, I refer you to my last performance summary post. For more detail please see here and follow the individual strategy links there.

I hope you enjoy following this investment strategy and if anyone wants to contact me, please feel free to post a comment below or get in touch via BYW.

Regards,
Dean.

In part 1 I set the scene with a bit of a recap.  Here are the actual trades I talked about:

Isonomy Plus made the following four trades on the 31st of May, split into two pairs; one pair for each of the two parts (profit potential and insurance) described previously:

1a) Buy-To-Close 1 SPY June 2011 $120 call option.
'SPY' is the symbol of a stock that tracks a broad stock market index.  We bought back a call option contract based on SPY which we wrote ('wrote' = created) about six months ago. In other words, some months ago we created a contract known as a call option (more about what this means in a follow-up post) which we then sold to someone else for cash.  Such a trade is known as "Sell To Open".
On May 31st we bought back that same contract so that the contract is annulled; i.e. we are no longer bound by it. Hence "Buy To Close".

1b) Sell-To-Open 1 SPY December 2011 $130 call option.
In this second part of the pair we wrote a new contract which we sold for cash; hence "Sell To Open".  Notice that the contract expiry date is different as well as what is known as the "Strike Price" – $130 instead of $120.  Again, the meaning of these terms will be explained later as I am trying to keep each post to a manageable length!

A short hand way of describing this pair trade is to say that "we rolled the SPY call contract forward in time and upwards in strike price".
Simplified result: This pair of trades generates a profit if the stock market index stays the same or goes up. It results in loss if the index goes down. Remember, SPY represents a broad stock-market index.

2a) Sell-To-Close 1 SPY December 2012 $95 put option.
Here we sold on an option contract (this time of the type called a 'Put' – I will explain what this means later) which we bought about six months ago; i.e. we no longer have the right to invoke the terms of that contract. Hence "Sell To Close".

2b) Buy-To-Open 1 SPY December 2012 $110 put option.
We bought a new put option contract to replace the one we sold, this time rolled up in price only, with the expiry date left the same.

Simplified result: This pair of trades generates a profit if the index falls but it results in a loss if the index stays the same or rises.  Pair 2 can be interpreted as 'insurance' since we lose money (pay a premium) if the stock market does not fall, but we make money (i.e. the insurance pays out to us) if the stock market falls.

Wrapping up

I will try to limit the length of future trade notes while still gradually explaining the rationale behind trades.  Hopefully with time you will become a bit more comfortable with the terminology and style.  I realise that there are a lot of things I did not explain here – options are a rather complicated concept to get one's head round and their use can be a rather subtle endeavour.  As I said in part one, I will write a series of posts to do my best at explaining options in laymen's terms so you can start to get a feel for these trade updates.

This is all a part of my investment strategy.  As far as performance is concerned, I refer you to my last performance summary post.  For more detail please see here and follow the individual strategy links there.

I hope you enjoy following this investment strategy and if anyone wants to contact me, please feel free to post a comment below or get in touch via BYW.

Regards,
Dean.

Ok, this is where I let everybody know what I am doing, but hopefully in simple terms.  As this is the first post in what will become a regular update series, it is rather long so I have split it up into two parts.

Recap

Remember, my investment strategies are to find a way that we (normal people) can stash our cash for 5-40 years and get a good return while at the same time keeping risk in check.

Having done quite a lot of research, the basics of what I came up with is to split invested cash between a few diverse assets; Gold/Silver, Shares, and what is called fixed interest.  The clever bit (I hope) is how I keep these balanced and how I invest in these areas within an overall long-term view.  In addition I use financial instruments called option contracts (referred to simply as 'options') to regulate risk and smooth out returns.

On the one hand the goal is a decent return for all who invest with my strategies but also, admittedly, on the other hand – I want to show that even for the layman there is a viable alternative to the way the mainstream investment industry goes about managing our money.

Ok all, I know it will take 5-10 years to bear fruit, but this is my go at strategies that should grow your money at a good rate.  Getting rich quick doesn't work and the mainstream industry offers meagre returns.  We fit in somewhere in-between; essentially by keeping a cool head, being patient (long-term outlook) and not getting too greedy, we make money both from the inefficiency of the mainstream guys and from the losses inevitably incurred by the gung-ho 'get-rick-quick' speculators and gamblers.

Now, onto the most recent trade in Isonomy Plus:

This was a combined trade of four different options.  I will describe here what the rationale behind the trade was and in a series of follow-up posts I will explain what options are and how and why I use them.

Essentially what I did here is to adjust the invested pot to better fit the fact that the stock market has risen quite a lot in the last six to nine months.  The adjustment came in two parts:
The first was to increase income if there is no further rise and at the same time to increase the chance to profit if there is a further rise.  The second was to increase the level of insurance in case the stock market falls back down again.

Roughly speaking, the adjustments I made can be translated into the following scenario:

Buy extra shares to profit from dividends and further rises, at the same time buy extra insurance which will pay out in case the market falls.  The insurance does not eliminate the risk (that would be so expensive that we would never make any profit!) but it does reduce loss if there is a crash, which allows us to keep a cool head when everyone around us is losing theirs 

Short interjection: don't worry if you have never heard of options or never traded anything on the stock market – in that case most of the following part 2 will be gobbledygook to you at the moment, although I try to explain each step little by little. Over time hopefully you will understand more and more as I continue posting these updates.
 If not, then do please post questions in the forum below or just keep track of the (past and ongoing) performance over the months and years by looking at the audited results on Collective2 until hopefully you are satisfied that I at least do know what I am doing!

I hope you enjoy following these investment strategies and if anyone wants to contact me, please feel free to post a comment below or get in touch via BYW.

On to the actual trades in part 2…

From time to time I will let everyone know how my investment strategy is doing, hopefully in easily understandable terms.

With this post of performance summary I am providing figures covering the 16 months since inception as of today. The figures I am giving you are:

So, as of today 28th May 2011:

These figures include some trading costs but not management costs.

More detailed statistics are available on the full system page.

Regards,
Dean.

From time to time I will let everyone know how my investment strategy is doing, hopefully in easily understandable terms.

With this first post of performance summary I am providing figures for the first year anniversary, being January 2010 to January 2011. The figures I am giving you are:

So, as of January 2011:

These figures include some trading costs but not management costs. The first three figures are the same because this summary is for the first year, therefore there is only one set of 12 months to consider. See the next post in this blog where the figures will be different.

More detailed statistics are available on the full system page.

Regards,
Dean.