MY SLIGHTLY FRUSTRATING PLAN

Gaining freedom, isn’t that what we’re all striving for? After taking freedom in my own hands after getting to grips with option ‘trading’, I’ve set out to create wealth, in a slightly frustrating way!

First things first. I worked for a brokerage and had to study and understand financial products and help clients with their needs and purchases. I learned about options, partly by deploying them in my own portfolio, and excelled in the tests, I really liked options! Who knew! But don’t worry, this won’t turn into an in-depth option piece.

Once I figured out that with a relatively small portfolio (and yes I admit, above average risk) I could move across Europe without a new job to live closer to the people that I love, I quickly packed my bags.

Ever since this moment I’ve been studying a new language, reading economics books to broaden my view and I’ve set some new financial goals. I want to increase my portfolio value, and subsequently my wealth. I thought of how Theta decay makes me money while waiting for options to expire. Basically it means that everyday, your sold option position is slightly less risky and thus increases your unrealized gains.

This means hedging with selling options could make you quite a decent buck without too much risk. This inclines that you fully understand the product, the risks and the underlying assets though.

Enough already, what is the frustrating plan?

Due to inflated stock prices in the western world, I’ve decided to set up my account so it will greatly profit when stocks go down… hard.

I have multiple portfolio parts, diversified ETF’s, deep value shares and my options. I add to my ETF’s every month, at least once, I add to stocks as I see fit and I ‘trade’ with options. Option trading happens in both directions, long and short (market up, and down).

So what is so frustrating? Well markets seem disconnected from actual economics. My ETF’s barely pull back enough to feel good about adding to those positions. Finding decently valued companies to buy shares of gets harder by the day. In the meantime a lot of bad economic numbers roll out of the machines but no one cares as the USA has a ‘Tweet-Happy’ President that likes to spread fake news about some sort of Trade Deal with China. And let’s not forget the Federal Reserve, Bank of Japan and the European Central Bank that seem to get more and more crazy in printing new money to buy bonds and even stocks! They can’t find inflation in the economy, they should simply look at asset prices! We are at the Dot Com bubble levels!

TAKEN FROM TWITTER USER: @NORTHMANTRADER.

Below you can see how much overnight repurchase agreements the FED purchases. Simply stated ‘repo’ is about how much money banks lend each other overnight. This is needed to fill the balance at the end of the day because otherwise a bank would technically go bankrupt. For years the FED didn’t need to intervene in the repo market but all of a sudden interest rates for repo lending spiked higher than ever before (meaning that banks want much more money for lending their money to another bank).

The FED is currently fixing it by pumping billions and billions into the system everyday. Without the FED intervening in this process we would’ve likely see some banks go bankrupt already. My money is on Deutsche Bank, figuratively spoken.

THIS INFORMATION COMES FROM FRED ECONOMIC RESEARCH.

Below you can see public data about the Federal Reserve balance sheet. For years they stopped printing new money for fiscal stimulus. But this trend is quickly reversing in the past few months.

THIS INFORMATION COMES FROM FRED ECONOMIC RESEARCH.

Conclusion

So basically I’m waiting for a recession for my option positions. I received a lot of money for obligations that would become near worthless if the stocks drop hard.The huge amount of premium I received for taking those obligations will be reinvested into long term equity like ETF’s and good quality companies once their prices have reached normal levels again.

All I really want for Christmas is for a reality check. There is no Trade Deal between the USA and China, the world is in more debt than ever, stock buybacks are at all time highs, company earnings are falling and GDP growth rates are declining at an enormous rate. It would be nice if the last assets, the stocks, would realize this too.

What is your view on current asset prices? Do you agree with the my post or do you have a completely different opinion? I’d love to hear from you and discuss!

DISCLOSURE: I HAVE LONG AND SHORT POSITIONS BUT I WOULD BENEFIT HUGELY FROM A BIG DIP IN STOCK PRICES.

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8 Comments

  1. I hope you’re right. I wouldn’t mind a stock market crash. It’s getting harder and harder to find good value stocks to buy and options to sell (I don’t do short calls).

    • DutchIndependence

      Hi SD,

      I agree, I even left out the part that it’s almost impossible to find nice opportunities for selling put options…

      Thank you for your comment!

      DI

  2. Hoping for a crash is no option in my opinion. Although markets are up, there is no reason for a crash. A healthy correction at maximum.

    • DutchIndependence

      Hi Mr. Groeigeld,

      I have a different opinion, in my view we are definitely due for some lower price action. Look at Central Bank policies, political instabilities, decreasing earnings around the globe, slowing GDP growth and maybe my favorite: stock market value vs GDP is at it’s highest since the dot.com crash. I’m not waiting for a crash persee, also a healthy correction would be great. I’m not solely positioned for a big ‘end of the world’ crash.

      I’d be interested in hearing your arguments about why everything is fine and nothing is inflated, it’d might make for a great discussion!

      DI

    • I agree. Hope as a tactic is a bad idea in my opinion. Being an eternal optimist, I also don’t think a major crash is coming. But a correction would be nice, although I’m not speculating on that.

      • DutchIndependence

        SD, I agree as well, blind hope is stupid. You won’t see me betting on a move without any reason. The names that I shorted through options simply have risen over or around 100% for this year, while we already had the longest bull market ever, and even while earning continue to drop. In the late stage of a cycle this is unsustainable.

        DI

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  4. Sander

    Hi Independence,
    First of all, I like your name. Secondly, are you really 24? Your view if the matter looks to me like you’re quite experienced in economic cycles. I like the depth of your analysis, but I do not necessarily share your conclusion.
    Over the years, I’ve learnt there is a big difference between ‘being right’ and ‘getting it you way’ (gelijk hebben versus gelijk krijgen in het Nederlands)
    Markets can stay irrational longer than you can stay solvent, Keynes already said in the 1930s.

    Having said this all: I also use theta to my advantage. I just love it. But I remember burning my fingers in the 2008 crash with long term puts.

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